Foreign Financial Assets

In preparing 2011 tax returns, a U.S. taxpayer may be obligated to file a Report of Foreign Bank and Financial Accounts (Form TD F 90-22.1, FBAR) with the U.S. Department of Treasury.  U.S. citizens, certain U.S. non-resident aliens and non-resident aliens who elected to be taxed as a resident of the United States will need to start reporting information on foreign financial assets beginning with tax year 2011.  The purpose is to investigate U.S. taxpayers hiding assets overseas.  The Form 8938 relates to the Statement of Specified Foreign Financial Assets.

Form 8938 generally must be filed by any individual holding an interest in certain foreign assets with an aggregate value exceeding $50,000 ($100,000 for joint filers) as of December 31 or $75,000 ($150,000 for joint filers) at any time during the tax year. The reporting requirement also applies to disregarded entities, such as single-member limited liability companies where the individual is the owner and has the Form 8938 filing obligation.

Specified foreign financial assets include:

  • financial accounts, depository or custodial, maintained by foreign financial institutions; and
  • other assets not held in accounts kept by financial institutions, for instance, stock or securities issued by non-U.S. persons, financial instruments or contracts with issuers or counterparties (currency swaps, options, derivative contracts) that are non-U.S. persons, and any interest in a foreign entity.

Special rules apply to other assets, such as gold holdings, artwork, and real estate. For gold holdings, if gold is held in a safety deposit box, it is not considered a specified foreign financial asset. If gold is held by a custodian, it is deemed a specified foreign financial asset. Artwork and real estate are currently not considered specified foreign financial assets.

The value of an interest in a foreign estate, pension or deferred compensation plan is the fair market value determined as of the last day of the tax year. The value of an interest in a foreign trust is the sum of the FMV of currency or other property distributed to the beneficiary during the taxable year in addition to the value, as of the last day of the tax year, of the beneficiary’s right to receive distributions. If no distributions happened during the tax year, the FMV for reporting is nothing.

An individual who wants to make sure tax filings are properly completed should consult with an experienced New York tax practitioner.