US Taxation of Individuals
The United States is one of two countries in the world that taxes individuals based on citizenship rather than residency. All US persons are required to file an annual US individual tax return (Form 1040) to report their worldwide income, whether they live in the US or abroad.
How to be considered a US person:
- Born in the US
- Born outside the US of a US parent
- Naturalized citizen
- Green card holder
- US resident (substantial presence test)
For an individual to be deemed a resident of the US, he or she would have to be present in the US for at least 31 days in the current year, with the sum of the following adding to 183 days or more:
- 100% of the days for the current year
- 1/3 for the first preceding year
- 1/6 for the second preceding year
Due dates:
- April 15 – regular filing due date and payment due date
- June 15 – automatic 2-month extension for taxpayers residing outside the US on April 15
- October 15 – 6-month extension is available by filing Form 4868 before the later of the April 15th and June 15th due date that applies to the taxpayer
Note that an extension to file is not an extension to pay on taxes owing, and interest would apply to any unpaid balance from April 15th until the balance is paid. Penalties will also be incurred unless the taxpayer has paid at least 90% of the tax payable by the time the extension is filed.
FinCEN Form 114
This form must be filed by all US persons who have a financial interest in or signature authority over a foreign financial account if the aggregate value of all foreign financial accounts exceed $10,000 at any time during the year. This includes bank, investment, or other types of foreign accounts that are maintained by a financial institution that is physically located in a foreign country. The form is filed with the US Department of Treasury Financial Crimes Enforcement Network.
For each account, the taxpayer must provide:
- Name of financial institution
- Address of financial institution
- Highest balance in the year
- Type of account
- Joint account holder, if applicable
The due date for the FinCEN form is April 15th and is eligible for the same extensions as Form 1040.
Penalties for not filing the FinCEN are severe. US persons who fail to properly file a complete and correct FinCEN may be subject to a civil penalty up to $10,000 per violation for non-willful violations that are not due to reasonable cause. If the omission is willful, the penalty may be up to the greater of $100,000 or 50% of the account balance at the time of the violation, for each violation. Criminal penalties may also apply.
Form 8938, Statement of Specified Foreign Financial Assets
Where the FinCEN form is filled with the Department of Treasury, Form 8938, if required, is filed with the IRS in conjunction with the 1040.
US citizens, resident aliens, and certain non-resident aliens who have an interest in specified foreign financial assets must file Form 8938 when the aggregate value of these assets is:
- Unmarried taxpayers living in the US – more than $50,000 on the last day of the year or more than $75,000 at any time during the year
- Married taxpayers filing a joint tax return and living in the US – more than $100,000 on the last day of the year or more than $150,000 at any time during the year
- Married taxpayers filing a separate tax return and living in the US – same as unmarried
- Unmarried taxpayers living abroad – more than $200,000 on the last day of the year or more than $300,000 at any time during the year
- Taxpayers living abroad and filing a joint return – more than $400,000 on the last day of the year or more than $600,000 at any time during the year
A taxpayer, living abroad, is considered to be a US citizen if their tax home is in a foreign country and they are a bona fide resident of a foreign country, or a US citizen or resident, who during a period of twelve consecutive months ending in the tax year is physically present in a foreign country at least 330 days.
Similar financial information is required as with the FinCEN: Name and address of financial institution as well as highest balance in the year.
The due date for Form 8938 is the same as Form 1040, including extensions filed, if applicable.
The penalty for failing to file Form 8938 is up to $10,000 for failure to disclose and an additional $10,000 for each 30 days of non-filing after IRS notice of failure to disclose, for a potential maximum penalty of $60,000. Criminal penalties may also apply.
Streamlined Foreign Offshore Procedures
For the many US taxpayers who are living abroad and have not kept up to date with their US filing requirements, the US currently has a process to be considered “in compliance”, which is called the Streamlined Foreign Offshore Procedures. To be eligible, the taxpayer must be a US citizen or green card holder who lived abroad for the most recent three years for which the US tax return due date has passed, and they have not filed a tax return during this period.
The scope of the required filings to be considered in compliance are as follows:
- Form 1040 tax returns and associated forms must be filed for each of the most recent three years for which the US tax return due date has passed.
- FinCEN Form 114 must be filed for each of the most recent six years for which the FinCEN due date has passed.
- Pay the full amount of any tax and interest due in connection with these filings.
When all of the above is followed, the taxpayer will not be subject to failure to file and/or failure to pay penalties. Retroactive relief will be provided on treaty positions, such as the election for income deferral on certain retirement and savings plans, provided the treaties are filed with the submission of tax returns. Filing under the Streamlined Foreign Offshore Procedures may be done once in a taxpayer’s lifetime.
Relief Procedures For Certain Former Citizens
This program is for US citizens who have never filed a US tax return and wish to renounce their citizenship. The first step is for the taxpayer to make an appointment with the US Consulate and renounce their citizenship. Subsequently, Form 1040 and related schedules including FinCEN Form 114 are filed for the five previous years, plus a dual status return for the year of renunciation. The IRS confirms receipt and processing of the submission, and the taxpayer no longer has a US tax filing obligation as a result of being a US citizen. Citizens are not required to obtain a Social Security Number for this program.