Common Tax Forms for Offshore Reporting
It’s early March and that means tax time for tens of millions Americans. As we become an increasingly mobile society, millions of U.S. taxpayers are wondering what forms are needed to report offshore income, assets and bank accounts. While no substitute for a good tax lawyer, CPA or enrolled agent, we offer a quick summary of the most commonly used forms.
U.S. taxpayers with offshore accounts or income, U.S. citizens living abroad, dual nationals and green card holders may all have special reporting obligations.
Form 114 – FBAR. Short for Report of Foreign Bank and Financial Accounts, the FBAR form is actually a Treasury Department form and not one published by the IRS, although the IRS collects the forms and enforces compliance with the program.
If you have aggregate foreign financial holdings of $10,000 or more at any time during the year, the government requires every offshore account to be listed on an FBAR. The $10,000 is measured in U.S. dollars so currency conversion may be required. Having an ownership interest or signature authority triggers the requirement.
Foreign accounts must also be reported on Schedule B of one’s individual income tax return. Because the FBAR is a Treasury Department form, the normal rules for filing extensions do not apply. Simply getting an extension for filing one’s income tax return does not extend the filing deadline for FBARs.
Forms 2555 and 2555-EZ. Use these forms to calculate the Foreign Earned Income Exclusion and any Foreign Earned Income Housing Deduction. Depending on certain foreign residency thresholds, up to $99,200 of foreign earned income may be deductible from your U.S. return. The exclusion does not apply to social security taxes, however. Self-employed taxpayers must still pay Uncle Sam for social security unless living in a country with an agreement with the United States. Canada and many European countries have such agreements in place.
If you live in a low tax country such as Dubai, the exclusion is a great deal. Live in a high tax country? Keep reading!
Form 1116 – Foreign Tax Credit. This form allows taxpayers to get a credit for income taxes paid to another country. The purpose of the credit is to avoid double taxation of the same income.
U.S. taxpayers living in high tax countries may get a much better deal by using the Foreign Tax Credit instead of the Foreign Earned Income Exclusion. And unlike the Form 2555 exclusion, the credit is available on both earned and unearned income.
Form 8938 – FATCA form. Short for the Foreign Account Tax Compliance Act, FATCA is a 2010 law that requires taxpayers to disclose certain foreign financial assets. Similar to the FBAR form, the FATCA form has different filing thresholds and slightly different definitions of qualifying foreign assets.
Often taxpayers must file both forms, although sometimes only one is necessary.
Many U.S. citizens own real estate in foreign countries. Often direct ownership of foreign real estate is not allowed meaning that a corporation or trust must hold the property. Although the real estate itself need not be reported, the value of the trust or corporate shares must be reported on the FATCA form.
Form 8288 – FIRPTA. While on the subject of foreign real estate, the IRS has certain filing requirements for foreign persons disposing of a U.S. property interest.
Form 8288 is used for reporting and withholding mandated by the Foreign Investment in Real Property Act (FIRPTA).
Form 3520 – Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. Some foreign gifts and inheritances as well as transactions with foreign trusts need to reported on Form 3520.
Forms 926, 5471, 8832, 8858 and 8865. These forms are for foreign corporations and partnerships or transactions with foreign businesses.
This list isn’t exhaustive. The U.S. tax code has become so complex that few individuals prepare their own taxes. Tax preparation software has made the task easier but we continue to recommend that taxpayers with cross border tax issues consult an experienced offshore tax attorney. This is especially true if you have unreported foreign accounts.
