The days are past when many taxpayers could safely take the position of not handling foreign matters. With greatly expanded emphasis on any financial transaction with a foreign taint, many more US taxpayers are finding that they do, indeed, have some reporting requirements. The importance of helping taxpayers comply properly is reinforced by the rather automatic imposition of substantial penalties for failing to report, or for merely being late with a required filing.
Living Abroad & the Foreign Earned Income Exclusion (2555)
For those US citizens (and Green Card holders) living outside of the United States on April 1st not merely travelling outside of the US, the normal filing date for their US tax return is June 15th. This automatic Living Abroad Extension does not apply if they have US sourced employment or self-employment income during the tax year being filed. A regular extension (Form 4868) can also be requested prior to June 15th in order to further extend the filing date to October 15th. Furthermore, an additional special extension until December 15th can be requested from the IRS by submitting a letter explaining that there are difficulties in gathering the information necessary to file a complete and accurate return .
Foreign Earned Income Exclusion
Foreign earned income for this purpose means wages, salaries, professional fees, and other compensation received for personal services that the taxpayer performed in a foreign country during the period for which they meet the tax home test and either the bona fide residence test or the physical presence test. It also includes non cash income ( such as a home or car) and reportable employment allowances for reimbursements. Foreign earned income does NOT include passive income, such as interest, dividends, pensions, rents, and the like .
To qualify for the tax benefits available to taxpayers who have foreign earned income, both of the following must apply:
They meet the tax home test; and
They meet either the bona fide residence test or the physical presence test
Disclosing Specified Foreign Financial Assets (8938)
Use Form 8938 to report a taxpayer's specified foreign financial assets if the total value of all the specified foreign financial assets in which they have an interest is more than the appropriate reporting threshold - see Reporting Thresholds later. Generally, all taxpayers required to file form 1040 are potentially responsible to file form 8938 - including nonresident aliens who elect to be treated as a resident alien for purposes of filing a joint income tax return. Note that filing this form does not relieve a taxpayer of the requirement to file FinCEN Form 114 (FBAR) .
The rules for what constitutes a Specified Foreign Financial Asset, as well as how to value the many different types of such assets, are highly specific. Care should be exercised when obtaining information from a taxpayer to ensure that only reportable assets are considered (but that ALL such reportable assets are included), and that the prescribed method of valuing each asset is followed . Several pages in the instructions to Form 8938 are devoted to these steps .
For many assets, determining the value of the assets for purposes of reporting on Form 8938 should be fairly straightforward. If the value is initially determined in a foreign currency, then that value must be translated into US Dollars using the appropriate rate that is prescribed by the US Treasury's Financial Management Service, which can be found at www.fms.treas.gov/intn.html. Choose the exchange rate on the last day of the tax year to compute the maximum value of a taxpayer's specified foreign financial assets for purposes of determining whether they exceed the relevant filing threshold.
At HerrickGlobal, we can give you peace of mind that comes with knowing you will not face the unknown alone. Our highly trained advisors can handle all of your tax filing needs quickly and efficiently. Schedule an appointment today - we look forward to meeting you!