By Laura K. Barooshian, CPA, MST
Throughout the past year we have been writing to alert our clients and their advisors that new Foreign Account Tax Compliance Act (FATCA) rules and the related reporting requirements would be part of the 2011 income tax filing. Well, tax season is here and those new rules are now a reality. What does it all mean?
For financial institutions FATCA will generally be effective in 2013 but for individuals with "foreign financial assets" the rules apply to 2011. So what is a "foreign financial asset," to whom do these new reporting rules apply, and what are the filing thresholds?
| A "foreign financial asset" is generally defined as: |
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any financial account maintained by a foreign financial institution, |
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stocks and securities issued by someone who is not a U.S. person and which are not held in a U.S. financial account, |
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any interest in a foreign entity (partnership, corporation or trust), or |
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any financial instrument or contract with an issuer or counterparty that is not a U.S. person. |
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| Some examples of items which are considered to be a "foreign financial asset" include: |
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stock purchased directly on a foreign stock exchange, |
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stock issued by a foreign corporation and held directly by a U.S. person, |
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interest in a foreign mutual fund, foreign hedge fund, and foreign private equity fund, |
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a note, bond or other indebtedness issued by a foreign person, |
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an interest in a foreign trust or estate, and |
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an interest in a disregarded entity which holds any of the above. |
Now let's take a look at who must report these assets on their 2011 income tax return. Generally, Form 8938 (Statement of Specified Foreign Financial Assets) will be required to be filed by a U.S. citizen, permanent resident (green card holder), or resident alien of the U.S. or a nonresident alien who makes an election to be treated as a resident alien for tax purposes.
| The last item to consider in determining whether or not Form 8938 is required to be filed is the value of the foreign financial assets. The following guidelines apply to filing Form 8938: |
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Single individuals (and Married individuals filing a separate return) living in the U.S. must file Form 8938 if the total value of the foreign financial assets exceeds $50,000 on the last day of the year or $75,000 at any point during the tax year. |
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Married individuals, filing a joint income tax return, and living in the U.S. must file Form 8938 if the total value of the foreign financial assets exceeds $100,000 on the last day of the year or $150,000 at any point during the tax year. |
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Single individuals (and Married individuals filing a separate income tax return) living outside of the U.S. must file Form 8938 if the total value of the foreign financial assets exceeds $200,000 on the last day of the year or $300,000 at any point during the tax year. |
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Married individuals, filing a joint income tax return, and living outside of the U.S. must file Form 8938 if the total value of the foreign financial assets exceeds $400,000 on the last day of the year or $600,000 at any point during the tax year. |
We suggest individuals and their advisors who believe they have "foreign financial assets" that will be required to be reported on Form 8938 for 2011 gather as much information as possible as to the ownership and value of those assets and contact their DGC team member to discuss how these new rules will apply to them.
We expect these rules to become more complex and invasive as the IRS fully implements FACTA. Recently, the U.S., France, Germany, Italy, Spain, and the United Kingdom announced they are "exploring a framework to share information on bank accounts across borders."
The international tax team at DGC is ready to assist with any questions you have in this area. Please contact Laura K. Barooshian at 781-937-5332 or Laurie J. Austin at 781-937-5329 with any questions.
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