By Jane Mepham
The United States has been described as a nation of immigrants, with this group constituting more 45 million of the total population, nearly 14% of the total population. This group is mobile and very global in every way, including their financial life. This leads to a financial relationship that straddles two countries, the United States and the overseas country of their origin.
In addition, there is also another group of citizens born in America who are adventurous in their investment, likely traveling or interacting with people from other countries. They end up with similar financial ties with other countries.
This article will highlight four tax-related things you should be aware of if your name can be associated with a financial product or an account in another country. Keep an eye out for the following:
The United States taxes US citizens and permanent residents on worldwide income.
The United States is one of a very small number of countries in the world that have a global tax. This means that any income regardless of the country in which it is produced must be declared to the IRS for all residents or citizens regardless of their current residence. The type of foreign income is broad and can come from sources such as rent, salary, business profits, or dividends from investments. Income is generally reported using the annual average exchange rate, but if it’s specific to a day, you can use the exchange rate for that day.
The government has a variety of ways to track income overseas, so hiding income or underreporting is probably one of the worst things you can do when it comes to taxes.
In 2012, the government adopted the Foreign Tax Accounts Compliance Act (FATCA), within the framework of the HIRE law. FATCA requires foreign banks and other financial and non-financial institutions to report foreign assets held by their US account holders. Failure to comply with these obligations entails severe penalties for these institutions.
One of the ensuing concerns is the fear of double taxation if those same assets are taxed in the country where the income is generated. There are a few strategies that help alleviate this problem, including tax credits and tax deductions.
There are concerted efforts of groups, such as the American Citizens Abroad Global Foundation, who would like this to be changed to a residence-based tax system. Until that passes, however, you’ll need to make sure you continue to report your worldwide income.
If you have overseas accounts, you may need to complete the FBAR form.
If you have a foreign financial account and the balance reaches $ 10,000 at any time of the year (even for a day), this should be reported as part of the annual tax return. The deposit form is called FinCEN Form 114, commonly referred to as the FBAR. Accounts range from bank accounts and life insurance policies to pension funds and inherited money.
The $ 10,000 is not an account balance, it is a cumulative balance of all accounts you have or accounts associated with your name. For example: a family abroad adds the names of their relatives in the United States to joint accounts for easier management. Everyone assumes the parent in the US doesn’t have to worry about the account, but by law that means the accounts must be reported and are now under the US tax code.
Even though the form is due when taxes are due, it is for informational purposes only and no tax is due. The filing date of the form is April 15e but there is an automatic extension until October 15e.
Failure to file the FBAR is considered a crime punishable by 5 years in prison and / or very severe financial penalties. If failure to file is considered a willful violation, the penalty or civil penalties can reach $ 124,588 or 50% of the account balance.
There is a second, slightly different form called Form 8938 which is filed if you reach a certain threshold and need to file taxes. The IRS has a nice comparison of the two shapes on their website.
If you receive a gift from a non-resident of the United States, you may need to report it when filing your taxes.
John works and lives in the United States Most of his extended family lives in Europe. When his youngest son was born last year, his grandparents, who are non-US residents, still living in Europe, wanted to help him and his wife buy a house in Austin, Texas. They were prepared to give him a large part of the down payment for the new house. They planned to do it twice.
According to IRS regulations, if the total amount received from the non-resident individual exceeds $ 100,000 in the tax year, it must be reported. Each gift must be identified separately if it is greater than $ 5,000. To clarify, this is for information only and does not need to be added to her income, which means there is no tax payable.
John’s grandparents ended up offering him $ 175,000, which meant that money had to be reported via form 3520. According to the IRS, the deadline for filing the form “is the 15th.e day of 4e months after the end of the US Persons tax year. “
If John’s grandparents were U.S. citizens or permanent U.S. residents living in another country, they would have had to complete Form 709 for tax and donation purposes required beyond the annual exclusion from l tax on donations.
The deposit threshold for donations received from foreign companies or foreign partnerships is much lower, even with adjustments for inflation. In 2019, that number was $ 16,388.
Failure to file the form will result in a penalty of 5% of the amount of the donation each month, up to a maximum of 25% if it comes from an individual or a foreign estate. The penalty is much higher if you come from a foreign corporation or trust.
If the donation is used as direct payment for eligible tuition fees or for medical expenses made on behalf of the recipient, there is no filing requirement.
Foreign investments can be very dangerous for US citizens and residents.
In my social circles, I meet a lot of people looking to invest overseas to diversify their portfolios. There are many ways to do this, including investing in US mutual funds that invest in foreign companies.
If you invest in a foreign mutual fund, the US tax code classifies it as a PFIC (Passive Foreign Investment Company).
Many people don’t realize what they are investing in, but it can include ETFs, mutual funds, insurance products, etc., which are registered outside of the United States.
The problem with these investments is that they are taxed in a very punitive manner and do not benefit from any favorable rates like long term capital gains. They are taxed at the highest ordinary income rates and can go up to 50%, due to the complex rules involved in accounting for income.
If you invest in any of these types of products, you must deposit Form 8621 each year for each of these investments. This is one of the more complicated forms required at tax time and if you have to do more than a couple it can get very complicated.
I suggest you file the form this year if you hold a PFIC, but if possible, plan to switch to US funds that invest in foreign markets. You will get the same diversification at a considerably lower cost and less headache.
If you keep these four things in mind, tax season should hopefully be a snap for you.
About the Author: Jane Mepham
Jane Mepham is the Founder and Senior Advisor of Elgon Financial Advisors. He is a Texas registered financial planning and investment advisor serving successful foreign born individuals and families across the country.
Do you have questions about your taxes, your personal finances and your investments? Get answers!
Email Jeffrey Levine, CPA / PFS, Director of Planning at Buckingham Wealth Partners, at:
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