Frequently Asked Questions
FAQs by U.S. Citizens and Legal Permanent Residents
I have a bank account in a foreign country. What are my tax and reporting obligations?
In addition to reporting interest earned on the account on your U.S. income tax return, you must also file a Report of Foreign Bank Accounts (FBAR) with the Department of Treasury if the value of the account exceeds $10,000 at any time during the year. If the funds in the account exceed $50,000, you must also file IRS Form 8938.
I have had a bank account in my home country for several years and never reported it to the IRS. What are my options?
The best way to remedy this problem is to enroll in the IRS Offshore Voluntary Compliance Program (OVDP), a program set up by the IRS to encourage taxpayers with foreign accounts to come into compliance with the tax laws. The sooner you enroll in the program, the better. If the IRS obtains information about your account before you enter the OVDP program, you will be ineligible for reduced penalties and may risk criminal prosecution. If you have an undisclosed foreign account, contact a tax attorney as soon as possible to discuss your options.
What is FATCA? Do I need to be concerned about it?
FATCA stands for the Foreign Accounts Tax Compliance Act, which was enacted in 2010 to crack down on U.S. taxpayers who used offshore financial accounts to evade U.S. taxes. However, the effect of the FATCA reaches far beyond those seeking to evade U.S. taxes. It imposes reporting requirements on nearly all foreign financial institutions with accounts that are beneficially owned by a US person. This includes not only banks and investment funds, but some trusts and corporations that engage in investment activities. Failure to comply with FATCA can result in a 30% withholding tax on all U.S. source income paid to the foreign institution. If you or someone in your family owns a foreign corporation or has an interest in a foreign trust, consult with your tax advisor to determine whether the foreign entity has reporting obligations under FATCA.
I am a U.S. resident and expect to inherit money from relatives living outside the US. Do I have to worry about any tax consequences?
There are generally no U.S. tax consequences for U.S. persons who inherit money from abroad. However, you must file IRS Form 3520 for any gift or inheritance from abroad that exceeds $100,000. While there is no estate tax on assets inherited from foreign persons, a substantial inheritance could affect your own estate tax situation. If you expect that the inheritance, together with your own assets, results in a net worth of more than $5.25 million, you may want to discuss tax planning options with your relatives so that future generations won’t be left with a large estate tax bill.
I am a U.S. resident and own a vacation home outside the U.S. Am I subject to U.S. tax if I sell it?
Yes, any capital gain on the sale will be subject to U.S. taxation. If you are required to pay tax to the country in which the property is located, you may claim a foreign tax credit against your U.S. tax liability.
How do I know if I have to pay U.S. income taxes?
You are subject to U.S. income taxes if either (1) you have income sourced in the U.S. or (2) you qualify as a “U.S. person” under U.S. tax rules. If you qualify as a “U.S. person,” you are subject to U.S. income tax on your worldwide income. If you do not qualify as a U.S. person, you are subject to U.S. income tax only on income that is sourced in the U.S. This includes any income earned from performing services in the U.S.; dividends, interest, and royalties received from U.S. companies or U.S. persons; and income earned through ownership of a business or partnership located in the U.S. There are many exemptions and complex rules governing this area of the tax code, so be sure to get competent advice from a tax professional.
Who qualifies as a “US Person”?
A U.S. Person subject to U.S. income taxation includes (1) U.S. citizens; (2) U.S. legal permanent residents (green card holders) and (3) persons who meet the “substantial presence” test under the U.S. tax code.
Under the “substantial presence” test, you are considered a U.S. Person if (1) you are present in the U.S. for at least 183 days during the calendar year; or (2) (a) you are present in the U.S. for at least 31 days during the calendar year and (b) you have been present in the U.S. for a weighted average of 183 days over the previous three years. Visit the IRS website for more information about calculating your status under the substantial presence test.
FAQs by Non-US Residents
I am a non-U.S. resident but my children live in the U.S. What U.S. tax issues do I need to be aware of when planning my estate?
While there are no U.S. taxes on assets directly inherited by U.S. persons from outside the U.S., if you set up a trust or begin transferring assets to your children during your lifetime, they may be subject to U.S. income tax on any earnings. Additionally, while U.S. estate tax does not apply to the transfer of assets to your children, it will apply to the transfer of assets to their children. Through careful planning, you can help to reduce estate taxes on your grandchildren and subsequent generations.
I am a non-U.S. resident and would like to set up a trust for my children who live in the U.S. Are there any problems with doing this?
Yes. Foreign trusts can result in heavy tax liabilities for U.S. beneficiaries. Be sure to consult a U.S. tax professional prior taking any action. There may be ways to structure the trust to minimize U.S. taxes or you may want to choose another vehicle to implement your estate plan.
I purchased a house while working in the U.S. and would like to keep it as an investment when I return to my home country. Are there any tax issues I need to be aware of?
Foreign ownership of U.S. real estate implicates a number of tax issues. If you own the property as an individual, the property will be subject to U.S. estate tax upon your death. Because the estate tax exemption for non-U.S. residents is only $60,000, the value of the property over that amount will be subject to estate tax at a rate of 40%. U.S. estate tax can be avoided through the use of a foreign corporation or certain types of trusts. Because each of these vehicles carries its own tax and legal issues, the best structure for holding the real estate depends on the circumstances of the individual investor.