Additional Tax Reporting For US Expats
As a US citizen you still need to file a US tax return each year while you are living outside the United States.
In addition, you are also required to file a separate report with your foreign financial accounts and bank accounts (FBAR).
It does not stop there for many US expats and there are additional forms that need to be filed each year depending on your circumstances.
1 - Form 8938 - Reporting foreign financial assets
Although you report any bank accounts, investment accounts (including ISAs), pensions and any other foreign financial accounts on the separate FBAR, you may also need to report those as part of your US expat tax return.
Step 1 - seeing which assets need to be reported
The IRS is looking for all assets that you have an interest in to be reported.
You have an interest in a specified foreign financial asset if any income, gains, losses, deductions, credits, gross proceeds, or distributions from holding or disposing of the asset are or would be required to be reported, included, or otherwise reflected on your income tax return.
Step 2 - reporting thresholds for filing form 8938
The reporting thresholds for the foreign financial assets you have an interest in are:
Single - more than $200,000 on the last day of the tax year or more than $300,000 at any time during the tax year.
Married filing jointly - more than $400,000 on the last day of the tax year or more than $600,000 at any time during the tax year.
Married filing separately - more than $200,000 on the last day of the tax year or more than $300,000 at any time during the tax year.
The form is filed with the main tax return, filed by the due date for that return (normally June 15 each year if you are a US expat - extended to July 15 for 2020).
Penalties - there is a flat rate penalty of $10,000 for filing late or not filing per year, additional penalties of $10,000 per month start after 90 days, up to an additional maximum penalty of $50,000.
2 - Form 5471 - US Citizens Reporting Interests In Foreign Companies
If you held 10% or more shares in a company outside of the US, at any time during the year, you may need to report that company back to the US each year using form 5471.
If you were a director, or officer, of a company outside of the US - even if you held no shares, or your shares were under the 10% threshold - you may also be required to file form 5471.
If you meet the 10% threshold and then acquire additional shares or dispose of any shares then you may need to report those transactions on form 5471.
There are different levels of reporting on form 5471 depending on your level of involvement with the company.
The form is filed with the main tax return, filed by the due date for that return (normally June 15 each year if you are a US expat - extended to July 15 for 2020).
Penalties - there is a flat rate penalty of $10,000 for filing late or not filing per company per year, additional penalties of $10,000 per month start after 90 days, up to an additional maximum penalty of $50,000.
3 - Form 8865 - US Citizens Reporting Interests In Foreign Partnerships
If you had 10% or more interest in a partnership outside of the US, at any time during the year, you may need to report that partnership back to the US each year and file form 8865.
There are different levels of reporting on form 8865 depending on your level of involvement with the partnership.
The form is filed with the main tax return, filed by the due date for that return (normally June 15 each year if you are a US expat - extended to July 15 for 2020).
Penalties - there is a flat rate penalty of $10,000 for filing late or not filing per partnership per year, additional penalties of $10,000 per month start after 90 days, up to an additional maximum penalty of $50,000.
4 - Form 8621 - US Citizens who have investments outside the US in funds (including ISAs)
Form 8621 is commonly known as PFIC reporting - passive foreign investment companies.
Step 1 - is the investment a PFIC?
The IRS has two tests:
Income test - 75% or more of the income from the investment company is passive income (for investments this includes interest, dividends and capital gains)
Asset test - 50% or more of the assets held by the company are held to produce passive income
If you invest in a fund and it meets the two tests above, for each fund you will need to complete form 8621.
ISAs (individual savings accounts) are tax free in the UK, but they are taxable in the US. Individual stocks and shares in an ISA do not have PFIC reporting, but ISAs commonly contain funds (groups of shares) and these are liable to PFIC reporting.
The form is filed with the main tax return, filed by the due date for that return (normally June 15 each year if you are a US expat - extended to July 15 for 2020).
Penalties - there is no penalty specifically for the form, but failing to file does allow the IRS to leave open the statute of limitations for the whole tax return indefinitely.
5 - Form 8833 - Claiming the US UK tax treaty
You may want to use the US UK tax treaty to stop double taxation, or another common reason is if you have IRAs and social security from the US while living in the UK.
The form is filed with the main tax return, filed by the due date for that return (normally June 15 each year if you are a US expat - extended to July 15 for 2020).
Penalties - if you claim tax treaty benefits, relying on a treaty based return position, and don't file form 8833, you are subject to a penalty of $1,000 for each failure.
6 - Form 8960 - Additional tax on investment income
If you have passive income - interest, dividends, capital gains, property income - you may need to complete form 8960.
The thresholds for form 8960 are below - these are your modified adjusted gross income (not just your investment income):
Single — $200,000
Married filing jointly — $250,000
Married filing separately — $125,000
If your total income exceeds the threshold, the investment income above the threshold is liable to Net Investment Income Tax (NIIT) at 3.8%.
The form is filed with the main tax return, filed by the due date for that return (normally June 15 each year if you are a US expat - extended to July 15 for 2020).
Penalties - there is no penalty specifically for the form, but failing to file does allow the IRS to leave open the statute of limitations for the whole tax return indefinitely.
SUMMARY
Hopefully this guide will help as you check what forms you need to include in your US tax return. The IRS also has a comprehensive guide for US citizens abroad - publication 54.
We are very happy to help with any questions and we can run through how to file your US expat tax return. Our friendly team of IRS Enrolled Agents and expat accountants have specialized expat tax preparation experience to help expats around the world and walk you through what the next steps are – contact us today.