What Is the 8938 Threshold and How Does It Affect You?

Taxpayers with foreign financial assets may need to report them to the IRS under specific conditions. Form 8938 is used for this purpose, and failing to comply can lead to penalties. Understanding when this requirement applies is essential.

Several factors determine whether you must file, including tax filing status and the total value of foreign assets. Financial changes such as an inheritance, property sale, or relocation can push you over the reporting threshold.

Filing Threshold Basics

The IRS requires taxpayers to file Form 8938 when foreign financial assets exceed certain values, which vary based on tax filing status and residency.

For U.S. residents:
– Single filers must report if foreign assets exceed $50,000 on the last day of the tax year or $75,000 at any point during the year.
– Married taxpayers filing jointly have a threshold of $100,000 at year-end or $150,000 at any time.

For taxpayers living abroad:
– Single filers and married individuals filing separately must report if foreign assets exceed $200,000 at year-end or $300,000 at any time.
– Married couples filing jointly have a threshold of $400,000 at year-end or $600,000 at any time.

These higher limits for expatriates reflect that those living outside the U.S. often maintain larger foreign asset balances.

Status-Based Threshold Variations

The requirement to file Form 8938 is based on more than filing status. U.S. citizens and resident aliens follow the standard thresholds, while nonresident aliens who elect to be treated as U.S. residents for tax purposes may also be subject to these rules. This often applies to individuals married to U.S. citizens who file jointly.

Green card holders, even if living abroad, must report foreign assets under the same rules as U.S. residents. However, those qualifying for the foreign earned income exclusion under the bona fide residence or physical presence tests may use the higher expatriate thresholds.

Temporary residents on work visas may also need to file if they meet the substantial presence test, which determines tax residency based on time spent in the U.S. Many visa holders do not consider themselves permanent residents but may still be required to report foreign assets.

Types of Assets to Disclose

Foreign financial assets subject to reporting include more than just bank accounts. Investments such as stocks, bonds, and mutual funds held in foreign institutions must be disclosed, even if they do not generate income. Ownership in a foreign partnership or an interest in a foreign trust must also be reported.

Foreign pension plans and retirement accounts are another category taxpayers often overlook. While some government-sponsored retirement accounts may be exempt, private foreign pension plans typically require disclosure. For example, Canadian Registered Retirement Savings Plans (RRSPs) and similar accounts in other countries may need to be reported.

Life insurance policies with cash value, such as whole life or universal life policies from foreign insurers, must also be included. The cash surrender value of these policies is considered a foreign financial asset, and taxpayers must report the highest value during the tax year.

Noncompliance Consequences

Failing to report foreign financial assets on Form 8938 can result in financial penalties and increased IRS scrutiny. An initial penalty of $10,000 applies for failure to file. If the failure continues for more than 90 days after an IRS notice, additional penalties of $10,000 per month apply, up to $50,000.

These fines are separate from penalties related to unreported income. If the IRS determines assets were intentionally concealed, it may impose a fraud penalty of 75% of the underreported tax liability. In extreme cases, willful failure to disclose foreign assets could lead to criminal charges, carrying potential imprisonment and substantial fines.

Events That May Shift Threshold

The requirement to file Form 8938 is not fixed, as financial or personal changes can push a taxpayer above or below the reporting threshold.

Receiving a large inheritance or gift from a foreign relative can increase foreign holdings, potentially triggering the reporting requirement. While gifts from foreign individuals are not taxable under U.S. law, they must be reported separately on Form 3520 if they exceed $100,000. If inherited or gifted assets are placed in foreign accounts or investment funds, they contribute to the total foreign asset value for Form 8938 purposes.

Selling a foreign property and depositing the proceeds into an overseas account can also push a taxpayer above the threshold, even if the property itself was not previously reportable.

Relocating to or from the United States can impact filing requirements. A U.S. taxpayer moving abroad may become eligible for the higher expatriate threshold, while someone returning to the U.S. could be subject to the lower domestic limits. Changes in marital status, such as marriage or divorce, can also shift the applicable threshold, as joint filers benefit from a higher reporting limit.

Taxpayers should reassess their foreign asset values each year to ensure compliance with IRS regulations.