FATCA Exemption: Does This Apply to You?
Under FATCA (Foreign Asset Tax Compliance Act), many US expats are required to report their foreign assets to the IRS by filing Form 8938. FATCA generally requires Americans to report all their foreign assets when filing their taxes. However, there are some types of assets that are exempt from this requirement—including real estate located outside of the United States and certain retirement plans meaning that some expats have FATCA exemption.
Let’s look at the details.
Key Takeaways
- The Foreign Account Tax Compliance Act (FATCA) is a law passed by the US Congress that requires US citizens who have foreign financial assets to report those assets to the IRS and pay taxes on any income generated from them.
- If an expat that does not file as Married Filing Jointly has $300,000 or more in specified foreign financial assets at any time throughout the year, or more than $200,000 on the last day of the year, they must file a FATCA report.
- If an expat has more than $400,000 in designated foreign financial assets on the last day of the year or $600,000 at any time during the year and they file a joint tax return with their spouse, they must file a FATCA report.
- For any US taxpayer living in the United States, they also have to report any foreign financial assets. There are also thresholds for reporting depend on whether the taxpayer files as Married Filing Jointly or not. However, the limits are much lower – one fourth of the amounts listed above.
What Is FATCA and Do I Need a FATCA Exemption Code?
The Foreign Account Tax Compliant Act (FATCA) is a US law that requires US citizens to report specified foreign financial assets that exceed certain thresholds.
FATCA was originally passed to stop Americans from evading their US tax obligations by hiding money in offshore bank accounts. But while the primary purpose of the law is foiling tax evasion, many expats get caught in the crossfire. After all, it’s only natural that Americans living abroad would own foreign assets and store their money in foreign accounts.
The good news is that not all Americans living overseas meet the standards for FATCA reporting. And, if this form is for a US account, then you don’t need a FATCA code, either.
Who Has to File a FATCA Report?
The thresholds for FATCA filing depend on your filing status and where you live. For expats who’ve passed the bona fide residence test, the thresholds are much higher.
- Expats who file their taxes as anything other than Married Filing Jointly must file a FATCA report if they own more than $200,000 in specified foreign financial assets on the last day of the year or $300,000 at any point during the year.
- Expats who file a joint tax return as Married Filing Jointly must file a FATCA report if they own more than $400,000 in specified foreign financial assets on the last day of the year or $600,000 at any point during the year.
Now, you may be wondering: what exactly qualifies as a “specified foreign financial asset?” According to the IRS:
“Specified foreign financial assets include foreign financial accounts and foreign non-account assets held for investment (as opposed to held for use in a trade or business) …”
That category generally includes:
- Foreign financial accounts
- Foreign financial instruments
- Foreign stocks and securities
- Foreign pensions
- Foreign mutual funds
- Interest in foreign entities
- Foreign hedge funds
- Foreign life insurance
But for a clearer idea of which foreign assets to include when calculating whether you need to file a FATCA report, let’s look over which ones are exempt.
When you live in the US, tax day is simple: April 15th! When you move abroad, it’s not so straightforward! Learn about all the expat deadlines and extensions you need to know to file.
What Financial Assets Are Exempt from Reporting?
There are exceptions to what needs to be reported on a FATCA report. Here is a list of items that are exempt:
- Cash
- Precious metals such as gold and silver
- Real Estate
- Foreign assets reported on one of the following IRS forms: 5471, 8865, 8858, 8621, and 3520.
- The foreign equivalent of US Social Security
Are FATCA Reports and FBARs the same?
FATCA reports and FBARs (Foreign Bank Account Reports) are very similar, but there are some specific differences. The main difference is the reporting threshold. The filing thresholds for FBARs are much lower. FBARs need to be filed if the aggregate highest balance during a year of all foreign financial accounts are $10,000 more.
In addition, only financial accounts maintained within foreign financial institutions are reported on an FBAR. FATCA reports include foreign financial accounts as well as foreign financial assets. The seemingly subtle difference being that FBARs include only financial accounts, whereas FATCA reports include financial accounts and other financial assets owned outside of financial institutions. Foreign financial assets include shares in a foreign corporation, shares in a foreign partnership, or other financial assets that are held outside of a foreign financial account. Think of paper stock certificates or contracts for investments in real estate or businesses as examples of financial assets held outside of financial institutions. It’s a bit of a confusing difference, so just remember the golden rule over what to include on FATCA reports – when not sure, report it.
The final main difference is that FATCA reports are filed with the IRS. FBARs are filed with a different part of the Treasury Department – FinCEN, or the Financial Crimes Enforcement Network.
What If I Haven’t Filed a FATCA Report Yet?
The penalties for failing to file a FATCA report when required can be steep. The IRS lists the possible fines as:
“$10,000 per violation, plus an additional penalty of up to $50,000 for continued failure to file after IRS notification, and a 40% penalty on an understatement of tax attributable to non-disclosed assets.”
However, if you haven’t filed a FATCA report yet, don’t panic. As long as you were unaware that you needed to file, you can use the IRS Streamlined Filing Procedures to become compliant without facing any harsh penalties.
Better yet, whether you’re compliant or not, you never have to file your FATCA report alone. At Greenback, we help expats around the world optimize their financial strategies and fulfill their US tax obligations.
Still Have Questions Regarding FATCA Exemptions? We Can Help!
FATCA is an extremely complicated endeavor, impacting a broad spectrum of foreign individuals. Some of these individuals will be more affected than others, and some are not directly impacted at all. Taxpayers should understand what these changes mean for them, as well as their tax filing obligations.
If you’re ready to be matched with a Greenback accountant, click the get started button below. For general questions on expat taxes or working with Greenback, contact our Customer Champions.
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