Foreign Income/Assets

File an FBAR and form 8938 if you hold assets overseas.

File Form 3520 - If you receive a gift from a foreign person in excess of 100k. - Severe penalties for not filing. 

Transferring cash -if its your own money there is no reporting - assuming they earned the money legally overseas and were reporting it as income if appropriate on their US taxes.

Ø What is the foreign earned income exclusions? 

If you are a U.S. citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income. However, you may qualify to exclude from income up to an amount of your foreign earnings that is adjusted annually for inflation ($105,900 for 2019). In addition, you can exclude or deduct certain foreign housing amounts.

Not foreign earned income: Foreign earned income does not include the following amounts:

  • Pay received as a military or civilian employee of the U.S. Government or any of its agencies

  • Pay for services conducted in international waters (not a foreign country)

  • Pay in specific combat zones, as designated by an Executive Order from the President, that is excludable from income

  • Payments received after the end of the tax year following the year in which the services that earned the income were performed

  • The value of meals and lodging that are excluded from income because it was furnished for the convenience of the employer

  • Pension or annuity payments, including social security benefits

 

Ø Are foreign bank/brokerage accounts reported on tax return?

FBAR must be filed by U.S. persons, which include U.S. citizens, resident aliens, trusts, estates, and domestic entities that have an interest in foreign financial accounts and meet the reporting threshold

If the aggregate value of financial accounts exceeds $10,000 at any time during the calendar year the FBAR is required. This is a cumulative balance, meaning if you have 2 accounts with a combined account balance greater than $10,000 at any one time, both accounts would have to be reported.

Penalty if not filed:

Civil monetary penalties are adjusted annually for inflation. For civil penalty assessment prior to Aug 1, 2016, if non-willful, up to $10,000; if willful, up to the greater of $100,000 or 50 percent of account balances; criminal penalties may also apply

You can choose each tax year to take the amount of any qualified foreign taxes paid or accrued during the year as a foreign tax credit or as an itemized deduction. You can change your choice for each year's taxes.

To choose the foreign tax credit, you generally must complete Form 1116, Foreign Tax Credit and attach it to your U.S. tax return. However, you may qualify for an exception that allows you to claim the foreign tax credit without using Form 1116. Refer to How To Figure the Credit. To choose to claim the taxes as an itemized deduction, use Schedule A (Form 1040), Itemized Deductions.

Note: Figure your tax both ways-claiming the credit and claiming the deduction. Then fill out your return the way that benefits you most. See Why Choose the Credit below.

Choice Applies to All Qualified Foreign Taxes

As a general rule, you must choose to take either a credit or a deduction for all qualified foreign taxes.

If you choose to take a credit for qualified foreign taxes, you must take the credit for all of them. You cannot deduct any of them. Conversely, if you choose to deduct qualified foreign taxes, you must deduct all of them. You cannot take a credit for any of them.

Why Choose the Credit?

The foreign tax credit is intended to relieve you of the double tax burden when your foreign source income is taxed by both the United States and the foreign country.

The foreign tax credit can only reduce U.S. taxes on foreign source income; it cannot reduce U.S. taxes on U.S. source income.

It is generally better to take a credit for qualified foreign taxes than to deduct them as an itemized deduction. This is because:

  1. A credit reduces your actual U.S. income tax on a dollar-for-dollar basis, while a deduction reduces only your income subject to tax;

  2. You can choose to take the foreign tax credit even if you do not itemize your deductions. You then are allowed the standard deduction in addition to the credit; and

  3. If you choose to take the foreign tax credit, and the taxes paid or accrued exceed the credit limit for the tax year, you may be able to carry over or carry back the excess to another tax year.

 Are foreign bank/brokerage accounts reported on tax return?

Any foreign tax paid by the mutual fund or REIT would be reported in box 6. You could claim this tax as an itemized deduction on Schedule A or as a credit on Form 1116.

You can always take deduction for foreign tax paid on Schedule A, or calculate foreign tax credit using form 1116. Credit is usually more beneficial, but in some cases you will be better of with a deduction.

However, in very specific cases, you can claim the credit directly on your 1040 without using the form 1116. Look at the 1040 instructions for line 47:

Exception. You do not have to complete Form 1116 to take this credit if all of the following apply.

All of your foreign source gross income was from interest and dividends and all of that income and the foreign tax paid on it were reported to you on Form 1099-INT, Form 1099-DIV, or Schedule K-1 (or substitute statement).

The total of your foreign taxes was not more than $300 (not more than $600 if married filing jointly).

You held the stock or bonds on which the dividends or interest were paid for at least 16 days and were not obligated to pay these amounts to someone else.

You are not filing Form 4563 or excluding income from sources within Puerto Rico.

All of your foreign taxes were:

Legally owed and not eligible for a refund or reduced tax rate under a tax treaty, and

Paid to countries that are recognized by the United States and do not support terrorism.

For more details on these requirements, see the Instructions for Form 1116.