FATCA—Should You Be Worried?
By Josh Bennett on June 3, 2014 - Category: Uncategorized
Unlike most other developed countries in the world, the US taxes its citizens who live abroad, insisting on their paying income tax on foreign earned income, be that salary or investment income. FATCA, or the Foreign Account Tax Compliance Act, was passed in 2010 in an ongoing effort to clamp down on tax evasion abroad, and goes into effect on the first of July, 2014. Under this act, foreign financial institutions will be required to report details of any account they manage that is held by a US citizen or green card holder, regardless of whether that account holder lives in the US or abroad.
What does this mean for you? It means that if you, as a US citizen, hold an account in any foreign institution, whether it be a local bank, a trust, a stock, hedge, or private equity fund, a foreign partnership interest or even life insurance or annuity policies with a cash value, they are obligated to alert the IRS as to the existence and value of your account. (If they fail to do so, they’re subject to a 30 percent withholding when the investment is cashed out.)
Additionally, if you live in the US and possess an overseas account, you are required to file IRS Form 8938, Statement of Specified Foreign Financial Assets, along with your annual 1040 return, reporting any assets abroad that total $50,000 or more. US citizens living abroad must report assets in excess of $200,000 for single filers and $400,000 for those filing joint returns. (Note that this is in addition to filing the required FinCEN Form 114, commonly referred to as FBAR, Report of Foreign Banks and Financial Accounts, required for any accounts with a total asset value of $10,000 or more.)
As of September 2013, G-20 leaders endorsed the idea to create a single model for such a financial information exchange, stating that it should become the new global standard. As of this writing, the US Treasury Department reports that 66 countries are in various stages of participation/cooperation.
Many US citizens who live overseas were stunned, however, when their foreign financial institutions closed their accounts and essentially locked them out in an effort to avoid the onerous reporting requirements and any possible associated penalties, a move that could seriously impinge on an individual’s ability to live and work abroad.
A number of recent media reports, including Time magazine and BBC Magazine, have highlighted the substantial increase in US citizens voluntarily renouncing their citizenship as a result, at least partially, of FATCA. Unsuspecting individuals born abroad to at least one parent who is a US citizen, even if they have never set foot on US shores, are discovering to their dismay that the US considers them citizens by extension and therefore liable. That these requirements and penalties are onerous has been vigorously disputed by the US Treasury Department, which insists that it has facilitated the reporting in a simple, streamlined fashion. There are many, however, who disagree.
Penalties for failing to file are stiff: up to $10,000 for failure to disclose and overall penalties up to a maximum of $60,000, in addition to possible criminal penalties. If you are concerned that FATCA may apply to you, don’t wait until it’s too late—speak to a competent tax professional who specializes in asset protection.