What is the Foreign Account Tax Compliance Act?

FATCA is a law that requires US citizens to file annual reports on any foreign account holdings they have. It was passed in 2010, in conjunction with the Hiring Incentives to Restore Employment Act (HIRE), which incentivized employers to hire unemployed workers. 

The US is one of only two countries that taxes its citizens regardless of place of residency. FATCA seeks to eliminate tax evasion by American individuals earning taxable income abroad. Penalties are imposed on US residents who do not report foreign account holdings and financial assets that exceed $50,000 in value. However, there is an exception for assets held in a foreign branch of an US institution or a US branch of a foreign institution. 

Taxpayers Living Abroad

An US citizen is considered to be living abroad if their tax home is in a foreign country or if they have been present in a foreign country for at least 330 days in a year. 

Individuals with more than $200,000 in foreign financial assets on the last day of the tax year or more than $300,000 at any time during the year must complete the Form 8938. The amounts are doubled for married couples filing a joint tax return. 

Taxpayers Living in the US

Individuals with more than $50,000 in foreign financial assets on the last day of the tax year or more than $75,000 at any time during the year must complete the Form 8938. The amounts are doubled for married couples filing a joint tax return. 

Foreign Institutions

Foreign financial institutions (FFI) and non-financial foreign entities (NFFE) are required to comply with this law. They must disclose the identities of US citizens with accounts and the values of assets in the accounts. FFIs that do not comply will be excluded from the US market and have 30% of the amount of any withholdable payment from US financial assets withheld from them, including interest and dividends. 

Enforcement

113 countries have signed FATCA declarations or treaties with the US, including most European countries. This means that many countries will enforce FATCA laws, which will ensure tax collection for American citizens who fulfill the requirements. Americans in the US and abroad with significant foreign holdings should remember to complete the form 8938.

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Sources: 

IRS
Department of the Treasury
HR Block
Investopedia