FATCA and how it affects you

FATCA and how it affects you

What is FATCA?

This page answers the question “What is FATCA?”. But before we get started, let’s take a look what others have to say about this controversial law.

The Wall Street Journal – FATCA worsens the already profoundly unjust tax treatment of millions of middle-class Americans living abroad.

Democrats Abroad – These survey results show the intense impact FATCA is having on overseas Americans. Their financial accounts are being closed, their relationships with their non-American spouses are under strain, some Americans are being denied promotion or partnership in business because of FATCA reporting requirements and some are planning or contemplating renouncing their U.S. citizenship.

What is FATCA?: The Fundamentals

The number of US citizens renouncing their citizenship has dramatically risen each year since the enactment of FATCA, the Foreign Account Tax Compliance Act, in 2010. In that year, only 1,006 individuals renounced US citizenship. In 2015, this figure skyrocketed to 4,279. Due to the large amounts of renunciations, in 2015 the State Department raised the fee for citizenship renunciation nearly 400% to 2,350 USD.

4,279 individuals relinquished their citizenship in 2015

FATCA is a general yet very convoluted regulation that aims to increase tax compliance for US citizens living abroad. It also requires foreign financial institutions (FFI’s) to give the IRS personal information on their US clients, allowing the IRS to literally spy on US citizens overseas. Given its complex nature and novelty, many have no idea what is FATCA or its affect on their personal situation.

The act was originally intended to sniff out high net worth individual Americans and criminals hiding large sums of money offshore to avoid tax. Indeed, it has made it more difficult for money launderers and tax evaders, but it has also punished the nine million US citizens living abroad to a different degree.

Now, law-abiding US expats have to fill out time-consuming forms, such as the IRS information-reporting form 8938, along with other FATCA compliant forms on their earnings. They’ll also have to report on their foreign bank activity in what’s known as FBAR, and you may even have to pay taxes on little-known things like phantom profit. (Phantom profit is the gain your currency of investment are made against the US dollar. If you have an investment in Euros that equals 100,000 USD, for example, and the Euro increased 0.5% against the dollar that same year, you may have to pay tax on it.)

There are punishments for not complying with FATCA. Individuals who owe significant amounts of money to the IRS risk losing their passport, paying heavy fines, and, in some cases, getting prison sentences. It may also go without saying, but not know what is FATCA does not exempt you from the consequences…

The State Department raised the renunciation fee to 2,350 USD

FFI’s are also highly regulated and penalized for improper compliance. In 2014, the IRS promulgated Form W-8BEN in 2014 for all FFI’s to ensure they get proper data on US citizen accounts. FFI’s who do not comply will suffer great penalties from the US government, and for this reason many investment houses and banks have decided not to take on US nationals as clients for fear of the IRS. For the same reason, many corporations abroad have decided to not hire US citizens.

Even domestic firms are feeling the pinch. If you have an IRA or online stock trading account in the US and move to a foreign land, some of these companies will freeze your accounts. This leaves Americans in a real dilemma if they’re trying to save for retirement whilst living in another country.

As one can see, with so many issues and technicalities like phantom profit, complicated forms, frozen retirement accounts, and not being able to open bank accounts abroad, just touching on the topic of “What is FATCA?” can cause a real headache.

Who Are Accidental Americans?

FATCA clearly makes life for many American living abroad a lot tougher, but it also affects non-Americans known as “accidental Americans.” Accidental Americans are defined by some of the bullet points below.

  • You were born in the United States (Boris Johnson, the mayor of London, was born in the United States, and has faced FATCA related issues when the IRS tried to tax the sale of his house in London)
  • You have a parent who is American
  • You are a non US person who shares a joint account with an American, or you allow a US person to have signatory authority on the account
  • You pass the Physical Presence Test (i.e. you spend a lot of time in the USA)

If any of these points pertain to you, you may have to report and/or pay taxes. It’d be highly recommended to seek professional advice from an American expat CPA if so, as the situation can be very tricky.

What is FATCA?: The Financials

At the end of the day, many see FATCA as merely a money-maker for Uncle Sam at the expense of hard-working Americans living abroad. Upon implementation, FATCA was estimated by the United States Congress Joint Committee on Taxation to generate nearly 9 billion in additional tax revenue over an 11-year horizon. While it is true some of this revenue comes from tax evaders and criminals, the majority is coming out of the wallet of US citizens paying double tax. Furthermore, the tax evaders and criminals, in the ever evolving cat and mouse game between their operations and the IRS, are reported by some sources to have already found alternative routes into their illegal activities.

Look no further than the Panama Papers fiasco that unfolded in early 2016. This incident revealed that the world’s wealthiest and most powerful could easily evade tax and hold millions offshore. Despite high profile names making the list, there were not many Americans named in the papers. The reason for this is that it’s just as easy to evade tax within the US, according to this NBC article. One doesn’t need to go all the the way to Panama when Nevada or Delaware is much closer…

Is FATCA a money maker or money loser?

Contrary to the facts above, FATCA, according to some sources, could be losing money. Astonishingly, a 2016 Forbes article estimated that the global cost for implementing FATCA could reach 8 billion USD per year. These costs will be borne by investors and account holders, and also the FFI’s compliant with FATCA. Based off these estimates, FATCA is actually losing money or breaking even, creating a frightening scenario for the future which could raise the double tax benchmark even higher to help cover the costs and global reach of FATCA.

So what is FATCA? As you can see, it can have different meaning for different people, and its affects vary greatly depending on your personal situation. However, at the end of the day, most can agree that FATCA is causing a lot of hardships for the average American making an honest living abroad.

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