Minimum filing requirements for minnowsMay 15, 2015 - Phil HodgenFriday Edition
Hi, it’s Phil Hodgen again. Welcome to the Friday Edition, where every Friday you get something international tax-flavored and useful. And (almost) every time I get on a plane, you get a Jell-O Shot from the airport, too. Hey. Next week. Toronto. Pack light, go fast.
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Richard Westin, a law professor at the University of Kentucky, wrote an article in the Tax Management International Journal a few years ago, containing this wonderful quote:
“The law, sir, is like a net. Little fish slip through it. Great fish crash through it. And all the rest are hopelessly entangled in it.”
40 TM International Journal 144 (March 11, 2011).
Who this is about
This is for Americans living abroad, with modest income and simple assets. The minnows. The problem they face is simple: what is the bare minimum tax paperwork demanded from them by their loving Uncle?
The answer is probably “FinCEN Form 114”.
The question I received:
I am a dual US/Canadian citizen living in Canada. My only income is interest income and is below the threshold for filing the 1040 form for income taxes. However, my cash assets are well over the $50,000 limit. Assets are cash only and income is interest income only.
Is it true that if this is the case that not only do I not have to file the Form 1040 but also Form 8938? I am also presuming Schedule B and Form 1116 can be skipped as well? (I know that if I do not file these years remain forever, “open” and that FBAR remains in force.)
No Form 1040, no Form 8938. Yes FinCEN Form 114. But do Form 1040 and Form 8938 anyway.
Tax return filing requirement
Every individual must file an income tax return. IRC §6012 says so. But people who have gross income below the standard deduction plus personal exemption amount are not required to file a tax return. IRC §6012(a)(1)(A).
Financial threshold: $10,300
The personal exemption in 2015 is $4,000 and the standard deduction for a single person in 2015 is $6,300. This means that if you file using single status and your gross income is under $10,300, you are not required to file an income tax return.
For my correspondent, he reports that his only source of income is interest, and the total amount of interest he receives every year is below the filing threshold. As a consequence, he is exempt from filing a U.S. income tax return based on income levels, as authorized by IRC §6012(a)(1)(A).
Schedule B, Form 1116
My correspondent mentions Schedule B (that’s where interest income is reported) and Form 1116 (that’s where he claims a credit against U.S. income tax for Canadian income tax paid).
Neither will be necessary. His income does not come up to the level for filing a tax return, so there is no need to give details about the interest income to Uncle Sam–there will be no tax. Nor is there any point in claiming a foreign tax credit on Form 1116, since he will not owe any U.S. tax at all. A foreign tax credit can reduce your U.S. tax bill to zero, but he is already at zero U.S. income tax.
Form 8938 is latest (and certainly not the last – rest assured that Congress will demand more of you as the years go by) of the forms in which the U.S. government requires you to strip (financially) naked for the IRS and declare the existence of your “specified foreign financial assets”.1
Dollar threshold for filing Form 8938
As usual, there is a semi-complex set of financial thresholds for whether
you are rich enough for the IRS to care about you you have a filing requirement for Form 8938. These thresholds are computed as a function of two variables: marital status and residence. Married people living outside the USA get the best deal.
My correspondent did not say how much cash he has in Canadian banks, except to say it is more than $50,000. The $50,000 threshold applies to people living in the United States: those people must file Form 8938 if they have specified foreign financial assets of more than $50,000 at year-end or $75,000 at any moment in the year.
The filing threshold that applies to my correspondent is much higher. Let’s say my correspondent uses the single filing status. He lives in Canada. He must file Form 8938 if his specified foreign financial assets (see the rant in the footnote) exceed $200,000 on December 31, 2015, or $300,000 at any point during the calendar year.
No tax return? No Form 8938
Fortunately for my correspondent (and for other American Minnows Abroad out there) there is a moment of salvation:
If you are not required to file an income tax return, you are not required to file Form 8938, regardless of how many dollars of “specified foreign financial assets” you have.
For my correspondent, there is no requirement to file a U.S. income tax return because his total interest income is less than $10,300 (using single status, 2015 data) and he has no other income. Therefore, he is exempt from having to file Form 8938, even if he has $1,000,000 in cash in Canadian banks.
Dread pirate FBAR
Form 8938’s evil twin is the dreaded FBAR: FinCEN Form 114. Here, American taxpayers declare ownership or control over foreign financial accounts. Again, it is up to you to know what ownership means, what control means, and what types of things are reportable or are not reportable. Or else.
Here the reporting bogey is $10,000. Whether you must file a tax return or not is irrelevant. Since my correspondent has more than $50,000 in Canadian bank accounts, he must file this form. Or else.
There are so many weird and wonderful filing requirements that might affect my correspondent or other minnows. These are tax forms that are required regardless of income.
Maybe my correspondent has all that cash in the bank because he inherited it from someone. Form 3520. Maybe my correspondent thinks he has cash but he really has a money market fund. PFIC. Form 8621. Etc.
Memo to all personnel: do not assume that just because you are a minnow that you have zero tax filing requirements.
What to do?
My correspondent’s basic question is whether he should file stuff. The answer is that he has no requirement to file, but I think he should.
FinCEN Form 114
This form is required no matter what. File it. Unfortunately, most minnows will have to file this form every year – if you hit the $10,000 threshold, even for a minute, you must file. If you have signature power over an account in someone else’s name, you must file.
Thwart the Borg; file Form 1040
I like filing tax returns showing nothing is due. It shifts the balance of power.
In my opinion the Borg is brain damaged and will not understand, ten years from now, why you did not file a tax return, and will not believe, ten years from now, that you did not have enough income to hit the filing requirement, and will not be charitable, ten years from now, when you say you destroyed all of the records years ago because you did not need them.
You will be in the uncomfortable position of “guilty until proven innocent”. The government will look at you suspiciously until you can prove in bullet-proof fashion that you are fully clean in the tax department.
If you file income tax returns showing zero tax, you throw the monkey on the government’s back. The tennis ball is on their side of the net. Three years go by and the statute of limitations says the year is closed.
Once you file a tax return, you may also have to file Form 8938. Do it. You are already telling the government about your financial assets on FinCEN Form 114, so you are not giving up any more privacy than you have already done.
This is more thinking than someone should have to do. Even with modest income, you face a cognitive overload of trying to figure out what is required, and then do it.
This is based on wildly incomplete data and massive assumptions, so in no way is legal or tax advice to my correspondent or anyone else. The point is to demonstrate (1) Form 8938 is not required if no Form 1040 is required; and (2) to tell you that the FBAR is the bane of your existence and will probably be required every year for most people. Hire someone smart to tell you exactly what the rules are as they apply to your situation.
See you next Friday.
- This meaning of this term is more expansive and fjordlike than you would imagine, full of baroque nuances that only an international tax expert can understand but you – mere mortal – are expected to follow on pain of Very Large Penalties. Someone’s promotion depended on writing many tens of thousands of words. You bear the risk if you do not understand what he wrote. Vote carefully, and use PGP encryption. ↩