Day 13: Step #5, Understanding The Tax Implications Of Your Move Overseas

How To Stay Compliant—Reporting Requirements For The American Abroad

Dear Student,

Today’s lesson is relevant only for U.S. citizens and green card holders. If you’re not an American, your tax situation is much less complicated overall.

Lucky you.

Meantime, we Americans are taxed in the States on our worldwide income no matter where we roam or for how long. The practical implication of this is that we Americans retain a reporting obligation Stateside forever (or until we’re no longer Americans).

First and foremost, you must file a tax return with the IRS each year, again, no matter where you’re living, unless your total income is less than the annual exemption amount of US$11,700 (in 2014) for a single 65 or older or US$21,500 for a couple both of whom are 65 or older. You can check Chart A in the instructions for Form 1040 for your filing threshold if you’re not over 65.

If you’re living outside the United States (or, in fact, if you’re even just traveling outside the United States) on April 15, then you are issued an automatic two-month filing extension…meaning your annual return isn’t due until June. 15. However, I recommend that you file Form 4868 if you won’t have your return done in time (by April 15). This way, your extension is for six months (until Oct. 15). If you’re going to miss the June 15 deadline, you can file Form 4868 by that date to get an extension until October, but it’s safer to just file the form in the first place.

That annual IRS filing requirement applies to all Americans (again, unless your total annual income is below the annual exemption amount) whether you actually owe any taxes or not. In addition, depending on your situation, the American abroad can have other filing requirements Stateside, as well. For example…

The most common filing requirement is what is referred to as the Foreign Bank Account Report (FBAR), or FinCEN 114 (you can see it here). This form must be filed online by any American who has signatory control over bank accounts outside the United States that have contained a cumulative total of US$10,000 at any point during the previous calendar year.

Let’s be clear on this. If you have 10 bank accounts in 10 different countries, each with US$1,000 in them at the same point during the prior year, you have to file this form.

If you have one bank account in Mexico (that you use, say, to pay the local electric bill for your vacation home in Puerto Vallarta)… and it has US$100 in it most of the year… but you wire down US$10,000 at some point to pay for home repairs… and the funds are in the account only for a single day before you withdraw them to pay your contractor… you also have to file this form.

The form is due by June 30 of the following calendar year (June 30, 2022, for calendar year 2021). If you have US$9,000 in accounts total during 2021, and you wire another US$1,000 to one of them on Jan. 1, 2022, then you don’ t have to file the form for 2021, but you will have to file it for 2022 (it will be due June 30, 2023).

The information required on the FBAR form includes the bank name, the bank address, the account number, and the highest value of the account during the year. If your spouse has signing authority over the same accounts, you can complete one form for both of you.

If you are a signer on an account in which the funds aren’t your assets (for example, a trust account or a corporate account), you are meant to include the account information on your form… unless the account is being reported on another form, for example, a form filed by the relevant corporation.

The other filing requirements you may have as an American abroad include a form if you’ve set up an offshore corporation or LLC, whether for a business or to hold a piece of property, or if you set up an offshore trust. These forms are required for what’s called U.S.-controlled foreign entities. These are entities that have U.S. shareholders or partners that own more than 50%. Presumably, entities you establish to hold your assets (real estate) or your own business (if you set one up) would fall into this category.

Until you become familiar with these forms (and maybe even after) it’s best to seek professional help in completing them. Specifically, I’m talking about Form 5471 for corporations, forms 3520 and 3520-A for trusts, and Form 8832 if you want to have an entity disregarded for tax purposes (meaning that income from the entity simply flows through to your personal 1040 form).

I strongly recommend that you seek professional advice before setting up any offshore entities to make sure you don’t create a situation you don’t intend.

The penalties for not complying with the filing requirements are onerous. In the case of the FBAR form, the penalty for non-wilful violation is up to US$10,000 per violation. The penalty for a wilful violation is the greater of US$100,000 or 50% of the account value. This means you could be fined US$100,000 for not reporting a bank account containing US$10,000 if the IRS decides you didn’t report it wilfully.

Again, I should clarify. The requirement is for bank accounts and “financial accounts.” Financial accounts include a stock brokerage account or any other account holding paper assets, such as gold certificates.

Thanks to the Foreign Account Tax Compliance Act (FATCA) those with offshore financial assets (which include offshore financial accounts) must file Form 8938 with their annual tax return. The threshold for filing Form 8938 is a bit more complicated than the FBAR. If you live in the United States, the threshold is less than if you live abroad… and if you’re married you’re allowed twice the assets before you have to file. Check here for the details.

For now, any offshore real estate holdings remain non-reportable as long as you hold title in your own name. That is to say, foreign real estate does not qualify as a foreign financial asset… neither does gold held in an allocated account in your name. Put those assets in a trust, corporation, or LLC, and you now are required to file one of the tax forms mentioned above (Form 3520/3520-A, Form 5471, or Form 8832) with the IRS.