When helping out a family member or investing in overseas opportunities, the last thing you want to worry about is the IRS.
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Add the IRS to your to-do list
You know that reporting income to the IRS is a must. But it’s equally important to report money transferred into or out of the country. Including gifts or loans among family.
With money laundering schemes on the rise, growing concerns about fraud, and funds sent overseas to support foreign terrorists, the IRS isn’t the only government agency that cares where and how you move money. The Department of Justice is just as interested, it turns out.
What’s the best way to send a lot of money overseas?
How can the IRS know what I’m transferring?
Financial institutions use specific numbering systems to process money transfers that include information on countries and bank accounts on the sending and receiving end. SWIFT codes, for instance, not only ensure that your money gets to where it is intended, but they also support the bank’s required reporting.
By law, banks report all cash transactions that exceed $10,000 — and any transaction of any amount that alerts their suspicions. Money transfer businesses, which often solely send money between countries, sometimes have reporting thresholds as low as $1,000.
Supporting the government’s right to know where your money is headed, the Bank Secrecy Act allows the IRS and Department of Justice to investigate large transfers of money to identify illegal activity more easily. For large money transfers, it’s a good idea to ensure that everything is fully above board and complies with the laws of all countries involved.
As with any large international money transfer, it’s important to compare your options so you can get the lowest fees and the best exchange rate between currencies:
Money transfer services with no maximum sending limit
What kind of IRS forms will I need?
Depending what and how much is going to where, the IRS requires you to fill out any number of tax forms. Here’s a few you might encounter, but talk to a professional for your specific requirements.
|Form Number||Form Name|
|Form 114||Foreign Bankand Financial Accounts (FBAR).|
For anyone who at any time had a foreign account valued at more than $10,000.
|Form 709||Gift and Generation-Skipping Transfer Tax Return.|
To report gifts subject to the gift tax.
|Form 3520||Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts.|
For US residents who directly or indirectly transferred money to a foreign trust.
|Form 8938||Statement of Specified Foreign Financial Assets.|
Required if foreign accounts and combined assets are worth at least $50,000.
What are the penalties for not filing?
Frankly, there is such attention on money leaving the country that whether you fail to report, don’t know you have to report or don’t report correctly — it will likely be discovered. If you’re found not in compliance, you’re on the hook for some stiff penalties.
Those who fail to report can expect fines of up to 5% of the asset value involved or $10,000 a year for up to six years. For those who wait until an investigation is launched, the penalty increases to up to 50 percent or $100,000 — whichever is greater. That amount can be applied to every year you fail to report for up to six years. You could also face criminal charges and up to 10 years in prison.
Whatever your reason for sending money overseas, it is no doubt with the best intentions or for an exciting venture. For extra peace of mind, work with a professional or reputable transfer company to ensure your compliance in all areas.
The gift tax
Since 2013, US citizens have been allowed to transfer up to $14,000 in US currency overseas as a gift without having to file a gift tax return. If you are married, both you and your spouse can give $14,000 to the same person. Further, if your giftee is married, both you and your spouse can each give $14,000 to each person in the married couple.
The means that the maximum amount a married couple can gift another couple without filing for the gift tax is actually $56,000. That’s a lot of gifts. Note that your support of dependent children is exempt from the gift tax altogether.
Once you go over the $14,000 threshold (or couple limits, considering your circumstances) you are responsible for filing a gift tax return. Filing a gift tax return doesn’t necessarily mean that you’ll pay the gift tax. Technically, you can gift up to $5.25 million in your lifetime without owing this tax.
Still, you can legally avoid filing for the gift tax in a number of ways. One is to reduce the amount of money sent to any one person. For instance, if you’re sending money to support a family, divide your total gift among the various members of the family to stay below the $14,000 individual limit. This is helpful when divvying up something like an inheritance, where the money will in fact be shared among family members.
Given the complexities of tax laws, it’s wise to seek the help of someone who knows the laws to ensure you’re in compliance.
How can I avoid the gift tax for legitimate support?
The amount to which you can help your children with payments toward their tuition, medical expenses and health insurance premiums is seemingly limitless. But you’ll need to pay the school, hospital or insurance companies directly. The IRS will notice — and expect to be notified — of any checks or transfers you send directly to your dependents.
If you’re considering setting up an overseas account, you’ll need to report it to the IRS. Even if the account is to hold money temporarily before a bigger transaction or to share access with a child or family member as a joint account. Besides traditional income tax statements, US citizens with bank accounts offshore must file a Foreign Bank Account Report (FBAR) by June 30 of each year that an overseas account holds $10,000 or more. Whether the money is there for a day or a year, it must be reported.
Be aware that some countries have limits on bank wire transfers — potentially on incoming and outgoing — so research the rules that apply to any country the money will travel through.
Could you benefit from a tax shelter or offshore account?