Understanding Form 8938: Your Guide to Reporting Foreign Assets
Are you a U.S. citizen or resident with financial assets held outside of the United States? If so, you might have heard of Form 8938. This form isn’t something you can ignore. Let’s break down what it is, why it exists, and whether it applies to you.
Why Does Form 8938 Exist? The Backstory
The IRS wants to know about foreign financial assets held by U.S. taxpayers. Why? Because these assets can generate income that is subject to U.S. tax. Think of it like this: if you earn money in the U.S., the IRS expects to tax it. The same is true for money earned from overseas assets. Form 8938 helps the IRS ensure that everyone pays their fair share, preventing tax evasion. The form became more significant after the Foreign Account Tax Compliance Act (FATCA) was enacted, which aimed to enhance international tax compliance.
How Does Form 8938 Work? The Mechanics
Form 8938 is all about reporting the value of specified foreign financial assets you own. It’s not about the income earned from those assets (that’s reported elsewhere on your tax return). It’s a separate requirement. You must file it along with your tax return if the value of your assets exceeds certain reporting thresholds. Think of it like making sure the IRS knows about all of your ‘overseas piggy banks.’
What Are Specified Foreign Financial Assets?
“Specified foreign financial assets” can sound intimidating, but they refer to several common types of holdings. These include:
- Foreign bank and brokerage accounts: Any account held at a financial institution outside of the U.S.
- Foreign stock and securities: Stocks, bonds, and other securities issued by foreign companies.
- Foreign partnership interests: Your stake in a foreign business partnership.
- Foreign mutual funds: Investment funds located outside the U.S.
- Foreign life insurance policies: If the policy has cash value, it may need to be reported.
- Other foreign financial instruments: This can be a broad category, so if you have doubts about a certain asset, it’s best to seek professional tax advice.
Reporting Thresholds: Do You Need to File?
Not everyone needs to file Form 8938. You only have to file it if the total value of your specified foreign financial assets exceeds specific thresholds. These thresholds vary based on your filing status and whether you live inside or outside the U.S.
- Taxpayers Living in the U.S.:
- Unmarried individual: Assets exceeding $50,000 on the last day of the tax year, or more than $75,000 at any time during the year.
- Married individuals filing jointly: Assets exceeding $100,000 on the last day of the tax year, or more than $150,000 at any time during the year.
- Married individuals filing separately: Assets exceeding $50,000 on the last day of the tax year, or more than $75,000 at any time during the year.
- Taxpayers Living Outside the U.S.:
- Unmarried individual: Assets exceeding $200,000 on the last day of the tax year, or more than $300,000 at any time during the year.
- Married individuals filing jointly: Assets exceeding $400,000 on the last day of the tax year, or more than $600,000 at any time during the year.
- Married individuals filing separately: Assets exceeding $200,000 on the last day of the tax year, or more than $300,000 at any time during the year.
It’s essential to track the value of your foreign assets throughout the year and see if you hit these reporting thresholds.
How to Fill Out Form 8938
Filing Form 8938 can seem complex, but it’s manageable with attention to detail:
- Gather your information: Collect all relevant financial statements and documents from your foreign accounts. This includes account numbers, the name of the financial institution, and the highest value of the asset during the year.
- Determine the asset value in U.S. dollars: You’ll need to convert the value of your foreign assets into U.S. dollars, usually using the exchange rate on the last day of the tax year.
- Complete the form accurately: Follow the instructions on the form and be sure to provide all requested details. You can either print the form from the IRS website and complete it manually, or use tax preparation software.
- Submit the form along with your tax return: It’s an attachment to your individual tax return (Form 1040) and must be submitted with it by the tax deadline.
Who Needs to File Form 8938?
Form 8938 is for U.S. taxpayers who have a specific level of overseas financial holdings. Specifically, you need to file this form if you’re any of the following:
- U.S. citizens: Regardless of where you live, you are subject to U.S. tax laws.
- U.S. residents: This includes green card holders and individuals who meet the substantial presence test.
- Certain nonresident aliens: Nonresident aliens may also have to report under certain conditions.
Remember, even if you think your financial life is simple, if you have assets overseas, it’s worth checking if you need to file Form 8938.
Form 8938 vs. FBAR: What’s the Difference?
It’s important not to confuse Form 8938 with the Report of Foreign Bank and Financial Accounts (FBAR), also known as FinCEN Form 114. While both forms deal with foreign assets, they serve different purposes.
- Form 8938: Is filed with your income tax return and is concerned with the total value of specific foreign financial assets. The IRS uses this for income tax purposes.
- FBAR (FinCEN Form 114): Is filed with the Financial Crimes Enforcement Network (FinCEN). It’s primarily about preventing money laundering and other financial crimes. The reporting thresholds are different, and you may need to file both forms if you meet the criteria for each. FBAR has different reporting thresholds from Form 8938. For the FBAR, you generally need to report if the aggregate value of your foreign accounts exceeds $10,000 at any time during the calendar year.
It’s possible you may need to file both of these forms if you meet their respective thresholds. When in doubt it’s always best to consult a professional.
Tips and Strategies for Handling Form 8938
- Keep detailed records: Maintain thorough records of your foreign financial assets and their values. This will make the filing process much easier.
- Don’t ignore foreign assets: It might seem tempting to avoid reporting your foreign assets, but it’s not worth the risk. The penalties for not filing Form 8938 can be quite steep.
- Seek professional help: If you’re unsure about how to complete the form or whether you need to file it, it’s a good idea to seek professional tax advice from a tax advisor familiar with international tax law. This is especially crucial for individuals with complex financial situations.
- File on time: Make sure to file Form 8938 along with your annual tax return by the tax deadline to avoid penalties.
Common Mistakes and Misconceptions
- Thinking you don’t need to file: Even if you think you don’t have a lot of assets, it’s worth double-checking the thresholds.
- Forgetting to convert currencies: The value must be in U.S. dollars. Failing to convert can result in inaccuracies and potential issues.
- Confusing Form 8938 with FBAR: They’re not the same, and you may need to file both if you meet the requirements.
- Believing there are no consequences for not filing: There are significant penalties for not filing, ranging from monetary penalties to more serious legal actions.
- Thinking its not applicable to individuals living outside of the U.S: Those living abroad still have to comply with US tax laws if they are citizens.
The Bottom Line
Form 8938 is an important form for U.S. taxpayers who have significant foreign financial assets. Understanding what it is, who needs to file, and how to file it correctly can save you time, money, and stress. Remember to keep good records, be aware of the reporting thresholds, and seek help when needed. By being proactive and informed, you can navigate this part of your tax obligations effectively.