Tax Tips for U.S. Americans Abroad
Perhaps as an American abroad, a few thoughts have streamed through your head like “What is FBAR filing” or “do I need to file an FBAR?” Here at MyExpatTaxes, we encounter questions like these on a weekly basis from expats in need of tax understanding and support. In today’s post especially, we’re going to walk you through everything you need to know about the FBAR.
What is the FBAR
The FBAR stands for Report of Foreign Bank and Financial Accounts. Plus, according to the IRS, a US American expat who is living and working abroad must file an FBAR if:
1. the United States person had a financial interest in or signature authority over at least one financial account located outside of the United States; and
2. the aggregate (total) value of all foreign financial accounts exceeded $10,000 at any time during the calendar year reported.
”United States person” includes U.S. citizens; U.S. residents; entities, including but not limited to, corporations, partnerships, or limited liability companies, created or organized in the United States or under the laws of the United States; and trusts or estates formed under the laws of the United States.IRS
This can be complicated for the average American expat to understand, so we’ll break everything down in the next paragraphs:
What is FBAR Filing
To determine whether you need to file the FBAR is based on how much is and has been in your foreign financial accounts within a full year.
Don’t know what a foreign financial account is? Check out this list below:
- Any bank account located outside of the US: Even American banks using a foreign branch (i.e. HSBC UK) is still a foreign bank account.
- Pension funds from working abroad: Most companies will set up a pension for you while you’re working for them. So if you’re working abroad, you probably have a foreign pension with money that you can withdraw at some point. Check with your employer if you’re unsure!
- Foreign life insurance policies with a cash value: Most US expats don’t realize this… but remember that foreign life insurance policy you pay premiums on in hopes of getting a nice annuity later during retirement? Yeah, that’s a foreign financial account too! (Term life insurance policies with no expected cash flow (investment) don’t count)
- Foreign mutual funds: Decided to use an EU broker instead of a US one? Foreign financial account alert!
Secondly, once you establish that you have at least one foreign financial account, you need to check if the aggregate value/total value in your accounts exceeded $10,000 at any time. This is the total (over $10,000) from ALL your foreign financial accounts at any time in the year. It DOES NOT mean if any ONE of the above foreign financial accounts has over $10,000.
As an example, let’s say you are a US expat living in Copenhagen, Denmark. You’ve had an open account for less than a year. This open account is a foreign bank account because it’s located in Copenhagen. On July 3rd, 2019 your account hit the $10,001 mark, but then after paying your credit card bill the week after, you went down to $9,000. You still need to report an FBAR because you exceeded $10,000 one time within the year. It’s a reporting threshold all Americans abroad need to take responsibility for.
It’s especially important to know that you must convert foreign money into USD when reporting the FBAR. So if the value of your money is in a currency stronger than USD, then you might unwillingly cross this $10,000 threshold sooner than expected.
How to Calculate the Total Value for the FBAR
Here is an example of how to calculate the total balance for all your foreign financial accounts:
- You have 3 bank accounts: 1 in the US, 2 in Germany
- You work in Germany, and have a pension set up there by your employer
- You also bought a life insurance policy from a German company and have been funding it for the last 10 years
What to do:
- Calculate the maximum (not ending) balance in the year for ALL accounts.
- Ignore any US accounts and instead only sum up total foreign financial accounts
- Convert foreign money to USD to determine if they exceed $10,000.
Remember: Once the total of your accounts goes over $10,000 at any one time during the year – you’ll have to file an FBAR.
Preventing Filing Penalties
As we report in this blog here, penalties can happen if Americans citizens abroad accidentally don’t know they have to file. The good news is if the IRS did not contact you yet and charge up to $10,000 penalty, then you can make it up penalty-free. You can use the Streamlined Procedure, which we at MyExpatTaxes can gladly assist you with.
For more information about the amnesty program – the Streamlined Procedure – you can read about it here or just come to us at MyExpatTaxes. We can help you answer your expat taxes questions and explain a foreign earned income exclusion. Plus, we have a quick software solution to prepare your US tax forms and settle income taxes from abroad in 30 minutes or less. We bet you will like it for the upcoming tax year.
This post was updated on December 18, 2019.