Filing Requirements For Americans
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$14,050 for a single 65 or older or US$27,400 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 in a non-pandemic year, then you are allowed an automatic two-month filing extension… meaning your annual return isn’t due until June 15. However, we 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 Dreaded FBAR
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 Portugal (that you use, say, to pay the local electric bill for your vacation home in Porto)… 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 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 signatory thing can cause problems. Most people aren’t aware of this point. It means that if you’re an expat working for a company in some foreign land, and you have signatory authority over the company’s local bank account, you have to report the account if the company isn’t reporting it.
Note that the FBAR isn’t an IRS form; it’s a Treasury Department form (the IRS’ boss). However, the filing date for the FBAR is the same as your tax return. That means April 15 (in a non-pandemic year) unless you file for an extension. Those living outside the United States get an automatic extension to file until June 15. However, you need to file an extension form 4868 by April 15 to get a full extension to October 15.
All that said, the Treasury Department is still giving an automatic extension until October 15 to file the form for anyone who misses the April 15 deadline. No specific request for extension is required… for the FBAR. While this could change as some point, it’s been in effect since they changed the filing deadline from June 30 to April 15. Still, file the FBAR as soon as you can, just to get it done. You don’t want to run the risk of forgetting about it. The penalties for not filing are draconian.
Certain exceptions can be found on the IRS’ FBAR guidance page here.
You can save time if you have 25 or more offshore accounts to report. In that case, you don’t have to complete the account details on the form, you just check the box indicating that you have more than 25 accounts. You’re still required to maintain the information that would have been included on the form had you filled it out in full, but, for some reason that no one seems to understand, if you exceed the magic number 25, you don’t have to provide individual account data on the FBAR.
Note that, even if you don’t meet the requirements for filing the FBAR, you still have a filing requirement if you hold any bank account offshore. In that case, you must tick a box in Part III on the 1040 Schedule B Form and list the countries where you have an account. Many people don’t realize this, and it is one easy way for the IRS to get you for noncompliance.
Foreign Financial Assets Go On Another Form (And They Include Financial Accounts Reported On The FBAR)
Foreign financial accounts reported on the FBAR are a subsection of total foreign financial assets
Foreign financial assets are “any financial account maintained by a foreign financial institution” and “to the extent held for investment and not held in a financial account, any stock or securities issued by someone that is not a U.S. person, any interest in a foreign entity, and any financial instrument or contract with an issuer or counterparty that is not a U.S. person.”
Form 8938 is the form used if you have foreign financial assets that meet the threshold. It’s possible to meet the requirements for Form 8938 without meeting the requirements for the FBAR and vice versa. You have to look at each reporting threshold individually.
If you’re living in the United States, you are required to complete Form 8938 if you have foreign financial assets of more than US$50,000 on the last day of the year or of more than US$75,000 at any point during the year. These are the amounts for single filers. The amounts double for married couples filing joint returns.
If you live outside the United States, the threshold amounts move to US$200,000 on the last day and to US$300,000 during the year for singles, and double that for married filing jointly.
While foreign financial accounts get reported on Form 8938 even if they are reported on the FBAR, certain other assets don’t have to be reported on this form if they are reported elsewhere… specifically on Form 3520 for foreign trusts, Form 5471 for foreign corporations, and a few other more obscure forms.
One thing to understand is that, even if you’re not required to complete a Form 5471 for shares you hold of a U.S.-controlled foreign corporation, you still have to report the existence of those shares if you meet the overall value threshold for Form 8938. Invest US$50,001 as a minority shareholder in some private company in Canada, and you have to report it. Invest US$10,001 in five difference private companies outside the United States, and you have to report all five investments… and any offshore bank accounts even if the bank account balances fall below the FBAR threshold of US$10,000.
Two foreign assets specifically exempt from Form 8938 are real estate held in your own name (if the property is held in an entity, that entity must be reported on the form somehow) and precious metals. The IRS gives guidance here, stating that precious metals held directly aren’t reportable.
Offshore attorneys and tax experts still debate as to what “held directly” means. However, besides the bullion you keep under your mattress, it’s generally accepted that metals in allocated accounts (that is, metals you own identified in a vault as yours) aren’t reportable.
Foreign currency isn’t reportable either, so if you have 100,000 euros stuffed in your mattress, whether that mattress is in Iowa or Portugal, you don’t have to report the cash (as long as you’re not traveling with it).
That Rental Property In Europe…
Considering buying real estate in Europe but renting it out for all or even just part of the year?
While real estate held in your own name doesn’t need to be reported on Form 8938, any income generated from property you own overseas does get reported on your tax return.
Rental income for non-U.S. real estate gets reported the same way as rental property in the United States. You put the income and expenses for the property on Schedule E on the 1040. You are able to take deductions against the income just as you would for U.S. rental property.
In addition to depreciation and other normal deductions, such as mortgage interest (note that you won’t receive a 1099-B from the foreign bank for this; you’ll have to ask the bank to send you a letter detailing the exact amount of interest you paid for the calendar year), utilities, and property and rental management expense, you will also be able to deduct the cost of checking up on your rental property, i.e. the plane fare to get to the country, etc.
Depreciation, however, is amortized over 40 years for foreign property rather than the 27.5 years for domestic property.
Deducting the cost of checking up on your rental property can also apply to other real estate investments, including agricultural investments. If you fly down once a year to Uruguay to check on your farm, that’s an expense against the income from that property.
One reader years ago bought two land lots on the coast of County Kerry and built a house on each. She furnished both… one for herself and one to be a rental. She hired a local rental management company to take care of the rental property. However, she visited once or twice a year to check up on her rental, staying in the other house. She’d inspect the rental, make any repairs, and then spend a few days or weeks in her house. The cost of the flights and other direct travel expenses were deductible on her U.S. Schedule E… and on her Irish tax return for her rental income.
Yes, along with reporting your rental income on your U.S. tax return, you may likely have a tax filing obligation in the country where the rental property is located, as well. You should seek help from a local accountant on this, keeping in mind that the tax accounting requirements in the foreign country will probably be different than those in the United States. For example, you probably won’t be able to deduct property depreciation. Many countries don’t depreciate built property for tax purposes, and no place I know of, including the United States, allows depreciation of the land value.
If no depreciation is allowed in the country where the property sits, you could end up with a tax liability and tax owed in that country on your net rental income. Meantime, on the U.S. side, you could have a tax loss, thanks to the depreciation.
Depending on the net income from your rental(s), you may not have to file a local tax return. Many countries, including the United States, have minimum thresholds for the amount of taxable income that must be earned before any tax is due. That threshold may be higher than your net rental income if you have only one rental in the country, depending on the size of the property. For example, the tax threshold in France for 2019 was 10,064 euros. Net rental income below that amount isn’t taxed in France.
Other countries tax rental income at the gross level and sometimes as it is earned. This means that in Portugal and Colombia, for example, you pay the tax—well, your rental management company is meant to withhold the tax from the rent they collect on your behalf and pay the tax for you—when the rental income is received.
Penalties
There are several more niche filing requirements that will apply to some… those working in their new home country and those with offshore corporations or other entities, for example. We won’t get into the details of all these filing requirements here, but we’ve included a bonus report in your homework today to help elucidate tax filing for Americans.
Again, we strongly recommend that you should 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-willful violation is up to US$10,000 per violation. The penalty for a willful 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 willfully.