U.S. Tax Laws Involving Foreign Income, Assets & Financial Accounts
U.S. Taxpayers (generally residents or citizens) must report their world-wide income, credits and deductions on their U.S. tax returns (Form 1040) and, in general, are entitled to foreign tax credits for taxes income taxed to a foreign country.
U.S. Taxpayers with an ownership interest or signature authority over foreign financial accounts (bank and brokerage accounts, on-line gaming accounts, corporate, escrow, trust and other entity accounts, certain retirement plans and life insurance with a cash value) are required to electronically file an annual Foreign Bank and Financial Account Reports (FBARS) on or before June 30th of the following year. There are no extensions. The maximum fine for the non-willful failure to timely file an FBAR is $10,000 and there is a six-year statute of limitations for assessment of the penalty. The penalty may be reduced or eliminated upon a showing of “reasonable cause.”
In addition to the FBAR requirement, starting in 2011 U.S. taxpayers with foreign financial account and certain other financial assets (generally, stock or securities, including certain employee stock benefit plans, partnership or LLC interests, precious metal certificates) must report those assets on Form 8938, which is filed with the Form 1040. The threshold filing requirements start at $50,000 for single taxpayers living in the U.S. and $100,000 for married couples. These amounts are doubled if the couple lives overseas. Note: Physically holding gold or silver bars or other precious metals (even if they are in storage) is not a financial account, but holding certificates representing an interest in precious metals is considered a financial account.
U.S. Taxpayers who have a 10% or greater interest in a foreign corporation must file Form 5471 with the Form 1040. There are equivalent filing requirements for 10% or more ownership in a foreign partnership. Interests in family investments, if held in an entity is subject to this reporting requirement, but total or partial ownership of real estate is not.
U.S. Taxpayers who receive a foreign gift or inheritance from an individual of more than $100,000 during the calendar year must file Form 3520 to report the gift or inheritance. The due date of Form 3520 is the same as the Form 1040, and is extended if a valid extension is filed for the Form 1040. The threshold reporting requirement for a gift from an entity or trust is much lower.
U.S. Taxpayers who earn wages or self-employment income while residing outside the U.S. may be entitled to a foreign earned income exclusion if they are considered residents of a foreign country or remain outside the U.S. for a period of 330 days during any 12-month period. The maximum income exclusion is $97,600 for 2013, $99,200 for 2014, $100,800 for 2015 and $101,300 for 2016. The exclusion, however, must be claimed on a timely filed U.S. tax return, it is not automatic. There is also a partial exclusion for housing costs, if they exceed a certain minimum.
IRS has a couple of “amnesty” programs available for taxpayers with unreported foreign income for foreign financial accounts, as well as taxpayers who failed to properly report ownership in foreign entities or receipt of foreign gifts or inheritances of $100,000 or more in the calendar year. Penalties are drastically reduced for taxpayers willing to sign a sworn statement, under federal laws of perjury, that they were not “willful” in their failure to comply with the tax law.
