The FATCA for Americans Abroad
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We talk about US taxes a lot here, but did you know reporting your foreign assets to the US government is just as important? FATCA, or Foreign Account Tax Compliance Act, gives foreign institutions and Americans living abroad the responsibility to report bank details and assets. FATCA is a prominent law that you’ll need to know, so we’ll break it all down for you in this post.
What is FATCA
The Foreign Account Tax Compliance Act – or FATCA – was founded and authorized by the US Treasury Department in 2014. Essentially, this law is made to track potential illegal tax activity and monitor American taxpayers earning income abroad. The government tracks through income and investments deposited into foreign bank accounts.
Additionally, through FATCA, the US government has the power to withhold payments from being deposited into certain foreign financial accounts or other entities.
Who Needs to Be Compliant with FATCA
You may be surprised to learn that it’s not just US individuals that are affected by FATCA – but foreign institutions and governments as well. The Foreign Account Tax Compliance Act makes sure everyone needs to be involved to prevent illegal money activity overseas.
Here is a list of who must be tax compliant with FATCA every tax season:
- US Citizen or Green card holders abroad (a.k.a. “resident aliens”)
- US business owners
- US individuals who are owners or majority shareholders in a foreign corporation
- Foreign governments
- Foreign banks and institutions that accept and store money
- Investment houses that accept and store money, plus work with foreign institutions
- US banks that operate with foreign banks
Two Ways FATCA Affects Expats
How does the FATCA law affect financial institutions and Americans living abroad? In the following two ways:
- It requires expats with foreign bank accounts to report their assets when filing a US federal tax return if they reach a certain monetary threshold
- Makes foreign financial institutions (e.g., banks and investment firms) report who their US account holders are and grant the IRS authorization to monitor expat’s accounts
Foreign Financial Institutions Explained
According to the IRS, the following foreign financial institutions can under the FATCA law:
- Mutual fund institutions
- Investment entities (hedge or private equity funds)
- Certain insurance companies
The following institutions are usually exempt from having to report or register under the FATCA law:
- Most governmental entities
- Non-profit organizations
- Local, small banks and financial institutions
- Retirement entities
Institutions eligible to register under the FATCA law can do so online and receive a Global Intermediary Identification Number (GIIN). Approximately 400,000 global institutions are already registered. To check if your local bank or institution has a GIIN, you can use the FFI List Search and Download Tool.
Additionally, foreign financial institutions that agree to report their account holder’s information to the IRS can withhold 30% on payments if the expat account holder does not comply with the FATCA law.
But if a foreign financial institution fails to report to the IRS, a 30% withholding tax will be placed on them when or if they trade in US markets.
FATCA Filing Thresholds for Expats
According to the IRS, if you are a US expat taxpayer with financial assets outside the United States, you will need to report such assets every year on Form 8938 – Statement of Specified Foreign Financial Assets.
Here are the FATCA for Americans abroad filing thresholds:
- Single or filing separately from spouse: If you have more than $200,000 at the end of the year or $300,000 at any one time in the year in foreign financial assets, you’ll need to submit Form 8938
- Married filing jointly: If you are filing jointly with your spouse and have more than $400,000 by the last day of the year or more than $600,000 at any one time during the year, you’ll need to submit Form 8938. This applies even if only one of the spouses lives abroad.
If American expats need to report their assets on Form 8939, they also need to file the FBAR since they reached the FBAR filing thresholds.
The Foreign Bank Account Report
The FBAR – or Foreign Bank Account Report – is similar to FATCA since its purpose is to uncover tax avoiders or people who use foreign bank accounts to hide money.
To put it simply, the FBAR is for foreign bank accounts. It’s specifically for people who have had $10,000 or more in all of their foreign bank accounts at any one time during the tax year.
Expats who fall within the FATCA reporting requirements fall within the FBAR filing requirements and can easily file both forms through the MyExpatTaxes software before June 15th (October 15th if filing FBAR separately).
FATCA for Americans abroad is different from the FBAR. While it’s also used to report foreign financial accounts and assets – it’s more comprehensive due to its high filing thresholds and reporting of the income from such assets.
Banking Issues and the FATCA
It is possible that you, as an American abroad, could experience bank issues while living abroad. Many foreign institutions do not want to go through the extensive paperwork the US government wants them to do if they have American customers. So they may not accept you.
It is also not uncommon to go to a bank overseas, request an account, and get denied because of your citizenship. This is, unfortunately, an obstacle US citizens will need to overcome abroad. We suggest just being safe and having a US bank account if you cannot find a bank account in time.
There have been reports of American families not buying a house, opening up a bank account, or credit card abroad due to institutions denying US citizens the FATCA laws.
Plus, people become angry being seen as a possible tax evader and have to hand their bank account asset details to the US government, even though they no longer live in the United States. In severe cases, American expats renounce their citizenship due to all of this.
Avoid FATCA Penalties with MyExpatTaxes
There is no fun in fees or penalties as a US citizen abroad. You can avoid failing to pay $10,000 or more in fees if you file on time with the proper forms. As an American expat, you can stay and remain tax compliant every year when you file expat taxes through our friendly expat tax software.
If you did forget to file and may have missed years of reporting under the FATCA rule, you can take advantage of our affordable Streamlined Procedure tax preparation program. It is one-third the price of other competitors in the expatriate taxation world.