The Foreign Account Tax Compliance Act (FATCA) was signed into law in 2010 as part of the HIRE Act, with the intention of combating tax evasion. Its aim is to impose a withholding on certain assets held on foreign soil by citizens and companies based in the United States. FATCA is a one-size-fits-all approach to preventing tax evasion – even U.S. citizens who don’t spend any time stateside are subject to FATCA, resulting in many criticisms of the law as thoughtless. The best way to be exempt from FATCA reporting is to not have any overseas holdings at all. Being that this is an unreasonable expectation in our ever-more-global world, let’s go over what constitutes being exempt from FATCA reporting.
What Are FATCA Reporting Exemptions
The reporting thresholds vary with two factors, your tax filing status and where you reside. The first consideration of the tax filing status is relatively straightforward. The reporting thresholds will change depending on whether the annual income tax filing is being filed jointly or according to a different status that is not joint. The bar for reporting is higher for joint filings, for intuitive reasons – two individuals filing jointly should have to earn more money to be subject to the same financial withholdings as one individual. Once the bar for reporting is exceeded, reporting is mandatory. Individuals filing with any status other than a married, joint filing have a reporting threshold of $50,000 if they reside in the United States and a reporting threshold of $200,000 if residing outside of the United States. If filing jointly when married, the thresholds double, meaning $100,000 in specified foreign assets for U.S. citizens residing in the United States and $400,000 for those residing outside of the United States. Pretty straightforward, right? Perhaps not. For better or worse, there is a lot of subtext to these statements.
1) Residency Requirement
First, there is the matter of what it is to be a United States citizen living abroad. The Internal Revenue Service (IRS) states that, “You are considered to live abroad if you are a U.S. citizen whose tax home is in a foreign country and you have been present in a foreign country or countries for at least 330 days out of a consecutive 12-month period.” What this means for those who spend the vast majority of their time abroad is that if you skip going home to visit your family for the holidays, you might have a significant difference in your reporting threshold, unlikely as that may seem. There is a subtext within the subtext, as well. The IRS states that as a condition for the reporting, that you are defined as living abroad only if, first, your tax home is in a foreign country. Your tax home is the city or country in which you do most of your work, defined as, “the place where you are permanently or indefinitely engaged to work as an employee or self-employed individual.” We could get more into the weeds on this one, but essentially, once your situation regarding your living situation is in a gray area, it is best to contact a tax professional to see where your exemption status lies.
2) FATCA Threshold
The next important consideration is whether your assets are applicable to the FATCA threshold. The assets that will contribute are designated as specified foreign financial assets. A specified foreign financial asset is not strictly one thing, but the first thing that it most definitely is, is any financial account managed by a foreign financial institution. This does not include, however, the foreign branches of U.S.-based financial institutions, or the U.S. branch of foreign financial institutions. Specified foreign financial assets will also include stocks or securities issued by persons not based in the United States, any financial interest in a foreign entity, and any financial instrument or contract that is issued by a non-U.S. person or involves a non-U.S. counter-party. Specified foreign financial assets also specifically do not include beneficial interests in a foreign trust or estate if the individual does not have knowledge of the interest, and interest in a social security or similar program administered by a foreign government.
Finally, timing is key for considering whether your assets are subject to FATCA withholding. The hard and fast rules of $50,000 and $100,000 for individuals and couples living in the United States and $200,000 and $400,000 for individuals and couples living abroad can be easily undone. There is a key clause in FATCA where these thresholds only apply so long as your specified foreign assets did not exceed a greater threshold at any point during the year. The thresholds are then $75,000 for non-jointly filing U.S. residents, $150,000 for married jointly filing U.S. residents, $300,000 for non-jointly filing U.S. citizens living abroad and $600,000 for married jointly filing U.S. citizens living abroad. The logic here is plain to see: The IRS wishes to stop people from evading tax payments by moving one-third or greater of their specified foreign financial assets before the last day of the tax year to avoid being subject to FATCA reporting.
4) Financial Institution Reporting
FATCA also requires foreign financial institutions to report certain information about their U.S. account holders to the IRS. This reporting is the other side of the coin, and makes reporting complicated for institutions that may have those from a multiplicity of nationalities as account holders. On top of reporting requirements, the institutions must withhold and pay 30% of any U.S. source income and gross proceeds of securities sales that generate U.S. source income. Generating, tracking and managing these reports becomes a time-consuming, tricky financial business. Leveraging technology is often the best way to begin managing complicated concerns such as FATCA withholdings. If you are looking for your next step in the entity management arena, consider Blueprint OneWorld. With over four decades of experience since our founding, Blueprint offers an optimized software suite with a dedicated team of service professionals to help install, maintain and customize the entity management software package that will best serve your needs. If you are interested, please call or send us an email to schedule a demo today.