FATCA Part Deux

FATCA is going to be a really painful experience.  Foreign Financial Institutions (FFI) will have a compliance nightmare, especially if they have to do a lot of withholding and remitting to the IRS.  Already, the US Treasury is backing off on some things like allowing an FFI to register with the IRS and report to its own country, provided the country is a FATCA partner.  This is a symptom of the level of difficulty faced by the participants to implement FATCA.  This is probably why Japan and Australia have refused to comply. FATCA has two faces: one that requires individuals confess their foreign accounts to the IRS on Form 8938 and the other requires FFIs to report on their customers who are US Citizens or Permanent Residents. How the banks will know who to report on is unknown right now because someone can have multiple bank accounts and multiple banks.  The focus of FATCA is not to collect withholding but to collect information.  Where they really want to collect (but have not emphasized ) is going after "tax cheats" and "money launderers".  What defines either is left up to the US Congress to define and redefine as needed. Some of the best tax avoidance tools are available domestically in the USA and do not require special reporting; but that is for another day.

Obamacare and the ex-pat

Well, now that President has been proven to lie that Obamacare is not a tax, how does it affect us?
For starters, these seven new taxes apply to those of us earning less than US$ 200,000:

1. Flexible spending accounts now are capped at $2,500 per year

2. Medical expense exclusion raised from 7.5% of gross to 10%

3. 20% penalty for non-medical withdrawals from Healthcare Savings Account (up from 10%)

4. 10% excise tax on indoor tanning salons

5. 40% excise tax on higher cost health insurance plans

6. Medicine Cabinet Tax - no purchases of over-the-counter drugs from a Flexible Spending Account

7. New surtax of 1% of your adjusted gross income (rising to 2.5% by 2016) if the government doesn't like your health insurance

The minimum coverage (number 7) does not apply to US citizens living overseas. You can figure out what else does apply. If you earn over US$ 200,000.00, you have special taxes all your own. Next blog I'll talk about that.

Meanwhile, US health insurance costs will skyrocket and we all will subsidize those who have health care provided for them.

Sweet dreams.

Passive Foreign Investment Company

As if the Controlled Foreign Corporation designation isn't bad enough, there is one that is even worse. It is the "Passive Foreign Investment Company" (PFIC) label. Passive income seems to be a particular target for the tax man. This designation was created by Congress to appease the mutual fund industry which had to compete with passive investments made in non-Controlled Foreigh Corporations. To be ruled a PFIC, anything organized as a corporation that (1) receives 75% or more of its income from passive investment sources or (2) has invested 50% or more of its assets in passive investments as distinguished from investments in a trade or business.

Any US shareholder who owns ANY interest in a PFIC is required to file form 8621, however no filing for tax year 2010 was required which means the first required year is 2011.
The CFC tax rules and the PFIC rules overlap so the law was modified in 1997 to relieve U.S. shareholders of compliance with the PFIC rules if the same income was subject to tax under the subpart f rules for CFCs. BUT the "fine print" indicates that this relief is only available for taxpayers who elect to treat their portion of the PFIC as a "Qualified Electing Fund" (QEF) in which the taxpayer pays taxes on his or her share of the fund's current earnings. This election would only apply to U.S. persons who own 10% or more of the PFIC shares and where more than 50% of the stock is owned by five or fewer U.S. shareholders.

See how nutty this all is? A foreign partnership that is organized to make passive investments will not get the PFIC designation because it's not a corporation and that may be an option. Please note that the IRS may impute CFC designation to partnerships (even though they are not corporations) and those rules should be considered carefully.

Controlled Foreign Corporations

¨Controlled Foreign Corporation¨ (CFC) is a really nasty designation to have put on a foreign corporation in which you own shares. For a corporation to be labeled ¨CFC¨ U.S. shareholders have to own or control more than 50% of the stock. Please note that this is NOT ¨50% or more¨ but ¨more than 50%¨. That means that a corporation in which a foreign national owns 50% or more, cannot be labeled ¨CFC¨ no matter how many U.S. shareholders there are. OK, so what is the definition of a U.S. shareholder? I thought you´d never ask. A U.S. shareholder is a ¨person¨ who owns 10% or more of the corporation´s voting stock. Notice that´s ¨10% or more¨ NOT ¨more than 10%¨. Gotta´ watch these things folks. It can be tricky. It means that, if your ownership of voting stock in a foreign corporation ever exceeds 9.99999999...%, YOU are a U.S. shareholder of a foreign corporation. You can read an official quick summary here. The definition of a ¨person¨ probably is the following from an IRS bulletin:

United States Person The term “United States person” means (1) a citizen or resident of the United States, (2) a domestic partnership, (3) a domestic corporation, or (4) a domestic estate or trust.

This is the only definition I could find in recent publications and refers to FBAR which is closely related to CFC in intent. If I find another, different definition, I´ll publish it ASAP.

So, why is ¨CFC¨a bad label. It means several things but for one; filing the form 5471 is required and it´s not fun. If you want to have a look click here. Failure to file can generate penalties up to US$ 70,000. Look at the instructions and see.

Please realize that the IRS imputes ¨foreign corporation¨ status to foreign limitadas, LLCs and partnerships; so using one of those vehicles DOES NOT remove liability in the eyes of the IRS. Be warned.

Filing requirements

I've been getting a lot of question about filing requirements so here is the answer.

You must file a tax return if you earn the following amounts of income:

Self-employed, any age: $400
Children and Teens classified as a dependent: $5,700
Single, under 65: $9,350
Single, over 65: $10,750
Married, filing jointly, both spouses under 65: $18,700
Married, filing jointly, one spouse over 65: $19,850
Married, filing jointly, both spouses over 65: $20,900
Married, filing separately, any age: $3,650

The first question most delinquent expat taxpayers have is almost always “How many years of US expat taxes do I need to file?” Unfortunately, there is no single answer to this question as it really depends on the specific situation. Technically, the IRS asks that you file for all years that your income was over the thresholds, but usually six to eight years will suffice.

For the FBAR form 8938 this exception exists (straight from the IRS form instructions):

Exception if no income tax return required.

If you do not have to file an income tax return for the tax year, you do not have to file Form 8938, even if the value of your specified foreign financial assets is more than the appropriate reporting threshold.

There you have it.

FBAR

We all know that FUBAR means, "Fouled Up Beyond All Recognition". What does FBAR mean?
How about "Fleeced Beyond All Recovery"? Nah. It actually stands for, "Foreign Bank And Financial Accounts". Right. Well, the form terrorizing people now is the Form 8938, which is new for most people this year. I'm addressing US Citizens living overseas now and the threshold of who must file is determined thusly:

If you are a taxpayer living abroad you must file if:

• You are filing a return other than a joint return and the total value of your specified foreign assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year;
  
• 
  
• OR
• 
  
• You are filing a joint return and the value of your specified foreign asset is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year.

This is from the IRS. If you don't have assets like these, rest easy (yes, as in, "calm down") and forget this form, at least this year.

Foreign Financial Assets

There is another deadline looming on the horizon for US citizens living overseas, and it could include those living domestically in the US. It is the filing date for the form TD F 90-22.1 which is June 30 each year and there is no provision for an extension. If you (wherever you live) have more than US$ 10,000 in foreign financial assets, you are supposed to file this form. Willful failure to file gets you a penalty of US$ 10,000! Supposedly, if you neglected to file in previous years and you file to catch up with an appropriate "mea culpa" (I'm guilty) statement asking for forgiveness, the fine will be forgiven. This is for "financial" assets only and, "yes" it includes your checking account from which you buy groceries if you live overseas and the balance goes over $10,000 even once during the year. Sorry to give you the bad news. Don't get caught on this one as not filing. Take care of it. Soon.

Overseas Due Date

Just a quick hint if you're overseas and can't get your tax return filed by April 15: you don't have to.
The good news is that you can get an automatic extension to June 15 just by claiming it on an election statement included with the tax return. Assuming you're not military, you should state that you live outside the United States and were residing outside the United States during the time period that includes April 15 and you claim the automatic extension to June 15.
No penalties. However, the IRS will charge interest on unpaid taxes from April 15 which should not be much. So, rest easy and check again for another tip that will help keep you out of trouble.