Here are some of the things U.S. Citizens need to keep in mind when filing out the 1040 every year. Do any of these apply to you?
Form 1040 This must include your worldwide income. We can use the foreign earned income exclusion Form 2555. However, it must be emphasized that although you may have earned below $94,500 (in 2013) this does not exclude you from filing the U.S. Tax Return. You have to file to claim the exclusion. You can also claim, with Form 1116, foreign taxes paid in Spain.
You also have to file the TDF 91-22.1, the Foreign Bank Account Report (FBAR) to the IRS. It is not part of the 1040 Income Tax Return and the annual deadline is June 30, with no possible extensions. It is now filed online, and you need to register in advance and obtain a PIN to sign the form. The Bank Secrecy Act requires you to file this report yearly if you have a financial interest in or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account, exceeding $10,000. The
Penalties for not filing this form: If non-willful, up to $10,000, and if willful, either $100,000 or 50 percent of account balances, whichever amount is greater. Criminal penalties may also apply.
Form 8938. This is the paper result of the FATCA law. Very similar to the FBAR, but part of the 1040 in which you must report all your financial assets. The threshold is different: for an unmarried taxpayer or married and filing separately, the total value should be more than $200,000 on the last day of the tax year ($300,000 at any time during the year). If married and filing jointly, the total value should be more than $400,000 on the last day of the tax year ($600,000 at any time during the year).
Penalties for not filing this form: up to $10,000 for failure to disclose and an additional $10,000 for each 30 days of non-filing after IRS notice of a failure to disclose, for a potential maximum penalty of $60,000. Criminal penalties may also apply.
It is not complicated to report pensions in the 1040. Nevertheless, the Treaty is confusing and may not be very clear when you take in consideration that you might receive them from both Spain and the US and also the different treatment of the Social Security Benefits and the huge tax differences among the different types of pensions. Spanish Pensions and Social Security Benefits are only taxable in Spain.
What about your investments? Form 8621. If you have Mutual Funds (Fondos de Inversión) in Spain or in any other country but the US, you have delivered yourself unto tax Hell, also known as Form 8621. Just don’t buy them if you can avoid it! The IRS does not like Mutual Funds abroad and the tax treatment is not good. According to the IRS, preparing and sending the form to the IRS will take 20 hours and 21 minutes. To sum it up, Form 8621 is a nightmare!
Form 5471 If you formed a company abroad and/or you own more than 10% of a business and are officer or director of it, you must file Form 5471. According to the IRS, preparing and sending the form with all Schedules needed will take you 27 hours and 11 minutes.
Gifts and inheritances Whether giving or receiving, in some cases they are tax free in Spain or in the US. You must remember your obligation to report them in both countries even if they are treated differently, and as well, these can trigger other tax filing requirements. Receiving large gifts or inheritances from non-residents have severe penalties both in Spain and in the US if they are not reported.
Compensation /(Indemnizaciones) from being laid-off from your regular job is tax-exempt in Spain. As far as the IRS is concerned, it is not tax-free in the US.
If you feel overwhelmed with the many forms to file and/or your individual situation is different, we can share our experience and expertise with you. We will suggest different options and select the one that best fits your case.
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