If you are like most people, it is fun to travel especially all around the US and all over the world. Actually, I recently traveled through Europe on vacation. It is great meeting people from other countries and hearing their stories. As a tax practitioner, I have met many people from many different foreign countries. I have served clients that were from Great Britain, Germany, Ireland, Sweden and even Norway.
They have all come to see me for various reasons. In this article I thought I would talk about some of the various scenarios in which someone from a foreign country would need to be aware of the tax trap that may be set for them. But be aware as some of these issues apply to U.S. citizens with assets abroad or income earned in a foreign country.
If you are a dual citizen of a foreign country and the U.S. or a resident alien, you are subject to federal income tax in the United States. The U.S. government, via the Internal Revenue Service (IRS), gets to tax 100 percent of your worldwide income.
A resident alien is defined a someone who spends more than 183 days in the U.S. in the current year (or the look-back period). The look-back period counts 100 percent of the days spent in the current year, 1/3 of the days in the previous year and 1/6 of the days in the year before that. So you could literally spend 125 days in the U.S. for each of the last three years and still meet the test as a resident alien and be required to file an individual tax return and pay U.S. tax on your worldwide income.
This next quagmire you need to be aware of applies to U.S. citizens and resident aliens. In general, if you are a United States person who has a financial interest in or signature authority over at least one financial account located outside of the United States you have a requirement to report to the U.S. government, through the U.S. Treasury, that you have this account. However, if you have less than $10,000 (in U.S. dollars) in all of your foreign bank accounts, there is not a separate reporting required. Unfortunately, this amount is determined by looking at the highest balance in your accounts during the calendar year. So if the highest balance in account A is $9,000 and the highest balance in account B is $2,000, then you are required to report this to the U.S. government. This is the case even if the balance at the end of the year may be $5,000 total in both accounts.
Should the aggregate of the highest balance of your accounts exceed the $10,000 limit, then you need to file Form 114, Report of Foreign Bank and Financial Accounts by June 30, 2016 for the 2015 calendar year. There are no extensions available for this form. The maximum penalty is $10,000 per violation. The form is required to be filed for each year in which you had this account. If the account is a joint account, each individual is required to file the Form 114. Now the final kicker, this has to be filed electronically. Effective July 1, 2013, the IRS no longer accepts paper filing of this return. You can go to http://bsaefiling.fincen.treas.gov/main.html to find out how to electronically file or contact a tax advisor who has experience with this form. Please note, the 2015 e-filing of Form 114 is the last one with a due date of June 30. Starting with the 2016 calendar year filing, the FBAR returns will be due starting April 15 of each year.
One final note on the FBAR forms. Please be sure to report the income that is generated on the accounts you report on the FBAR forms. If you fail to do so, this can be a criminal matter as that is looked as tax evasion. If you have a foreign bank account, did not report the income you will need a referral to an attorney to assist with this type case. Please call our office for a referral to a qualified attorney.
Of course we cannot forget the nonresident aliens. These are the people who come to the US and generally spend 90 days or so a year but they either earn money, own property or have both (but the same 183 day rule stated earlier still applies). In their case, they need to file a tax return to pay taxes on the income earned or the gain realized on the sale of property. So for that foreign national gentleman who sold his house in Cocoa Beach that he owned for four years as a rental, the buyer of the property (this is handled by the title company) is required to take federal withholding from the sales proceeds. There is an option for the nonresident to opt out of this, but you need to consult a tax adviser well in advance of the closing to make sure this is handled properly. The foreign seller will need to file Form 1040NR in order to obtain a refund of any overwithholding.
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