In the United States, all citizens are legally required to report their income, and this extends to any international income or assets held. Even if you have offshore assets, you are expected to report them to the IRS and pay your taxes according to your rate. Since the Offshore Voluntary Disclosure Program ended in 2018, there’s no way around this requirement.
The IRS takes the official stance of understanding why a U.S. citizen might want to hold offshore accounts, including convenience and easier international transactions. Still, U.S. law forbids that any citizen use offshore accounts as a way to avoid paying taxes.
When filing taxes on offshore assets, U.S. taxpayers will generally report their income on tax Schedule B. Part III of the document pertains specifically to offshore accounts. If the value of assets held internationally exceeds certain thresholds, a form 8938 Statement of Foreign Financial Assets could be required. If accounts have $10,000 or more in them at any time during the school year, Form 114, Report of Foreign Bank and Financial Accounts (FBAR).
Failing to file the right forms at the right time can result in severe penalties. For example, if a taxpayer fails to disclose pertinent information about their offshore assets via Form 8938, the penalty is up to $10,000 plus an additional $10,000 for each 30 days of non-filing after the IRS issues a notice of failure to disclose. There can also be criminal penalties associated with failure to correctly file the Form 8938.
When it comes to the FBAR, the non-willful failure to file of the document comes with a penalty of up to $10,000. If the failure to file was willful, the penalty can be up to as much as $100,000 or 50% of account balances, whichever is greater, and criminal penalties can also apply to failure to file the FBAR.
Many worries how they can leverage offshore banking to truly reduce tax payments without causing problems with the IRS. There are several options for doing this, and we’ll discuss those further in the coming sections.
Options for Reducing and Handling Tax Liability on Your Assets
There are several routes to take to help legally handle your tax liability on the assets you have, whether they are held domestically or offshore. Here are a few ideas:
1. Bank in Low-Tax States in the United States
No matter where you are located or where you are banking, if you are a citizen of the United States, you are required to report your assets and pay taxes accordingly at Federal level. At the state level, however, taxes vary from place to place. One way to reduce the taxes you’ll pay on your assets is to look for states that have no state income tax.
There are currently several states in the U.S. that don’t have any state income tax, including Alaska, Texas, Wyoming, South Dakota, Washington, Nevada, and Florida. Banking in one of these states can help you lower your tax liability on your assets without having to rely on offshore banking or deal with the requirements set forth by the IRS.
2. Set Up an Overseas Corporation
If you are still interested in offshore banking, then setting up an overseas corporation is perhaps the best way to ensure that you are legally and effectively reducing your tax liability. The benefits of setting up an overseas corporation also include protecting assets from litigation, protecting assets from political unrest, and protection from economic instability. You could potentially see that your tax liability goes to 0%, depending on the jurisdiction.
There are several countries that are desirable for setting up overseas corporations, including Singapore, Hong Kong, Dubai, Bahrain, Malta, Ireland, and Gibraltar. Setting up an overseas corporation in the right jurisdiction can help reduce your tax liability.
3. Report All Assets, As Is
Another option is to quite simply report all of your assets, as is. You might find that your current situation is much more straightforward than either moving your assets to another state or to another country. Setting up an overseas corporation might not be ideal, depending upon your situation. You might weigh out your options and decide that reporting your options as they are is the best solution for your needs.
Takeaway
Part of any wealth management strategy should absolutely concern taxation, as taxation is an always-evolving issue that varies from area to area. While you are required to report your assets to the IRS, there are still ways to reduce your taxes in other areas. Or, you might find that simply reporting your assets as they are is the best way to handle your assets.
Reporting your assets in a timely and accurate manner can also save you from the burden of penalties.
JAN
2020
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