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International

Foreign Taxation of Individuals

By December 12, 2013No Comments

The following information relates to foreign filing requirements for individuals, trusts, estates, and entities.  This information is pertinent as failing to file any of the Forms could lead to severe penalties.

Form TD F 90-22.1 Report of Foreign Bank and Financial Accounts

Any U.S. person with financial interest or authority over foreign financial accounts that exceeds $10,000 must file a Form TD F 90-22.1 Report of Foreign Bank and Financial Accounts (“FBAR”). These are required to be filed electronically by June 30th of the following year.  The persons who are required to file this form include U.S. citizens, resident aliens, and entities created, organized, or formed under U.S. laws.

The following types of financial accounts would need to be reported on the FBAR if you meet the filing requirement threshold:

  • Bank accounts (checking and savings)
  • Investment accounts
  • Mutual funds
  • Retirement and pension accounts
  • Securities and other brokerage accounts
  • Debit card and prepaid credit card accounts
  • Life insurance and annuities having cash value

The penalty for failing to file an FBAR can be as high as the greater of $100,000 or 50% of the maximum balance of the account per violation. For example, if you fail to file for two consecutive years, the total penalty could be as high as 100% of the account balance.

For those who did not realize this information was required to be filed, the IRS has enacted an Offshore Voluntary Disclosure Program to reduce the penalty.  The penalty assessed in the Program is calculated at 27.5% of the highest year’s aggregate value during the period covered by the voluntary disclosure (the highest balance over an eight-year period).  If you have multiple accounts, the penalty is assessed on the highest combined total year.

Form 8938 Statement of Specified Foreign Financial Assets

Under the Foreign Account Tax Compliance Act (FATCA), any individual with interest in specified foreign financial assets must attach Form 8938 with their tax return if they meet certain filing thresholds. The thresholds for filing this form are listed below:

  •  $50,000 on last day of tax year, or $75,000 at any time throughout the year for single or married filing separate if living inside the U.S.
  • $100,000 on last day of tax year, or $150,000 at any time throughout the year for married filing joint if living inside the U.S.
  • $200,000 on last day of tax year, or $300,000 at any time throughout the year for single or married filing separate if living outside the U.S.
  • $400,000 on last day of tax year, or $600,000 at any time throughout the year for married filing joint if living outside the U.S.

Form 8865 Return of U.S. Persons with Respect to Certain Foreign Partnerships

This Form must be filed if the taxpayer meets any of the following requirements:

  • The taxpayer owned 50% or more of a foreign partnership at any time during the year.
  • The taxpayer owned 10% or more of a foreign partnership at any time during the year, while the partnership was controlled (50% or more) by other U.S. persons. For example, if the foreign partnership is owned by five U.S. taxpayers that each holds a 10% interest, then all five taxpayers must file Form 8865.
  • The taxpayer contributed cash or other property to a foreign partnership in exchange for an interest in the partnership and one of the following two conditions is met.

a. Immediately following the contribution, the taxpayer owned at least 10% of the interest in the foreign partnership, or

b. The value of the property contributed exceeds $100,000.
Form 926 Return by a U.S. Transferor of Property to a Foreign Corporation

The taxpayer must file this Form if it has certain transfers of property to a foreign corporation. The following are considered reportable transfers:

  • The taxpayer transfers cash to a foreign corporation and immediately after the transfer, (a) the taxpayer holds directly or indirectly at least 10% of the total voting power or the total value of the foreign corporation or (b) the amount of the cash transferred by the taxpayer exceeds $100,000.
  • The taxpayer transfers other property to a foreign corporation and immediately after the transfer, (a) the entity holds directly or indirectly at least 5% of the total voting power or the total value of the foreign corporation or (b) the amount of the other property transferred by the entity exceeds $100,000, unless the taxpayer owns less than 5% and is a tax-exempt entity with no unrelated business income from the partnership.
    Form 2555 Foreign Earned Income

Lastly, Form 2555 is used to claim the foreign earned income exclusions and foreign housing exclusion. A U.S. person who meets either the bona fide residence test or physical presence test may exclude up $97,600 of foreign earnings in 2013 from the U.S. taxable income (this limit changes yearly based on inflation).

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