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The Tax Implications of Opening a Foreign Bank Account

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    Foreign bank accounts aren’t just for the super rich. An increasing number of United States-based taxpayers of all income levels are now finding it beneficial to open them for a variety of reasons, but doing so is a big decision — and one that should be made with ample consideration to your unique financial needs. 

    The process of opening a foreign bank account can come with a host of benefits — including privacy, currency diversification, and peace of mind — but there are certain tax implications of which U.S. citizens need to be aware before starting. Here’s what you need to know about foreign financial accounts to determine if they are right for you.

    Why Individuals Open Foreign Bank Accounts

    Offshore accounts are often associated with secrecy and tax evasion, but the truth is they are legitimate ways to protect your savings. People have a lot of reasons for opening accounts with foreign financial institutions, including that they: 

    • Are expats who want an account in the countries where they’re living.
    • Want insurance against political or economic instability in their home countries.
    • Want to take advantage of higher interest rates offered by foreign banks. 
    • Want the option to move to other countries and have their finances available. 
    • Want to rent or purchase properties in foreign countries and need local accounts to obtain loans or prove they can pay rent. 
    • Regularly do international business or send money to someone overseas and want to avoid wire transfer fees.
    Two Parties Closing International Business Deal Who May Need A Foreign Bank Account

    You may have your own reasons for wanting to diversify your savings. No matter what inspires you, there are steps you will need to follow in the U.S. and abroad to securely open your new account. 

    Can US Citizens Have Foreign Bank Accounts?

    Every country has its own requirements for opening an account as a U.S citizen, and it’s important to adhere to all regulations in both countries. In general, you’ll likely need the following to open an overseas bank account:

    • Two banking references
    • One or more professional references
    • Two forms of identification
    • Proof of address

    You should also expect to have a meeting with someone from the bank, during which you may be asked why you’re opening the account, where the money will be coming from, and how much you expect to deposit and withdraw each month. While some of it may start to feel like a violation of privacy, keep in mind these safeguards are all in place to prevent illegal activity. 

    Stay patient with the process. It may take longer than it would to set up an account in the U.S., so  keep your focus on the benefits and why you’re setting up your offshore account in the first place. 

    Foreign Bank Account Tax Implications 

    As a U.S. citizen, you’ll have to follow reporting requirements for your foreign financial assets every tax year. These are a few of the things you need to be aware of:

    Report of Foreign Bank and Financial Accounts (FBAR) 

    Per the Bank Secrecy Act of 1970, you must file the FBAR every year if the total of all your offshore accounts is more than $10,000 at any point within the calendar year. This is filed with the U.S. Treasury’s Financial Crimes Enforcement Network (FinCen) through FinCen Form 114. This form must be filed by the due date to avoid civil and criminal penalties. The BSA E-Filing System makes the process convenient and secure.

    FBAR penalties can be severe, so foreign account holders who missed filing an FBAR form in past years need to take action immediately. The Internal Revenue Service (IRS) does offer the opportunity to explain why you haven’t met the filing requirements, but you will need to be prepared with all your documentation. 

    Foreign Account Tax Compliance Act (FATCA) 

    In addition to filing an FBAR with the Treasury Department, some U.S. taxpayers will need to file Form 8938 with the IRS along with their income tax return. In general, this is when your foreign assets exceed $50,000, though you should discuss your situation with your tax attorney for clarification on whether you need it.

    Foreign Earned Income Exclusion

    U.S. citizens living abroad are taxed on worldwide income, but there are some circumstances in which you may qualify for a Foreign Earned Income Exclusion or a foreign housing exclusion or deduction. These include if you are a legitimate resident of another country and residing there for an uninterrupted period during the tax year, or if you are a U.S. citizen or resident alien who is physically present in that country for at least 330 days within a consecutive 12-month period. In these situations, a certain amount of your foreign income may not be taxed by the U.S. government. If you qualify, it’s definitely a break you need to be taking advantage of.

    High-Tax Kickout

    The high tax kick out (HTKO) rule is a provision of the United States tax code that applies when the effective tax rate for foreign source income allocated to the passive category exceeds the greatest United States tax rate. When this happens, the high-taxed income is moved from the passive category and into general income. This change in classification means that the income is now subject to taxation at the greater United States tax rate.

    Working With a Trusted Tax Advisor 

    Tax filing is complicated enough without having to navigate the FBAR and other foreign bank account reporting requirements. A trusted tax advisor can help ensure you’re filing the proper forms by the due dates, adhering to all regulations, and keeping up-to-date on ever-changing filing rules and requirements. 

    Shaking Hands With Accountant After Creating Foreign Bank Account

    Proper tax and FBAR filing can help you avoid an IRS audit and potential criminal or civil penalties. Using professional tax services can save you a lot of time, money, and hassle in the long run.

    Let Us Help You Meet Your Foreign Bank Account Requirements

    Whether you’re filing the FBAR for the first time, trying to catch up after missing years you should have been filing, or considering opening your first offshore account, we can help. Contact Silver Tax Group today to discuss your foreign bank account questions, or to speak with an expert about other tax-related questions you might have.

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