FATCA, FBAR, PFIC… this alphabet soup of tax/financial related acronyms can certainly send chills down the spines of Americans living abroad. And it should – the US is the only country on the planet (besides Eritrea) that taxes its citizens worldwide, and non-compliance can result in hefty penalties. Luckily, by understanding a few simple guidelines, you can better protect your savings while retiring abroad and never have to worry about the IRS. Here is some general financial advice for Americans retiring in the Philippines and elsewhere.
FATCA
FATCA (the Foreign Account Tax Compliance Act) entered into force in 2010, and it has been reinforced during the past several years. Before, the government was relatively lax on tax reporting for Americans abroad. But today, it’s essential to report all your assets and financial activity every year. To ensure overseas Americans are tax compliant, the US has signed deals with thousands of companies and countries (the Philippines included) to ensure they report their transactions with Americans to the IRS.
That means if you’re making investments, or are earning money, or are using a bank account in a foreign country, those entities will report your activity to the IRS. When you file taxes and don’t report the same activity, the IRS sees that it doesn’t match and believes you are evading taxes. We all know that the consequences for tax evasion aren't good.
My advice to stay FATCA compliant is to report everything each year via a qualified expat CPA. I stress expat because a CPA back home most likely doesn’t have the qualifications or knowledge to work with Americans living abroad effectively, the rules are very different. Even if you’re making under $100,800 (the current foreign earned income exclusion amount) and don’t owe any tax to the government, you’re still required by law to report everything correctly.
FBAR
The Report of Foreign Bank and Financial Accounts, or FBAR for short, is a particular form for reporting foreign bank accounts. The IRS website states that you are required to report an FBAR form if you have “a financial interest in or signature authority over at least one financial account located outside of the United States, and the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year…” If you have a bank account with $10,000 (or the equivalent in foreign currency) or more, you must report it.
FBAR forms are available online and can easily be done by yourself. The most important thing is just doing it. That being said, having a professional review your info is never a bad recommendation, it’s better safe than sorry.
PFIC
PFIC stands for Passive Foreign Investment Company, and they can be quite nasty! In simple terms, most non-US investments, mutual funds, pension plans, life insurance products, etc., can result in a very high tax on gains each year. There are fantastic, tax-efficient investment products available to most foreign nationals living abroad, something that can add significant value to your golden years, but Americans must be very careful when making investments while retiring/living abroad.
At risk of sounding like a broken record, it may be a good idea to have a qualified expat professional review any non-US investments you possess to ensure they’re not PFICs. If you’re looking to make new investments while abroad, ask if they are PFICs or not. As a rule of thumb, if it’s not US-based, there’s a good chance it’s a PFIC. There are indeed specific, SEC compliant investments available to Americans living abroad, but the options are especially limited when compared to what other nationalities have available.
As you can see, it’s best to ask questions and, most importantly, report absolutely everything – honesty is the best policy. The IRS won’t accept “I didn’t know” as a legitimate excuse. If you’re FATCA compliant, you have absolutely nothing to worry about except working on your tan in paradise!
Very timely article. Does anyone know someone who does tax preparations in the Philippines? I live in Central Luzon, so preferably somewhere in this area, Last year i had to wait until Dec of 2016 to file taxes for 2015. Also does anyone have any information on how to obtain ITIN numbers for spouses and dependents? Good information, and thank you.
Hi Dale. I don’t know any expat CPAs who live in the Philippines, but there are a few who commute to Manila from other places. There are also a few reputable sites who help expats with their tax filing. Try a quick search on Google. Also take note of price: depending on your situation, it should be several hundred dollars. And also be sure to ask for references and qualifications to make sure the CPA has a good name.
Hello everyone
My wife and I live in the U.S. but when we went to our bank in the Philippines they had us sign a Certification Consent Wavier and sing a W9 form. They also asked why we were sending so much money to the Philippines. My reply was we send money before we go on vacation there.
We don’t have $10,000 in our accounts so do we still have to report to the IRS that we have accounts in the Philippines?
Hi Alan. Two things. 1. Remember that for FBAR it’s an aggregate total of 10,000 USD (or currency equivalent). So if you have, for example, 5, 000 in one foreign bank, 2,500 in another, and 2,500 in another, you’ll still have to file an FBAR. 2. If you’re an American and open a foreign bank, that bank will most likely make you sign various US tax forms – that’s normal. That bank will report your holdings to the IRS. If you’re aggregate total is below 10,000 you’re probably fine, but you may want to check with your CPA just to make sure. When in doubt, err on the side of caution.
The question on the tax form is if you have a foreign account, no matter what amount. The second part is if it is more than an aggregate of $ 10,000 or more at any time in the year and if it was then you must file a FBAR. But you must check the box for any and all accounts abroad.
That’s a good point, Marvin. Furthermore, it must be noted that FBAR requirements are subject to change, so it’s always good to stay on top of the latest developments.
Can you use online TurboTax or HR Block instead of CPA for a ,simple tax return when living abroad?
Hello Paul. Yes, you can use these devices. However, just make sure you know about PFICs, FATCA, FBAR, and any other tax liabilities that may apply to you as an expat, and file accordingly.
Hi Trey, I am a dual citizen. Meaning I am a Filipino Citizen and US Citizen passport holder. Do these American Tax rules still apply to me? I am also looking to open a business in Philippines. Do I have to report these to the IRS as taxable income?