Answers To Two Important U.S. Tax Questions
It’s tax time again for us Americans.
That is, this Tuesday, April 18 (April 15 is a Saturday and April 17 is a holiday in D.C.), is the reporting deadline for those of us who haven’t filed for an extension until October.
How many tax dates do we Americans have to consider? Let’s see…
There’s the initial tax deadline of April 15 each year (unless it falls on a weekend, as it does this year).
Then you have the automatic extension deadline for Americans living abroad. That’s June 15.
Finally, you have the six-month extension deadline for anyone who files Form 4868, which gets you to Oct. 15 (unless it falls on a weekend, as it, too, does this year).
Since 1970 and through last year, those of us who’ve met the reporting requirements also have had a June 30 deadline for filing a Foreign Bank Account Report (FBAR). That form has been re-designated as the FinCEN Form 114. Starting with the 2016 calendar year, the FBAR/FinCEN Form 114 is filed on April 15.
In other words, the FBAR is theoretically due next Tuesday along with your tax return.
However, the U.S. Treasury Department is giving everyone an automatic extension this year until Oct. 16. Previously they reported that you could apply for an extension of the FBAR filing date only if you filed for one for your tax return, but I guess they got worried that too many of us hadn’t gotten word that the FBAR filing date had changed.
I filed the extension for my tax return over the weekend. It’s great that you can do this online these days.
Meanwhile, as others have been preparing for the April deadline over the past couple of weeks, I’ve heard from Simon Letter members and past attendees of my annual Offshore Wealth Summit (the next one takes place here in Panama City in June) with reporting and filing questions.
The Tax Q&A List
A: Assets held by your IRA are reported by your custodian. Therefore, the good news is that you don’t have to report the LLC or the rental income. The bad news is that you do have to pay taxes on the rental income earned in your traditional IRA when you take withdrawals from the account.
If you have a bank account for your IRA LLC… and you qualify otherwise to file an FBAR… then that bank account must be reported on your FBAR. However, neither the LLC nor the bank account need to be reported on Form 8938.
As I’ve been saying for years now, it’s not so much the taxes owed anymore as it is the information reporting requirements. That’s what the FBAR and Form 8938 are—information reporting to make it possible for the U.S. government to track every American’s assets so the U.S. government can try to determine if you might be earning income from an asset that you’re not reporting.
My return this year is about 100 pages including worksheets. That translates to 55 pages sent to the IRS, 80% of those informational.
The information reporting requirement isn’t only for expats but for any U.S. person with assets outside the United States. Fortunately, the threshold for filing Form 8938 is four times higher for an expat than for a resident American. Still, the thresholds are low at US$50,000 for a single living in the United States and US$200,000 for someone living outside the country (double those figures for married couples).
Which brings me to another frequently asked question:
A: Anything that can be identified as your asset only through a piece of paper is considered a financial asset reportable on Form 8938. Specifically excluded by the IRS are real estate held in your own name and allocated metals (gold and silver, but also industrial metals held for investment).
Note that, in the case of gold, silver, and other metals, I’m speaking of the physical metals themselves. Gold represented by a piece of paper, such as a Perth Mint Certificate, is reportable.
As are those junior mining stocks from Canada you bought directly from the company years ago and stuffed in your filing cabinet.
And real estate held by an offshore entity is reportable as an asset of the entity… unless the entity is owned by your IRA.
Take these reporting requirements seriously. Fail to report foreign financial assets as required on Form 8938, and the IRS could disallow your basis when calculating your capital gain. In other words, if you don’t report an offshore financial asset and then sell that asset, you could be facing tax on 100% of the proceeds of the sale rather than the gain only. Not to mention the potential fines for not having reported the asset in the first place.
It’s all part of a crackdown on offshore investments because the U.S. government believes it’s missing out on billions of tax dollars from Americans not reporting their international transactions. That’s what FATCA was meant to help with… tracking Americans’ offshore assets.
But the math is faulty. The U.S. government won’t collect enough additional tax, these current and increasingly aggressive efforts notwithstanding, to make a dent in the U.S. debt. Meantime, they’re growing their bloated staffs and overheads and making it harder all the time for honest, hardworking Americans to pursue interests offshore… and more expensive all the time for those of us who continue to try.
That could be why the movement to repeal FATCA appears to be gaining some traction. A bill was introduced last week to repeal FATCA, and several lobby groups are trying to help push it through.
The repeal of FATCA has my full support, of course, but I wonder if it could ever possibly come to pass. Once a government has control… does it ever give it up?
If you’re an American abroad who has yet to file for your extension, do it now.
“Lief, I have an immigration question. My daughter is an Army veteran. She receives a disability income monthly of U$2,000. She wants to apply for the Belize pensionado program using this income. The lawyer she consulted says he needs a letter verifying the information and says that the letter must state that the income is for life. Is this true?”
Yes, to qualify for Belize’s Qualified Retired Person (QRP) residency program, the income must be for life. The letter confirming the payments must indicate that somehow.