For U.S. citizens and green card holders living abroad, understanding your tax obligations can feel like a maze. Two of the most important forms you need to know about are the FBAR and FATCA. While they both relate to reporting foreign financial accounts, they serve different purposes and have distinct requirements. Let’s break down the key differences.
The FBAR: Reporting to FinCEN
The Foreign Bank Account Report, or FBAR, is a critical piece of your financial reporting, especially if you hold bank accounts outside the United States. If the combined maximum balance of all your foreign accounts reaches $10,000 at any point during the year, you are required to file.
- What you file: You must file FinCEN Form 114, reporting each foreign account you hold.
- Who you report to: This report goes to the Financial Crimes Enforcement Network (FinCEN), not the IRS.
- Purpose: The FBAR is a tool to combat illicit financial activities, like money laundering and tax evasion.
Many foreign financial institutions, including those in India, are now required to disclose information on U.S. account holders (including NRO and NRE accounts) to the U.S. government. This increased transparency means that the information you report on your FBAR can be cross-referenced, making accurate and timely filing more important than ever.
FATCA: The IRS’s View on Foreign Assets
FATCA, the Foreign Account Tax Compliance Act, is another crucial component of U.S. tax compliance for Americans living abroad. Enacted in 2010, FATCA requires foreign financial institutions to report high-value accounts of American citizens and green card holders to the IRS.
As an individual, you may also be required to file a separate report directly with the IRS.
- What you file: You need to file IRS Form 8938.
- Who you report to: This report goes directly to the IRS.
- Reporting Thresholds: The reporting thresholds for FATCA are significantly higher than the FBAR and vary based on your location and filing status:
- If you live in the U.S.: You must file if your foreign accounts reach at least $50,000 at any time during the year.
- If you live abroad: The threshold is much higher. You must file if your foreign accounts exceed $200,000 on the last day of the tax year or more than $300,000 at any time during the year.
- Married filing jointly (living abroad): The thresholds are even higher, requiring a report if your foreign accounts total $400,000 on the last day of the tax year or more than $600,000 at any time during the year.
Why Report to Both?
You might be wondering why you have to report your foreign accounts twice. The simple answer is that the FBAR and FATCA are two separate reporting requirements for two different government bodies. The FBAR is for FinCEN to fight financial crime, while FATCA is for the IRS to ensure tax compliance on worldwide income.
For U.S. citizens and green card holders living abroad, these are two of the most commonly missed reporting obligations. Failing to comply with either can result in significant penalties, so it’s essential to understand and meet both requirements.
