Americans living abroad have the opportunity to explore and invest in local opportunities as well as continue investing in the US. However, there are complex US reporting rules for Americans who have investments overseas. These rules fall into 4 main categories: FATCA reporting, FBAR reporting, PFIC reporting, and foreign company reporting. The IRS has global reach and most non-US banks and financial firms are reporting the same information about US citizens’ accounts, so expats who don’t report their foreign investments can face fines or other consequences. In this article, we’ll provide an overview of the rules you need to know if you’re an American with overseas investments.
FATCA reporting requirements
The Foreign Account Tax Compliance Act (FATCA), enacted in 2010, aims to combat offshore tax evasion by US taxpayers. Under FATCA, US citizens and residents must report their foreign financial assets to the Internal Revenue Service (IRS). This includes offshore bank balances and also financial assets like stocks, bonds, and financial instruments held outside the US.
FATCA reporting requirements apply to US citizens, green card holders, and resident aliens living abroad. The reporting thresholds depend on your filing status and whether or not you are a US resident. For non-US residents they are:
- $200,000 on the last day of the tax year or $300,000 at any time during the year for single filers,
- $400,000 on the last day of the tax year or $600,000 at any time during the year for married individuals filing jointly.
Your offshore financial assets should be reported on IRS Form 8938. Form 8938 requests detailed information about your foreign assets, including the name of the institution holding the asset, account numbers, and the value of each asset. It should be filed as part of your annual individual federal income tax return.
FBAR reporting
In addition to FATCA, US citizens and residents must file the Foreign Bank Account Report (FBAR) form if they have foreign financial accounts with combined balances totaling more than $10,000 at any point during the year. FBARs are filed online and is called FinCEN Form 114.
The FBAR filing requirement applies to any US person who has a financial interest in, or signature authority over, foreign financial accounts, including foreign bank accounts, brokerage accounts, and investment funds. This means that if you hold investments in foreign accounts, you are still required to file an FBAR if the combined value of these accounts exceeds the $10,000 threshold, regardless of whether they are reportable under FATCA.
FBARs must be filed electronically through the FinCEN E-Filing System by October 15th each year.
PFICs
A PFIC is any foreign corporation primarily generating passive income or holding passive assets. Under US tax law, a foreign company is classified as a PFIC if it meets either the:
- Income test: 75% or more of its gross income is passive, such as interest, dividends, or royalties.
- Asset test: 50% or more of its assets produce passive income.
PFICs are subject to unfavorable tax treatment by the IRS. Income from PFICs is taxed at the highest ordinary income tax rates, and deferred distributions may incur additional interest charges. Furthermore, complying with the reporting requirements, such as filing IRS Form 8621, can be costly, with accounting and record-keeping fees potentially reaching thousands of dollars per PFIC investment annually.
Investors holding PFIC shares must file Form 8621 to report income and gains.
Example of PFICs include:
- Foreign mutual funds, some individual pension plans, and certain ETFs: Many non-US mutual funds, individual pension plans and ETFs generate income from dividends and interest, classifying them as PFICs.
- International REITs: Foreign Real Estate Investment Trusts that derive most of their income from rental properties may be considered PFICs.
- Foreign holding companies: Companies investing in stocks, bonds, or other financial assets without active business operations can qualify as PFICs.
To avoid the complexities and punitive tax treatment of PFICs, US investors abroad can invest in US-based mutual funds or ETFs, invest directly in US stocks or in US or foreign real estate, through a US-based brokerage account that is happy working with expats in your country
Finally, note that Americans who have ownership stakes above certain thresholds in foreign registered corporations, trusts or partnerships are also subject to additional US reporting forms and potential US taxes.
Final thoughts
While the complexities of reporting foreign assets and PFICs can be intimidating, they shouldn’t deter you from investing as an American living overseas, as you’ll still need to save for your future financial goals such as retirement and your children’s education.
The good news is that with the right strategies and expert guidance, you can still invest in both US and foreign investments while minimizing the burdens of reporting and tax. Research and seek advice from an experienced expat financial advisor to manage these challenges effectively and invest wisely as an expat.
If you have any questions about financial planning or investing as an American living abroad, get in touch.
This article is for informational purposes only; it is not intended to offer advice or guidance on legal, tax, or investment matters. Such advice can be given only with full understanding of a person’s specific situation.