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How does FATCA affect U.S. citizens overseas? 5 facts you don't know!
Since its passage in 2010, the Foreign Account Tax Compliance Act (FATCA) has had a profound impact on U.S. citizens overseas. The impacts may be greater than you think, especially for U.S. citizens living in other countries and managing their finances. This article explores five key facts about FATCA to help you better understand the impact of this law.
1. Background and purpose of FATCA
The main purpose of FATCA is to ensure that the US government can track all US taxpayers, including those with overseas accounts. According to reports, the bill was originally designed to combat tax evasion by U.S. residents, rather than just targeting U.S. citizens overseas.
The number of U.S. citizens affected by this bill could be as high as 5.7 million to 9 million.
2. Scope of application of the law
FATCA applies to all persons identified as U.S. residents or so-called “U.S. persons,” including all U.S. citizens and green card holders. This law is not limited to people living in the United States, but also applies to Americans living in other countries, which makes them subject to stricter reporting requirements.
3. FATCA and reporting requirements
According to FATCA requirements, all U.S. citizens and green card holders are required to report their overseas financial assets to the Internal Revenue Service (IRS) annually. This includes filing Form 8938 and must also report FBAR (Form Reporting Foreign Bank and Financial Accounts) to the Financial Crimes Enforcement Network (FinCEN).
Failure to comply with FATCA reporting requirements could result in fines of up to 40%.
4. Responsibilities of financial institutions
Under FATCA, all foreign financial institutions (FFIs) must identify and verify the U.S. citizenship status of their account holders. Failure to comply with these regulations could result in the institutions being liable for a 30% retention tax. For American citizens overseas, this means that their account management will become more complicated.
5. Difficult choices for American citizens
Due to the impact of FATCA, many overseas U.S. citizens choose to renounce their U.S. citizenship, which in turn increases the number of people who renounce their citizenship each year. It has been reported that since 2010, more and more American citizens have chosen to renounce their citizenship due to heavy regulations and severe tax pressures.
The United States and Eritrea are the only countries in the world that impose taxes on non-resident citizens.
Overall, FATCA has undoubtedly brought about tremendous changes to the lives and financial situations of US citizens overseas. Faced with increasingly stringent financial reporting requirements, have you ever considered how these regulations may affect your own assets and future plans?
