Last Updated: March 17, 2023
The Foreign Account Tax Compliance Act (FATCA) is one of the many tax laws that people in the United States must abide by. If such big tax terms intimidate you, don’t worry: you’re in the right place. In this article, we explain what is FATCA, how it works, what falls under it, and how it affects U.S. citizens; we’ll also mention how it affects foreign institutions. By the end of this piece, you will be more informed about this important tax law.
What Is FATCA?
Passed in 2010, FATCA states that all U.S. citizens, whether at home or abroad, must report their income on foreign account holdings, along with any foreign assets. This includes all real estate equity and stocks as well. The federal law was implemented as a part of the Hiring Incentives to Restore Employment (HIRE) Act, which promotes transparency in eliminating tax evasion and job stimulation. The main purpose of FATCA is to calculate the actual amount of income a person earns, and then determine the right amount of tax to be paid.
|DID YOU KNOW? Since being signed into law by President Barack Obama, more than 80 international countries have agreed to follow this law by correctly reporting the income of US residents.|
How Does FATCA Work?
While you may think that the IRS does not have any say over your foreign assets, you are wrong. The U.S. government works with foreign banks, FATCA member countries, and other financial organizations to disclose all foreign assets of U.S. residents. International countries that fail to cooperate with the IRS could lose a stake in U.S. markets. As a result, no country will support you in hiding your assets if conditions don’t suit you; don’t bother trying!
The basic filing requirement is that the taxpayer is a resident of the US, regardless of what country they are living or working in.
What Should Be Reported Under FATCA?
Although tax regulations are very complicated, it is easy to look up the general FATCA regulation. Different types of income that need to be disclosed to the IRS include:
If you’ve worked in another country and are eligible to receive foreign pensions, you must report it to the IRS. There may be a few circumstances where this filing gets complicated; if you’re concerned, determine if you can find a reputable tax service for help.
If you have these, you’re holding financial assets outside your own country. Stockholdings include stocks, bonds, mutual funds, ADRs, and more. IRS FATCA law requires you to report any of these assets.
Foreign partnership interests
To increase the transparency of foreign income, the IRS requires foreign partnership interests to be reported. Any US resident who owns a business in partnership outside the country must report these details and/or other financial transactions.
Foreign financial accounts
A foreign account is one that operates outside the US. Even if you did not earn any income from the account, you must report it to the IRS.
Foreign mutual funds
Just like stockholdings, FATCA compliance also requires you to inform the IRS of any foreign mutual funds that you own, and the interest earned on them.
Foreign issued life insurance
According to the IRS tax law, Americans must report any international life insurance. This helps in calculating the exact income and expenses incurred by the individual.
Foreign Hedge Funds
Foreign hedge funds are a way to diversify your investment portfolio. However, you must also report them to the IRS. It helps calculate the right amount of foreign assets that you have like the others.
Foreign real estate held through another entity
Assets also include any foreign real estate held by you. The IRS requires you to disclose this information.
After all of that, here is some good news for you: you DO NOT need to report your houses as assets to the IRS! Residence properties are excluded from the FATCA code.
|The Foreign Account Tax Compliance Act, abbreviated FATCA, is a tax law that requires US citizens to report their foreign income and assets to the IRS.|
|The law works in collaboration with foreign financial institutions to reduce tax evasion and increase transparency in tax reporting.|
|Several specific items come under needing to be disclosed per FATCA codes. These include foreign pensions, stockholdings, partnership interests, mutual funds, and more.|
|However, the only thing excluded from this are any homes you own overseas. International properties do not need to be reported under FATCA.|
What Are the Reporting Thresholds?
Reporting thresholds for residents living in the United States vs being abroad are different. There is also a slight change if you’re married, reporting jointly, or filing individually. Here are the reporting conditions as stated by the IRS.
For taxpayers living in the United States, you must file under FATCA if you:
- Are unmarried and the total value of your foreign asset is more than $50,000 at the end of the tax year, or if you made more than $75,000 during the year.
- Are married, filing a joint tax return, and your particular financial asset is more than $100,000 on the last day of the year, or more than $150,000 at any point.
- For married partners filing separately, FATCA reporting is required when, per the IRS, “The total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year, or more than $75,000 at any time during the tax year.”
For taxpayers living abroad, you must file if, from the IRS website:
- “You are married filing a joint income tax return and the total value of your specified foreign financial assets is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year. These thresholds apply even if only one spouse resides abroad. Married individuals who file a joint income tax return for the tax year will file a single Form 8938 that reports all of the specified foreign financial assets in which either spouse has an interest.”
- “You are not a married person filing a joint income tax return and the total value of your specified foreign financial 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.”
How Does FATCA Affect US Citizens and Foreign Financial Institutions?
Now that we have talked about FATCA requirements for individuals, let’s go over how it affects US citizens and foreign institutions.
It is costly for foreign banks
As you can guess, FATCA is costly for foreign banks. Not only do they have to keep track of their local account holders, but they also have to keep an eye on a foreign account and report it to the IRS. This adds unnecessary costs to banks.
Foreign banks may refuse to open accounts for US residents
As mentioned above, FATCA requirements for banks require banks to report foreign assets to the IRS. The additional costs lead to banks denying United States citizens a bank account.
It may defer foreign investments from the US
FATCA can delay foreign investments from the US, as people may be reluctant to invest in international projects due to the taxes owed.
It may turn out more costly than beneficial for the US
Ultimately, the income earned by US residents adds money to the economy in some way or another. Regulating foreign investments can make people less inclined to practice the behavior, thereby reducing income flow. This, when it occurs, turns out to be more expensive for the US.
Can FATCA Be Avoided?
While you may think that your foreign income can go unreported, this is not the case. There is no legal way to avoid FATCA, although there are ways you can reduce your taxes like maximizing tax returns.
Avoiding federal law will only lead to unnecessary trouble and FATCA penalties. You can be charged with a $10,000 penalty, an additional $50,000 if you continue to not report your income, and even 40% of the income for non-disclosed assets.With that being said, here’s our advice: pay your taxes! You can receive help from tax relief companies if you’re looking to reduce your taxes.
|DID YOU KNOW? Fines for not paying under FATCA can go as high as $2.6 billion! The money you end up owning is higher than the tax you owe, so here is your reminder to pay your taxes on time.|
The Foreign Account Tax Compliance Act, or FATCA, is a federal tax law that requires US citizens to report their foreign income and assets to the IRS. These include income from foreign pensions, stockholdings, partnership interests, mutual funds, and more. The FATCA disclosure varies from person to person and also depends upon the total income earned. Not reporting FATCA in annual reports can lead to severe penalties. Although it was implemented to reduce tax evasion, it has certain disadvantages like being costly for both foreign banks and US residents.
When you’re disclosing information under FATCA, this means that the IRS is requiring all foreign banks and financial institutions to report the financial accounts held by US citizens abroad.
Complying with the FATCA means that you are reporting all foreign assets and income of US residents from outside the country.
First, you need to remember what is FATCA, and that all income earned is taxable. Simply put, it is a code that states that US residents must report all their foreign assets and foreign income to calculate the right amount of tax owed.