If you live abroad or hold foreign financial assets, your U.S. tax return can be more complicated than you think. You may need to file additional forms, such as Form 8938, with your federal income tax return.
Form 8938, officially called the Statement of Specified Foreign Financial Assets, is a form used to report certain foreign financial accounts and other foreign financial assets to the IRS. It is part of the reporting rules created under the Foreign Account Tax Compliance Act, better known as FATCA.
You may need to file Form 8938 if you are a U.S. taxpayer with foreign financial assets that exceed certain value limits. The filing thresholds depend on your filing status and whether you live in the United States or abroad.
U.S. citizens living overseas often need to pay special attention to this form. Foreign bank accounts, retirement plans, investments, and business interests may all affect the filing requirement.
Who Is Required to File Form 8938?
According to the IRS, you may need to file Form 8938 if you are a specified individual (U.S. citizen, resident, and certain nonresident) or a specified domestic entity (U.S. corporation, trust, and partnership) holding foreign assets that exceed a certain value.
Your obligation is also tied to the tax year. If you are not required to file an income tax return for that year, the IRS generally does not require you to file Form 8938 even if your foreign assets exceed the normal reporting threshold.
Filing Thresholds by Status and Country of Residency
The amount of foreign assets you can hold before Form 8938 is required depends on your filing status and where you live.
- Single or married filing separately, living in the United States: More than $50,000 on the last day of the tax year or more than $75,000 at any time during the year.
- Married filing jointly, living in the United States: More than $100,000 on the last day of the tax year or more than $150,000 at any time during the year.
- Single or married filing separately, living abroad: More than $200,000 on the last day of the tax year or more than $300,000 at any time during the year.
- Married filing jointly, living abroad: More than $400,000 on the last day of the tax year or more than $600,000 at any time during the year.
- Specified domestic entity: More than $50,000 on the last day of the tax year or more than $75,000 at any time during the year.
The IRS also has rules for determining whether you qualify as living abroad. In general, your tax home must be in a foreign country, and you must satisfy either a bona fide residence test or a physical presence test. The physical presence standard generally requires at least 330 days in foreign countries during a qualifying 12-month period.
What Accounts Need to Be Reported on Form 8938?
You must report specified foreign financial assets on Form 8938 if you meet the filing requirements. Some common examples of specified foreign financial assets include:
- Financial accounts held at foreign financial institutions, such as bank accounts
- Stocks or securities issued by foreign persons
- Interests in foreign corporations, partnerships, and trusts
- Foreign retirement or deferred compensation plans
- Foreign mutual funds
- Foreign-issued insurance or annuity contracts with cash value
What Doesn’t Count as Specified Foreign Financial Assets?
- Directly owned foreign real estate
- Foreign social security-type benefits
- Financial accounts held at a foreign branch of a U.S. bank
- Foreign currency held directly
How to Calculate Maximum Value for Reporting
Determining whether you exceed the filing threshold requires more than checking your account balances on December 31.
In general, you must determine the maximum value of your specified foreign financial assets during the tax year. For financial accounts, the IRS allows taxpayers to rely on periodic statements unless they know those statements do not provide a reasonable estimate of the account’s maximum value.
Values in foreign currencies must be converted into U.S. dollars. The IRS generally directs taxpayers to use the U.S. Treasury Bureau of the Fiscal Service exchange rate for the last day of the tax year. If no Treasury rate is available for the currency, another publicly available exchange rate may be used.
Joint ownership can also affect the calculation.
When spouses file jointly, a jointly owned specified foreign financial asset is generally reported once using the entire maximum value. When married spouses file separate returns, each spouse generally reports the jointly owned asset and uses its entire maximum value rather than only one-half.
These rules make recordkeeping especially important when several accounts or currencies are involved.
How to Report on Your Income Tax Return
Form 8938 is attached to your federal income tax return.
You will generally provide identifying information for each reportable asset. That may include the account or asset type, financial institution, country, maximum value, and other required information.
Form 8938 also asks for information about income connected with your foreign financial assets. Foreign interest, dividends, gains, and other income may have to appear elsewhere on your tax return as well. Reporting an asset on Form 8938 does not replace the requirement to report taxable income from that asset.
Keep documents supporting the values you report. Bank statements, brokerage statements, pension records, ownership documents, and currency conversion records can help show how you calculated your Form 8938 amounts.
What Is the Difference Between FBAR and Form 8938?
Form 8938 and the FBAR are often confused, but they are separate reporting requirements. You may need to file both Form 8938 and an FBAR if you meet the separate reporting thresholds.
The FBAR, also known as FinCEN Form 114, focuses mainly on foreign financial accounts. A U.S. person generally must file an FBAR when the combined value of reportable foreign financial accounts exceeds $10,000 at any point during the calendar year. The FBAR is filed with FinCEN, the U.S. Treasury Department’s Financial Crimes Enforcement Network.
Form 8938 has much higher thresholds and covers a wider range of foreign financial assets. Unlike the FBAR, Form 8938 is filed with your federal tax return.
Failure to File and Penalties
Failing to file Form 8938 when required can result in significant penalties.
The standard failure-to-file penalty can be $10,000. If the IRS sends you a notice and you still do not file a complete and correct form within 90 days, additional penalties can begin to apply.
The continuing penalty can reach $10,000 for each 30-day period, or part of a period, after that 90-day window. The maximum additional continuing penalty is $50,000.
Tax underpayments tied to undisclosed foreign financial assets may also face a 40% accuracy-related penalty. Other civil or criminal consequences can apply in serious cases.
Common Mistakes Expats Make With Foreign Income and Assets
One common mistake is forgetting foreign retirement plans. A taxpayer may think of a pension as an employee benefit rather than a financial asset. However, foreign pension and deferred compensation interests can fall within Form 8938 reporting rules.
Trusts are another problem area. Foreign trusts can create several U.S. reporting requirements, and Form 8938 may be only one part of the filing picture.
Taxpayers also sometimes use only the balances on December 31st, but the Form 8938 filing test can depend on the value of assets at any time during the year, not just their year-end value.
Married taxpayers filing separately should be especially careful. Living in the United States does not give each spouse half of the married-filing-jointly threshold. A married taxpayer filing separately generally uses the same $50,000 year-end and $75,000 anytime thresholds as an unmarried filer.
File Form 8938 Accurately With Expat CPA
Foreign asset reporting can become complicated quickly, especially when your finances include several countries, currencies, retirement plans, investments, or business interests.
Expat CPA can help review your foreign asset inventory and determine which accounts and investments may qualify as specified foreign financial assets. We can also help identify the filing threshold that applies based on your residency and filing status.
Our team can calculate maximum account and asset values, apply appropriate currency conversions, and prepare Form 8938 as part of your U.S. income tax return.
We can also coordinate Form 8938 with FBAR and other FATCA-related reporting requirements. This helps reduce the risk that an account reported on one form is accidentally missed on another.
If you are unsure whether you should file Form 8938 or believe you missed the form in a prior year, Expat CPA can review your situation and help you understand your next steps toward U.S. tax compliance. We’ve been helping American expats file taxes since 1994, and we are happy to do the same for you. Connect with us today and schedule your consultation.