AFSA NEWS 56 JANUARY-FEBRUARY 2024 | THE FOREIGN SERVICE JOURNAL Taxpayers should note that the FEIE excludes the income from the bottom tax brackets, thus leaving remaining ordinary income on the return to be taxed at the higher tax brackets applicable to the return. Consequently, for certain married taxpayers, filing separately may result in a combined lower tax liability than filing jointly. We recommend that taxpayers consult with a qualified tax professional to ascertain the most advantageous filing status for each tax year. Foreign Accounts and Asset Reporting U.S. tax reporting is often more complicated for members of the Foreign Service community, particularly when offshore postings give rise to offshore assets. It is common for Foreign Service spouses to take jobs in the local economy, through which foreign bank account and pension interests are acquired, giving rise to enhanced U.S. tax and reporting obligations. Similarly, many Foreign Service spouses own businesses organized outside the United States, which require additional U.S. reporting beyond income and deduction items. Even the most well-intentioned and diligent taxpayers can run afoul of the minefield of reporting requirements that exist for U.S. persons (citizens, residents, and Green Card holders) who have offshore income and assets. As the pool of accountants and tax attorneys with the expertise to identify and correctly complete the specific forms that need be filed is limited, it can be a challenge to obtain accurate advice and report correctly. The penalties for failing to file or making mistakes on foreign reporting forms are severe, often disproportionate to the infraction. U.S. persons are taxed on their worldwide income and must file Form 1040, regardless of where they are living. In addition to the basic tax return, Foreign Service taxpayers may also be required to report a wide variety of offshore assets and activities on specific U.S. reporting forms, even if such activities occur abroad and even if the assets earn $0 in income. For example, U.S. persons with ownership or signature authority over a foreign bank account must denote this interest in Part III of Schedule B of Form 1040. This oftenoverlooked section of the return (signed under penalties of perjury) lets the IRS know when to expect a Foreign Bank and Financial Accounts Report (FBAR). A Schedule B misstatement can be used against the taxpayer by the IRS when assessing penalties. The FBAR form is required from taxpayers with non-U.S. bank accounts and other offshore assets (including life insurance policies and pensions) that have an aggregate value greater than $10,000 at any time during the year. Failing to report an asset on an FBAR can lead to penalties ranging from $15,611 per account, per year (for a non-willful error) up to the greater of $156,107 or 50 percent of each account balance, per account, per year (for a more serious offense, such as those with Schedule B errors). Willful failures and errors can result in additional penalties (which may exceed the value of the asset) and even jail time. Taxpayers with interests in certain foreign financial assets must also file Form 8938 if the total value of such assets exceeds the applicable statutory reporting threshold. Errors relating to this form may result in a penalty of $10,000 per year. Additional tax forms must be filed by taxpayers who: (1) have interests in or engage in transactions with offshore entities, trusts, and pensions; (2) have investments in foreign mutual funds; (3) own business interests organized outside the United States; (4) receive substantial gifts or inheritances from non-U.S. persons; and/or (5) wish to claim the benefit of a treaty-based return position. Many of these reporting forms must be filed even if they have no impact on tax liability. The statute of limitations for assessment on a foreign reporting form does not close until three years after the form is filed. New Domestic Company Reporting Requirement Beginning 2024 Pursuant to the Corporate Transparency Act passed by Congress in 2021, certain domestic (U.S.) companies are required to report beneficial ownership information (BOI) to FinCEN starting in 2024. We refer readers to the BOI website at https://fincen.gov/boi. According to the BOI FAQs found at https://fincen.gov/boi-faqs, domestic companies such as corporations, limited liability companies, and any other entities created by the filing of a document with a secretary of state or any similar office in the U.S., and foreign companies such as entities (including corporations and limited liability companies) formed under the law of a foreign country that have registered to do business in the U.S. by the filing of a document with a secretary of state or any similar office, are considered BOI reporting companies. There are currently 23 entities exempt from this reporting. Readers should read question C.2. of the BOI FAQs for these exempt entities. Qualified Business Income Deduction (QBID) To equalize the taxes paid by sole proprietorships and passthrough entities with those paid by C corporations, the TCJA created a deduction for up to 20 percent of qualified business income (QBI), qualified real estate investment trusts (REIT) income, and publicly traded partnership income. Calculate the QBID on Form 8995, for which the associated instructions are essential.
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