Blog

𝐔𝐧𝐝𝐞𝐫𝐬𝐭𝐚𝐧𝐝𝐢𝐧𝐠 𝐅𝐁𝐀𝐑 𝐚𝐧𝐝 𝐅𝐨𝐫𝐞𝐢𝐠𝐧 𝐀𝐬𝐬𝐞𝐭 𝐑𝐞𝐩𝐨𝐫𝐭𝐢𝐧𝐠: 𝐖𝐡𝐚𝐭 𝐘𝐨𝐮 𝐍𝐞𝐞𝐝 𝐭𝐨 𝐊𝐧𝐨𝐰

If you have money in a foreign bank account or own assets overseas, you may need to report them to the U.S. government. This might sound intimidating, but it’s a straightforward process once you understand the basics.

𝐖𝐡𝐚𝐭 𝐢𝐬 𝐅𝐁𝐀𝐑?

FBAR stands for Foreign Bank Account Report. It’s a form you file with the U.S. Treasury Department to report any financial accounts you own or have signature authority over in a foreign country. The form is officially called FinCEN Form 114, and it’s filed electronically through the Financial Crimes Enforcement Network (FinCEN) website.

𝐖𝐡𝐲 𝐃𝐨𝐞𝐬 𝐭𝐡𝐞 𝐔.𝐒. 𝐂𝐚𝐫𝐞 𝐀𝐛𝐨𝐮𝐭 𝐌𝐲 𝐅𝐨𝐫𝐞𝐢𝐠𝐧 𝐀𝐜𝐜𝐨𝐮𝐧𝐭𝐬?

The U.S. requires taxpayers to report foreign accounts to prevent tax evasion, money laundering, and other financial crimes. It’s not about taxing your money twice—it’s about transparency. If you’re compliant, there’s nothing to worry about!

𝐖𝐡𝐨 𝐍𝐞𝐞𝐝𝐬 𝐭𝐨 𝐅𝐢𝐥𝐞 𝐚𝐧 𝐅𝐁𝐀𝐑?

You must file an FBAR if:

• You are a U.S. person (this includes citizens, residents, businesses, trusts, and estates).

• You have financial interest in or signature authority over at least one foreign financial account.

• The total value of all your foreign accounts exceeds $10,000 at any time during the calendar year.

𝐖𝐡𝐚𝐭 𝐂𝐨𝐮𝐧𝐭𝐬 𝐚𝐬 𝐚 𝐅𝐨𝐫𝐞𝐢𝐠𝐧 𝐅𝐢𝐧𝐚𝐧𝐜𝐢𝐚𝐥 𝐀𝐜𝐜𝐨𝐮𝐧𝐭?

• Bank accounts (checking, savings, etc.)

• Investment accounts

• Mutual funds

• Retirement accounts

• Some types of insurance policies with cash value

𝐖𝐡𝐚𝐭 𝐢𝐬 𝐅𝐨𝐫𝐦 𝟖𝟗𝟑𝟖 (𝐅𝐨𝐫𝐞𝐢𝐠𝐧 𝐀𝐬𝐬𝐞𝐭 𝐑𝐞𝐩𝐨𝐫𝐭𝐢𝐧𝐠)?

In addition to FBAR, some taxpayers must also file Form 8938 with their annual tax return. This form is used to report specified foreign financial assets if their total value exceeds certain thresholds.

You must file Form 8938 if:

• You are a U.S. taxpayer (including residents and certain non-residents).

• The total value of your foreign financial assets exceeds the following thresholds:

• Single Filers or Married Filing Separately: $50,000 on the last day of the year or $75,000 at any time during the year

• Married Filing Jointly: $100,000 on the last day of the year or $150,000 at any time during the year.

𝐖𝐡𝐚𝐭 𝐂𝐨𝐮𝐧𝐭𝐬 𝐚𝐬 𝐚 𝐒𝐩𝐞𝐜𝐢𝐟𝐢𝐞𝐝 𝐅𝐨𝐫𝐞𝐢𝐠𝐧 𝐅𝐢𝐧𝐚𝐧𝐜𝐢𝐚𝐥 𝐀𝐬𝐬𝐞𝐭?

• Foreign bank accounts

• Foreign stocks or securities

• Interests in foreign partnerships or corporations

• Foreign mutual funds

• Foreign-issued life insurance or annuity contracts

𝐇𝐨𝐰 𝐭𝐨 𝐒𝐭𝐚𝐲 𝐂𝐨𝐦𝐩𝐥𝐢𝐚𝐧𝐭?

• Keep Track of Your Accounts

• Make a list of all your foreign accounts, including the account numbers, bank names, and maximum values during the year.

𝐂𝐨𝐧𝐯𝐞𝐫𝐭 𝐭𝐨 𝐔.𝐒. 𝐃𝐨𝐥𝐥𝐚𝐫𝐬

Use the official IRS exchange rate to convert foreign currency amounts to U.S. dollars.

𝐅𝐢𝐥𝐞 𝐨𝐧 𝐓𝐢𝐦𝐞

FBAR is due April 15, with an automatic extension to October 15.

Form 8938 is due with your tax return on April 15 (or October 15 if you file an extension).

𝐖𝐡𝐚𝐭 𝐇𝐚𝐩𝐩𝐞𝐧𝐬 𝐢𝐟 𝐘𝐨𝐮 𝐃𝐨𝐧’𝐭 𝐅𝐢𝐥𝐞?

• Failing to file FBAR or Form 8938 can result in hefty penalties:

• FBAR Penalties: Up to $10,000 per violation for non-willful failures.

• The civil penalty for a willful violation can be as high as $100,000, or 50% of the balance in the foreign account at the time of the violation—whichever is greater.

𝐅𝐨𝐫𝐦 𝟖𝟗𝟑𝟖 𝐏𝐞𝐧𝐚𝐥𝐭𝐢𝐞𝐬: $10,000 for failure to file, with additional penalties if the IRS notifies you and you still don’t comply.

𝐓𝐡𝐞 𝐠𝐨𝐨𝐝 𝐧𝐞𝐰𝐬? If you missed filing in the past, the IRS offers programs like the Streamlined Filing Compliance Procedures to help you catch up without facing harsh penalties.

𝐅𝐢𝐧𝐚𝐥 𝐓𝐡𝐨𝐮𝐠𝐡𝐭𝐬

Reporting foreign accounts and assets might seem overwhelming, but it’s a necessary step to stay compliant with U.S. tax laws. The key is to stay organized, understand the requirements, and file on time. If you’re ever in doubt, don’t hesitate to reach out to a tax professional who can guide you through the process.

Remember, the goal is transparency—not to punish you for having foreign accounts. By staying compliant, you can avoid penalties and enjoy peace of mind knowing you’ve done everything right.

Got questions about FBAR or foreign asset reporting? Contact us at (703) 594-6695 or contact@sumitwise.com.

Claiming the Home Office Deduction: A Technical Guide for Tax Professionals

The home office deduction can be a valuable tax-saving opportunity for eligible taxpayers, including self-employed individuals, freelancers, and small business owners who use part of their home for business purposes. However, strict IRS guidelines govern the qualification and calculation of this deduction. This guide outlines the key requirements and methodologies for properly claiming the home office deduction on a tax return.

Eligibility Criteria

To claim the home office deduction, taxpayers must meet two primary requirements established by the IRS:

Exclusive and Regular Use Test: The home office must be used exclusively and regularly for business. This means the space cannot be used for personal activities at any time.

Principal Place of Business Test: The home office must be the taxpayer’s principal place of business, or it must be used to meet clients, patients, or customers in the normal course of business. Alternatively, it can qualify if it is a separate structure on the taxpayer’s property used solely for business purposes.

Methods of Calculation

The IRS allows taxpayers to choose between two methods for calculating the home office deduction: the Simplified Method and the Regular Method.

1. Simplified Method

The simplified method allows taxpayers to deduct $5 per square foot of home office space, up to a maximum of 300 square feet (capping the deduction at $1,500 per year).

No direct expenses, depreciation, or carryover amounts are considered under this method.

Business income cannot be reduced below zero using this method.

2. Regular Method

This method involves allocating actual expenses between business and personal use.

Taxpayers must determine the percentage of their home used for business, typically calculated as:

(Square footage of home office / Total square footage of home) × 100

Deductible expenses include:

Direct Expenses (100% deductible) – Costs directly related to the home office, such as repairs and maintenance exclusive to the space.

Indirect Expenses (Partially deductible) – Mortgage interest, rent, real estate taxes, utilities, homeowners insurance, depreciation, and general maintenance, prorated based on the percentage of business use.

Depreciation – Homeowners may depreciate the portion of their home used for business, though this may lead to depreciation recapture upon the sale of the home.

Reporting Requirements

Form 8829 (Expenses for Business Use of Your Home): Taxpayers using the regular method must complete and attach Form 8829 to their Schedule C (Profit or Loss from Business).

Schedule C (Form 1040): The home office deduction is reported on Schedule C for sole proprietors.

Schedule A (Form 1040): If taxpayers opt for the standard deduction, they cannot separately deduct mortgage interest and property taxes related to the business portion.

Partnerships and S Corporations: Partners may deduct home office expenses on Schedule E if the partnership agreement allows for expense reimbursement. S corporation shareholders must be reimbursed through an accountable plan; otherwise, deductions are not allowed.

Limitations and Considerations

Income Limitation: The deduction cannot exceed the taxpayer’s gross income from the business.

Carryover of Excess Expenses: Under the regular method, excess home office expenses that exceed business income can be carried forward to future tax years.

Employee Use Restriction: As of the Tax Cuts and Jobs Act (TCJA) of 2017, employees working remotely cannot claim the home office deduction unless they are self-employed or operating a business.

Audit Risk: Due to potential abuse, the IRS closely scrutinizes home office deductions. Taxpayers must maintain proper documentation, including floor plans, utility bills, mortgage/rental agreements, and business records.

Conclusion

Properly claiming the home office deduction requires strict adherence to IRS guidelines. Tax professionals should carefully assess a taxpayer’s eligibility, select the appropriate calculation method, and maintain thorough records to substantiate the claim. By ensuring compliance, taxpayers can effectively reduce their taxable income while mitigating audit risks.