Every tax year, U.S. taxpayers are required to report any financial assets held outside the country to the Department of the Treasury if those assets have a combined value greater than $10,000. If the combined value of those assets exceed $50,000, additional reporting to the Internal Revenue Service is also required for individual taxpayers. These additional foreign financial assets are reported on Form 8938, a “Statement of Specified Foreign Financial Assets,” as part of the annual income tax return.
PYA’s accounting and tax consulting services can help with the challenges of reporting with this new foreign financial assets form.
Form 8938 is part of the Foreign Account Tax Compliance Act, which was signed into law in March 2010.
There are three requirements to file Form 8938. Taxpayers must:
1. Be a specified individual
A specified individual is a U.S. citizen, resident alien of the U.S., non-resident alien filing a joint income tax return, or a non-resident alien of the U.S. who is a resident of American Samoa or Puerto Rico.
2. Have specified foreign financial assets
These financial assets may include any account maintained by a foreign bank or financial institution, including assets held for investment. These assets could include stocks or securities from a foreign corporation as well as interest in foreign retirement plans, estates, trusts, pension plans, deferred compensation plans and include jointly-owned assets. Personal residences, rental properties, and foreign currency not in a financial account need not be reported.
3. Have foreign financial assets valued greater than the applicable reporting threshold
- For unmarried taxpayers living in the U.S., that threshold for the total value of the foreign financial assets must be more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.
- For married taxpayers filing jointly and living in the U.S., the threshold is $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year.
- Unmarried taxpayers living abroad have a threshold of more than $200,000 on the last day of the tax year, or more than $300,000 at any time during the tax year. Joint returns for taxpayers living abroad have a threshold of $400,000 and $600,000. Taxpayers living abroad are defined as U.S. citizens whose tax homes are in another country and who are either a resident of that country for the tax year or physically spend at least 330 days in 12 consecutive months outside the U.S.
Other foreign reporting responsibilities
As stated, Form 8938 isn’t the only document that taxpayers with assets outside the U.S. will be required to submit. For aggregate values exceeding $10,000, Form TD F 90-22.1, Foreign Bank Account Reporting (FBAR), must be filed separately from tax returns and submitted electronically by June 30, 2014. Filing Form 8938 does not excuse citizens from filing the FBAR form, and unlike Form 8938, FBAR applies to LLCs, corporations, partnerships, trusts, and estates, not just individual taxpayers.
Foreign assets covered by FBAR forms include bank accounts, brokerage accounts, mutual funds, trusts, and other types of foreign financial accounts, even though they may not produce taxable income.
There are two determining factors as to whether U.S. citizens are required to file FBAR forms:
1. If the U.S. citizen has either financial interest or authority over one or more financial accounts outside the U.S.
2. If the aggregate value of those accounts also exceeded $10,000 during the tax year being reported.
The threshold for the FBAR form is significantly lower than Form 8938’s threshold. As a result, some taxpayers may find themselves required to submit an FBAR form but not Form 8938.
There are some exceptions to the FBAR form, including: some foreign financial accounts owned by spouses; foreign accounts owned by government entities; or international financial institutions such as the World Bank; taxpayers with individual retirement accounts; foreign accounts maintained by the U.S. military banking facility; and several other exempt groups.
Foreign-sourced financial income is always reportable by U.S. resident taxpayers without regard to the FBAR and Form 8938 filing requirements.
Navigating the ins and outs of foreign assets and taxes can be complicated. If you have questions about foreign financial assets or the new Form 8938 and its requirements, contact the experts listed below at PYA, (800) 270-9629.
