Foreign Informational Reporting Requirements

If you spend more than 183 days in a single calendar year in the US or you are looking to change your residency to the US while you have not cut ties financially with your home country, then you are going to want to read this!

Do I really need to pay tax to the US and my home country?

Once tax residency has been determined, it is important to discuss taxes and how foreign tax credits work. Tax is first paid to whatever jurisdiction the tax is earned in. If income is earned in multiple countries, then income tax on those earnings should be paid to the country where the income is earned. Note that tax treaties will sometimes allow for a different tax treatment.

After the tax is paid where it is earned, then you would report your worldwide income to whatever country you deem as your tax residency. Any income tax paid to a foreign country can be used to reduce your taxes in your country of residence. If the tax rates of the foreign country are lower than in your country of residence, you may still owe tax to the country of residence.

For example, if you have a Czech company and receive either wages or dividends from that company, you would pay the Czech tax authority at the applicable rate. If you received income of $10,000 USD then you would pay the 15% tax to the Czech tax authority ($10,000 * 15% = $1,500). You would then also include that income on your US resident tax return. If your tax rate in the US was only 10% and this was your only source of income, then you would not need to pay any tax to the US. If your tax rate in the US was 22%, then you would owe the US an additional $700 ($10,000 * 22% = $2,200 – $1,500 = $700).

What are my Foreign Informational Reporting Requirements?

If you continue to maintain a non-US company or non-US bank accounts, there are additional reporting requirements that must be taken into consideration. It is extremely important to be aware of these additional requirements as the penalties for non-compliance typically start at $10,000 USD and the IRS has been very aggressive in this area. The most common forms and areas of additional consideration are as follows:

FBAR – if you have foreign bank accounts that cumulatively exceed $10,000 USD
Form 8938 – similar to the FBAR but has a higher threshold at $50,000 USD for Single US residents or $200,000 USD for Single Foreign Residents
Form 5471 – if you have more than 10% ownership of a foreign corporation, then we would recreate the corporation’s financial statements as though it were a US company
Form 8865 – equivalent to Form 5471 but for partnerships
Form 3520 and 3520-A – if you are involved in any foreign trusts then there may be additional reporting/tax associated
Foreign investments – depending on how foreign investments are held, there could be additional reporting/tax associated

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