As an accountant who specialises in working with Americans who live or work in foreign countries, I can’t tell you how many deeply confused people I deal with every tax season. Filing taxes in America is complicated enough when you work a regular local job. It gets incredibly more complex when you factor in residing, owning a business, working a job, and keeping you money abroad. With that in mind, I wanted to put together a short guide to the forms and liabilities you are going to need to know about if you live the life of a U.S. expat. Good luck!
Form 3520 is the Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. You must file this form if you are the grantor or “substantial owner” of a foreign trust. If you received over $100,000 from a foreign individual or over $15,601 from a foreign corporation, you would also have to file this form.
A common example of a foreign trust is the Registered Education Savings Plan. The RESP was established by parents wanting to send their children to university in Canada. Any payouts a student receives must be claimed on Form 3520. Pension plans similar to a 401(k) (“defined contribution plan”) might be treated the same way. Tax treaties might exempt one from this requirement, as would be the case with Canadian RRSPs.
Form 5471 Form 5471 applies to you if either:
You have bought or sold shares of a foreign corporation (during the tax year in question), causing you to own at least 10% of the corporation, or if you own at least 10% of a Controlled Foreign Corporation (CFC), then you must file Form 5471 for every year that continues to be true.
A CFC is a foreign corporation in which “U.S. shareholders” own at least 50% of the corporation. A U.S. shareholder is defined as a U.S. person who owns at least 10% of a foreign corporation.
PFICs & Form 8621
Form 8621 deals with Passive Foreign Investment Companies (PFICs). These could include foreign mutual funds and other investment vehicles. Unlike the other forms covered here, it has no minimum threshold. The PFIC tax regimes and the excess distribution regime are punitive tax rules. Investing outside the U.S. is too big a subject to cover here, but it’s one many people are growing more and more concerned with every passing tax year.
FBAR & Form 8938
Americans need to file form FinCEN 114 (the FBAR form) if they have more than $10,000 in foreign bank accounts at any point in the year ($10,000 being the sum of the aggregate balance of their bank accounts). They also need to file Form 8938 if the value of their offshore assets is $200,000 or more on the final day of the tax year, or $300,000 anytime throughout the year (though this amount is higher for married couples who file jointly – lower filing thresholds apply to those who reside within the United States). Assets reported on Form 8938 include bank accounts and interests in foreign entities (such as trusts, partnerships, or corporations).
What you are required to claim on the FBAR:
- Foreign accounts where you have financial interest or authority of signature.
- Financial accounts in a foreign branch of a U.S. financial institution.
- Foreign mutual funds.
- Foreign-issued life insurance or annuity contract.
What you are not required to claim on the FBAR:
- Domestic mutual funds that invest in foreign stocks.
- Personal property held directly.
- Regulated financial accounts such as TFSA and RESP in Canada or Livret A in France.
Again, this process is made easier if you (forgive the pun) take into account all your investments and belongings.
Some Other Important Forms
Schedule A is the form you’ll use to deduct your itemized expenses, such as mortgage interest, property taxes, medical expenses, and charitable contributions. Note that only charitable contributions to U.S. and Canadian charities are deductible. Using this form is beneficial when your itemized deduction amount is more than the standard deduction, which is $6,300 for a single person or $12,600 for a married couple filing jointly in 2015 and 2016.
Schedule B is used to report taxable interest and dividends. You must fill out Part III of the form if at any point during the tax year you’ve had a foreign financial account (e.g. a bank account, securities account, or brokerage account).
Schedule C is used to report the income (and deductible expenses) for your self-employment activity during the tax year.
Schedule D is where you report the capital gains and losses on your investments such as stock sales.
Schedule SE computes your self-employment tax, which comes into play when you cannot claim the benefits of a Social Security Totalization Agreement.
Form 8938 is the Statement of Specified Foreign Assets. Filing this form does not replace your obligation to file an FBAR. You need to check whether your foreign financial assets are subject to these reporting requirements and if they exceed certain financial thresholds. The threshold can vary, however.
Form 8854 is known as the Initial and Annual Expatriation Statement. It is used by people who have renounced their U.S. citizenship or ended their long-term resident status to confirm that they are compliant with the U.S. tax system. The United States is the most expensive country in the world to renounce citizenship from. You might also be subject to an exit tax. The IRS requires five years of tax returns to avoid covered expatriate status, and you would attach Form 8854 to your final return.