Newburg Staff Writers-March 8, 2021 (12:00 PM)
Which foreign assets do I report to the IRS?
For individuals, the U.S. operates under a worldwide taxation system. As a result, there are numerous foreign assets, some subject to taxation, that a person may have to report on their U.S. tax return. These assets include but are not limited to:
- Foreign Rental Real Estate
- Pension and Annuity Distributions
- Life Insurance
- Financial accounts:
- Bank accounts
- Stock/Brokerage accounts
Foreign Rental Real Estate
When a U.S. person has foreign rental property that generates rental income, it is reportable to the IRS. From the IRS’ tax perspective there is no de minimis requirement regarding the reporting and taxation of foreign real estate income – all rental income must be reported. Failure to report any real estate activity may result in fines and penalties.
The same deductions can be applied for a rental property in the U.S., including mortgage interest, local property taxes, repairs, management fees, depreciation, etc., however both foreign rental income and deductions must be reported in U.S. dollars.
Expats who pay foreign taxes on their foreign rental property income can claim U.S. tax credits on a dollar for dollar basis to reduce, or in many cases, eliminate the U.S. tax due on their rental income. To claim these tax credits, expats must file Form 1116 when they file their federal return. If they pay more foreign tax than the U.S. tax they owe, they will have excess U.S. tax credits that can be applied to other income types, or just deferred for future use.
Foreign Pension and Annuity Distributions
A foreign pension or annuity distribution is a payment from a pension plan or retirement annuity received from a source outside the U.S. You might receive it from a:
- foreign employer
- trust established by a foreign employer
- foreign government or one of its agencies (including a foreign social security pension)
- foreign insurance company
- foreign trust or other foreign entity designated to pay the annuity
Just as with domestic pensions or annuities, the taxable amount generally is the Gross Distribution minus the Cost. Income received from foreign pensions or annuities may be fully or partially taxable, even if you do not receive a Form 1099 or other similar document reporting the amount of the income. Under most treaty states, pension income is taxable only in the state of residence when the distribution is made. This would cause foreign pensions to be taxable in the U.S. but not necessarily taxed in the foreign country from which it is sourced.
Taxpayers who are citizens of the U.S. must report on Form 114 their foreign financial accounts (life insurance, bank accounts, financial accounts, etc.) in which they hold financial interest, that exceeds $10,000 at any time during the calendar year.
Individual taxpayers and specified domestic entities with significant foreign financial assets might find that not only are they subject to the FBAR filing requirements, but more intensive reporting as well. The Form 8938, the Statement of Specified Foreign Financial Assets, applies to owners of certain foreign assets who have $150,000 in foreign assets at any point in the tax year, or more than $100,000 at the end of the year if married filing joint, with halved requirements if unmarried, filing separately, or a specified domestic entity.
For more information on FBAR/8938 reporting please reference our FBAR, Form 8938, and FATCA Newsletter.