U.S. Tax of Foreign Retirement (2018) – Reporting Foreign Accounts
U.S. Tax of Foreign Retirement (2018) – Reporting Foreign Accounts
The interrelation between U.S. Tax and foreign retirement is a very complicated topic.
That is because even though a particular retirement fund might receive tax-deferred treatment under one country’s foreign jurisdiction, it may not receive tax-deferred status in the United States.
U.S. Tax of Foreign Retirement
When it comes to foreign retirement, there are typically two aspects to the fund: Foreign Account Reporting & U.S. Taxation.
Foreign Account Reporting
The first aspect is the reporting of the retirement. Depending on the type of retirement, it may be required to be filed on forms such as an FBAR (Report of Foreign Bank and Financial Account Form), FATCA (Foreign Account Tax Compliance Act), Form 8621 (Passive Foreign Investment Companies) or Form 3520/3520-A (Foreign Trusts)
FBAR & Foreign Retirement
If you have a foreign retirement account, then more likely than not you will have been assigned an account number. And, if you have an account number, then you are typically required to include the account number on your annual FBAR statement. The threshold requirements for filing an FBAR are relatively low, and it is required to be filed by any individual who has more than $10,000 in annual aggregate total of all of their foreign accounts on any given day of the year (not more than $10,000 per account, but more than $10,000 in annual aggregate total).
Form 8938 & Foreign Retirement
In addition to filing the FBAR, there are other potential forms that you may need to file, with the second most common international tax form being FATCA Form 8938. When it comes to reporting, form 8938 is more encompassing, because it is not limited to just foreign accounts, but rather includes specified foreign financial assets – which can mean many different things beyond just an account.
The threshold requirements for filing form 8938 are significantly higher than they are for filing the annual FBAR. One distinction that should be made is that form 8938 is filed directly with your tax return.
Therefore, if you are filing married filing joint – even if only one person is required to file form 8938 – the form must be included on the joint return – which could lead to a dual penalty situation wherein the innocent spouse could become subject to a Form 8938 penalty, just because he or she signed the tax return that was filed married filing jointly.
Form 3520 or 8621 & Foreign Retirement
Unlike the two above referenced reporting forms (which are relatively common), form 3520 and form 8621 are much more complicated forms. Depending on the nature of the investment, whether the investment holds mutual funds, whether there are current distributions, and whether or not the individual has invested more money into the plan then the employer — will impact the reporting requirements.
For more information on these reporting requirements, please click either of the two links below:
U.S Income Tax & Foreign Retirement
When it comes to the U.S. income tax of foreign retirement accounts, it becomes much more complicated.
Here is a typical example: if a person has a CPF in Singapore which is a mandated retirement fund, and the person is a US person for tax purposes, than they typically have to pay tax on the accrued, but non-distributed income generated within the CPF.
Since the CPF is growing tax-free in Singapore, the U.S. person now has to go out of pocket to pay tax on money they have not even received – and which is mandated by the government in Singapore and not taxed during the growth phase of the retirement.
Alternatively, if the same person has a retirement fund in the UK or a Registered Retirement Savings Plan (RRSP) in Canada, the person does not have to pay immediate tax on the accrued but non-distributed income.
Why? Primarily because there is an income tax treaty between United States and the UK, as well as between the United States and Canada. These two treaties essentially break down the tax rules regarding retirement – and in most situations, unless a person is receiving an actual distribution, they are not currently taxed.
Conversely, there is no tax treaty with Singapore (or other similar countries in which there is a problem and find such as Malaysia or Thailand), and therefore they don’t receive the same tax-deferred treatment (noting, that the United States issued to memos regarding deferrals and accrued but not distributed income for the CPF back in 1996 and 1997).
Evaluating your Foreign Retirement
When it is time to file your U.S. taxes, it is important to conduct proper research and analysis regarding your specific country, and your specific tax treaty as it related to U.S Income Tax laws. Even if there is a tax treaty, that does not mean the specific retirement fund will be identified in the treaty. This is currently true with the Income Tax Treaty between the United States and Australia, in which even the very common “Australian Superannuation Fund” is not identified by name in the treaty.
Nevertheless, if there is a tax treaty in place, then there are usually some general rules you can go back. Likewise, if there is no tax treaty in place than it is important to conduct research to determine whether the IRS has ever provided any guidance on the particular type of retirement fund.
IRS Offshore Voluntary Disclosure
If you are already out of compliance for not properly reporting or paying tax on your foreign retirement income or accounts, you may consider getting into compliance with one of the approved IRS Offshore Voluntary Disclosure Programs.
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Ezra holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver. He has also earned the prestigious IRS Enrolled Agent credential. Mr. Krantz's articles have been referenced in such publications as the Washington Post, Forbes, Nolo, and various Law Journals nationwide.
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