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What if I have foreign bank accounts (and other foreign assets)?
What if I have a Foreign Bank Account?
If you have an ownership interest in a foreign bank account or any other foreign asset, you may have additional reporting and tax obligations in the United States. In fact, penalties for noncompliance are very severe.
Below are the key take aways:
1. Determine if You Have a Reporting Obligation
Foreign Bank Account (FBAR):
If the aggregate value of your foreign financial accounts exceeds $10,000 at any time during the calendar year, you must file FinCEN Form 114 - more commonly referred to as an "FBAR."
This includes bank accounts, brokerage accounts, mutual funds, trusts, or other types of foreign financial accounts.
The IRS does not mess around with this. Failure to report your ownership interest in these foreign assets can result in heavy penalties up to one-half of the balance of the account value as well as criminal penalties.
Statement of Specified Foreign Financial Assets (FATCA):
Another potential report that you may have to file if you own foreign assets is the Foreign Account Tax Compliance Act report - or FATCA. Whereas the FBAR report is more focused on traditional bank accounts, the FATCA reporting requirement encompasses a more extensive range of foreign assets.
If you meet certain thresholds, you must file Form 8938 along with your tax return to report specified foreign financial assets.
Thresholds vary depending on your filing status and residency (e.g., $50,000 for single filers living in the U.S.; higher for those abroad).
FBAR and FATCA compliance
2. Report Your Foreign Income
If your foreign asset or assets generate income (e.g., dividends, interest, rents, or capital gains), you must report that income on your U.S. income tax return (Form 1040).
The U.S. taxes its citizens and residents on their worldwide income and even though you may earn income overseas, you still have to report it to the IRS.
3. Claim Foreign Tax Credits or Exclusions
If you paid foreign taxes on the income generated by the asset, you might be able to:
Claim a foreign tax credit using Form 1116, or
Exclude some income using the Foreign Earned Income Exclusion on Form 2555 if applicable. These are all topics for another blog post for another day.
4. Comply with Additional Forms
Depending on the type of foreign asset or interest you have, you may need to file additional forms on top of the FBAR and FATCA:
Form 3520 and Form 3520-A: For foreign trusts or certain foreign gifts/inheritances.
Form 5471: If you are a shareholder in a foreign corporation.
Form 8865: If you are a partner in a foreign partnership.
Form 8621: For interests in a Passive Foreign Investment Company (PFIC).
These additional reports also carry steep penalties for noncompliance. We will address them in future blog posts, but if you have questions now, please reach out to us at Liberty Tax Defenders. We have extensive experience in international taxation and would love to help you out!
5. Maintain Documentation
As with anything else pertaining to income taxes, make sure you keep detailed records of foreign accounts, assets, and income, including account statements, ownership documents, and tax returns from any foreign company or jurisdiction.
7. Consider reaching out to Liberty for Help
The reporting requirements for foreign assets and international taxation as a whole are very complex. Please do not hesitate to reach out to us at Liberty Tax Defenders as we have extensive experience in international taxation issues. 817-995-5008 or email us at: info@libertytaxdefenders.com.
Cheers!
P.S. Make sure you get your FREE copy of our SPECIAL REPORT: "The 8 Secrets The IRS Does NOT Want You To Know!" (simply click on the link in the previous sentence, scroll down to the second section of our home page, and download your copy today!)
Or, email us at: info@libertytaxdefenders.com for your FREE copy.
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