With the 2010 HIRE act, the U.S. Government accomplished two things: throttling domestic hiring and adding a revenue stream. Within the 2010 HIRE act was FATCA, or the Foreign Account Tax Compliance Act, which mandates all U.S. persons pay tax on assets exceeding $50,000 in value. U.S. persons living abroad are now subject to the same tax affiliations as residents. FATCA has a huge effect because non-compliance comes with a 30% penalty on withholdable payments. This article details all you need to know about FATCA and the penalties surrounding it.
What Are Withholdable Payments?
To enforce FATCA, the IRS uses withholdable payments as a means of enacting tax penalties on non-compliant U.S. persons. Withholdable payments are any payments of interest, dividends, rents, royalties, salaries wages, annuities, licensing fees, or other FDAP income gains, and profits. Some exemptions apply so ask your financial advisor about which of your income streams qualify under withholdable payments.
So What Now?
It’s important to understand the consequences of non-compliance with FATCA. They are quite heavy. If not in compliance with FATCA, the IRS can enact a 30% tax penalty on a withholdable payment from a U.S. institution. Some individuals are certain to be U.S. persons and thus subject to FATCA while others fall in a grey area.
Am I Subject to FATCA?
U.S. Citizens, Green Card Holders, and U.S. Residents for Tax purposes are subject to FATCA. Those born in the United States are U.S. citizens as well as those who are naturalized. Additionally, those born outside of the United States but who have a U.S. parent can potentially be U.S. citizens and thus subject to FATCA. In addition to being a U.S. citizen, those with a green card can be subject to FATCA. The IRS classifies anyone who has had a green card for at least one day as a green card holder, although certain exemptions apply. Lastly, U.S. residents are subject to FATCA. To find out if you are a U.S. resident for tax purposes, use the 183 day rule, or Substantial Presence Test.
The Substantial Presence Test & 183-Day Rule
The Substantial Presence Test determines whether an individual is a U.S. resident for tax purposes. You qualify as a U.S. Resident for Tax Purposes when you have been in the U.S. for at least 31 days in the calendar year and adhere to the 183-day rule.
The 183-day rule applies to a person who has been in the U.S. for 31 days during the current calendar year and has at least a 183 ‘IRS-days’ total over the last 3 years. These ‘IRS-days’ are composed by the total number of days in the United States in this calendar year, plus 1/3 of total days present in the year before the current year and 1/6 of total days present in the year two years before the calendar year. If you meet the criteria of the Substantial Presence Test, chances are the IRS may consider you a U.S. resident for tax purposes.
A few Circumstances are Exempt:
Some circumstances may not apply to the count mentioned before. Individuals in the U.S. on an A or G visa (but not an A-3 or G-5), a teacher or trainee in the U.S. under a J or Q visa, a student in the U.S. under a F, J, M, or Q visa, or a professional athlete present in the U.S. to compete in a charitable sports event are not subject to ‘days’ on the 183-day rule. This however, only applies to stays which they are exempt under visa.
So, Again, Am I Subject to FATCA?
We’d really like to go over this again. If you are an American living in Europe, it is pretty obvious you are subject to FATCA. But we regularly encounter so many others that are not aware of the fact that they have to comply with U.S. tax laws.
In other words: if you have ever lived, studied and/or worked in the United States and you’ve been granted a U.S. social security number and a green card, chances are you are in fact subject to FATCA, and you have to file U.S. taxes. The same goes for children of U.S. parents, even if they have not been born in the States and even if they haven’t lived there for one day in their life. Or for those who have married a U.S. citizen.
The IRS’ arm stretches far and impacts everyone with ties to the United States. Make sure it does not affect you or find out what the implications are if it does. Contact a financial advisor that can help you get clarity and can assist you with your U.S. – FATCA compliant – tax reporting and wealth management.
Beacon Financial Education does not provide financial, tax or legal advice. None of the information on this site should be considered financial, tax or legal advice. You should consult your financial, tax or legal advisers for information concerning your own specific tax/legal situation.
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