F one spouse lived overseas and one didn't, what should I choose for foreign financial assets

[DanielV01 · Accepted solution]

This is a FATCA question.  If one spouse is overseas, your limits for filing the FATCA form (Form 8938) are higher.  The following comes from the IRS website FATCA filing

Reporting Thresholds

Reporting thresholds vary based on whether you file a joint income tax return or live abroad. If you are single or file separately from your spouse, you must submit a Form 8938 if you have more than $200,000 of specified foreign financial assets at the end of the year and you live abroad; or more than $50,000, if you live in the United States. If you file jointly with your spouse, these thresholds double. You are considered to live abroad if you are a U.S. citizen whose tax home is in a foreign country and you have been present in a foreign country or countries for at least 330 days out of a consecutive 12-month period.

Taxpayers living abroad. You must file a Form 8938 if you must file an income tax return and:

• You are married filing a joint income tax return and the total value of your specified foreign financial assets is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year. These thresholds apply even if only one spouse resides abroad. Married individuals who file a joint income tax return for the tax year will file a single Form 8938 that reports all of the specified foreign financial assets in which either spouse has an interest. (Italics and bolding added)
• You are not a married person filing a joint income tax return and the total value of your specified foreign financial assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year. 

Taxpayers living in the United States. You must file Form 8938 if you must file an income tax return and:

• You are unmarried and the total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year 
• You are married filing a joint income tax return and the total value of your specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year. 
• You are married filing separate income tax returns and the total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. For purposes of calculating the value of your specified foreign financial assets in applying this threshold, include one-half the value of any specified foreign financial asset jointly owned with your spouse. However, report the entire value on Form 8938 if you are required to file Form 8938.

[jyee315]

I would like to extend on this question. 

My wife as a non-resident alien (Canada), but I treat her as a resident for tax purposes and file married filing jointly. I am a US citizen/resident. Can I use the higher limit for the 8938 because she is living abroad, though I am living in the US. If that is the case, then I do not need to file 8938 as her net assets is < 400k. Does that sound right? Thanks. 

[SusanY1]

I would recommend filling out the 8938 since your wife is treated as a resident for tax purposes.  When you file a joint tax return, the law sees you as one singular "taxpayer," so it is likely that, if challenged, the IRS would argue that the "taxpayer" resides in the US since one of you resides in the US.

There is no tax associated with the reporting on Form 8398, but the penalty for noncompliance is $10,000 per instance.  It's better to file the form to avoid a potentially costly mistake.  If you were to relocate to Canada, however, you could then safely skip the form in the years when your combined foreign accounts are below that threshold.  

While I certainly see how one might make a case for her assets not qualifying when she resides abroad, there isn't anything I can locate in official sources that addresses this situation, so I'd err here on the side of caution. 

@jyee315 

[jyee315]

Susan

   In following up with this. This is going to be a problem for me, and I am trying to see what is best for me to do to avoid being audited and to fix my problems in the past. I have not been filing my wifes FBAR and 8938 for the past 6-7 years (since getting married). Once again, she is a non-resident alient that I am treating as a resident for tax purposes.  Her net assets are likely around 350k USD.  I plan on filing FBAR retroactively for the past 6 yrs, and 8938 for the past 3 yrs to try to stay compliant, but I fear that it would probably trigger more suspicion and risk audit .

   For her interest and dividends and gains that she gets from her Canadian security investment, where do I put it on my tax return. As it is foreign, there is no 1099 that they provide. Can I just lump it and add it to the foriegn earned income and exclusion? 

   Thanks for your help 

[SusanY1]

While there are never any guarantees regarding audits, the IRS tends to be somewhat forgiving when a taxpayer makes honest mistakes and then works to correct them.  Simply filing a late or amended return generally does not trigger an audit.

When you file an FBAR/FinCEN 114 late, there is a space to indicate why it is being filed late.  In this case "not aware of requirement" or similar option is appropriate.

For the Form 8398s for prior years, I suggest that you attach a similar statement to the form before mailing.  Explain that your wife is a nonresident alien who does not live in the USA but that as a joint filer treated as a resident, you're submitting the reports of her assets using the resident rules.  

If you remedy the situation before the IRS asks you to, you're generally not subject to the penalty.  The penalty is for noncompliance, not late compliance. 

Do not add your wife's foreign interest and dividends to the foreign earned income section.  Instead, you can add these to the appropriate sections for those items in TurboTax, even though there is no 1099.  When you are in those corresponding entry areas of the program, choose "I'll type it in myself" when prompted to enter the data.  

If your wife paid taxes on this income, be sure to enter that information in the section for the foreign tax credit as well.  



 

[jyee315]

In follow up with this question. When I enter my wife's foreign dividend (Canada) under investment, should I put it under "ordinary dividend" or "qualified dividends". Canada dividends are split into "eligible" and "non-eligible" and are taxed differently than US ordinary/qualified dividend. It obviously would benefit me if I put them under qualified dividends as it is taxed at a lower rate than ordinary dividend. Should I just put them all as under qualified dividends?

The question also extends to stocks, in terms of long term vs short term gains. Canada doesn't differentiate long vs short term like the US do.  

[DaveF1006]

Eligible dividends are considered qualified dividends so you can report the eligible dividend 1/2 split as a qualified dividend, and the other half as an ordinary dividend. You may also report a stock as a long term capital gain if the holding period of the stock is more than one year.