Foreign Accounts, FBAR & FATCA (2025)

Tax Residency Status

US citizens and resident aliens are taxed on worldwide income. Nonresident aliens are taxed only on US-source income.

Resident Alien Tests

Green Card Test: Lawful permanent resident at any time during the year.

Substantial Presence Test: Present in US for:

• ≥31 days during current year, AND
• 183+ days using formula: current year days + 1/3 × prior year days + 1/6 × 2 years prior

Exceptions: Foreign government officials, teachers, students (temporary), commuters from Canada/Mexico, medical conditions.

Closer Connection Exception

Even if meeting substantial presence test, can claim nonresident status if: present <183 days in current year, tax home in foreign country, AND have closer connection to that foreign country. Must file Form 8840.

Dual-Status Taxpayer

Part-year resident (year of arrival or departure). Different rules apply for each period.

Nonresident Spouse Election

US citizen/resident with nonresident alien spouse can elect to treat spouse as US resident for tax purposes. Must file jointly and agree to tax worldwide income. Requires ITIN for nonresident spouse.

Foreign Earned Income Exclusion (FEIE) — §911

Exclude up to $130,000 (2025, OBBBA) of foreign earned income. Must have:

• Bona fide residence in foreign country for uninterrupted period including full tax year, OR
• Physical presence in foreign country for 330+ full days in any consecutive 12-month period

Housing exclusion/deduction: Additional exclusion for housing costs above 16% of FEIE cap. For 2025: 16% × $130,000 = $20,800 base housing amount (housing costs above this may be excluded, with location-specific caps). Exclusion applies to employer-paid amounts; deduction applies to self-employed-paid amounts. Reduces income tax but does NOT reduce SE tax. Meals and lavish/extravagant costs excluded.

FEIE is an election: taxpayer must file Form 2555. Once elected, remains in effect until revoked (IRS consent required to change back). Cannot use FEIE and Foreign Tax Credit on same income.

Foreign Tax Credit (FTC) — §901

Credit for foreign income taxes paid. Can take credit on Form 1116 or deduction on Schedule A. US citizens/residents can credit foreign taxes on foreign-source income (but NOT on income excluded under FEIE).

Excess credit can carry back 1 year, forward 10 years. De minimis: may skip Form 1116 if all foreign income is passive (reported on 1099-DIV/1099-INT) and total foreign tax ≤ $300 ($600 MFJ). Not available for taxes paid to Iran, North Korea, Sudan, or Syria. Can switch between credit and deduction by year (amended return within 10 years to switch to credit).

FBAR (Foreign Bank Account Report) — FinCEN Form 114

Must file if US person has financial interest in or signature authority over foreign financial accounts with aggregate value >$10,000 at any time during calendar year. "US person" = citizens, resident aliens, trusts, estates, domestic entities. NRAs generally do not file (exception if NRA elects resident treatment or files jointly with US citizen).

Due date: April 15 (automatic extension to October 15). Filed electronically through BSA E-Filing System (NOT with tax return — filed with FinCEN, a Treasury bureau; IRS enforces). Records retained 5 years.

Foreign financial accounts include: foreign bank accounts, securities accounts, cash-value insurance policies, foreign mutual funds. Excluded: foreign-government-owned accounts, international-financial-institution accounts, US military banking facility accounts, IRA/qualified retirement plan held foreign accounts.

Penalties:

• Non-willful: up to $16,536 per deficient annual FBAR for penalties assessed on or after Jan 17, 2025 — per FBAR, not per account. The aggregate 50% ceiling is IRS penalty-administration policy, not the statutory maximum.
• Willful: greater of $165,353 (2025, inflation-adjusted) or 50% of account balance, per year, up to 6 years. Plus possible criminal penalties (up to $250,000 fine + 5 years).
• Relief: IRS generally will not penalize late FBAR if taxpayer properly reported all foreign account income on the return and was not previously contacted.

Spouses: if each spouse completes/signs Form 114a and neither has separately-owned reportable foreign accounts, may file a single FBAR; otherwise each files and reports the full value of jointly-owned accounts. Minors with reportable accounts must file (parent/guardian files/signs if child cannot). Entities meeting the threshold must also file.

FATCA — Form 8938

Must file Form 8938 with tax return if specified foreign financial assets exceed threshold:

Specified foreign financial assets: foreign stocks/securities not held through a US broker, foreign mutual funds, cash-value foreign life insurance/annuities, foreign financial institution accounts.

Penalty: $10,000 for non-filing; +$10,000 per 30 days after IRS notice (max +$50,000); total up to $60,000. Plus 40% accuracy-related penalty on underpaid tax attributable to undisclosed foreign assets.

Note: FBAR and Form 8938 are separate requirements. May need to file BOTH.

Other Foreign Reporting Forms

Beneficial Ownership Information (BOI) — 2025

The Corporate Transparency Act (2021) required BOI reporting. In 2025, Treasury paused BOI reporting enforcement for US citizens and domestic reporting companies; FinCEN issued a temporary final rule removing BOI requirements for US-created entities and US persons. For 2025, BOI reporting generally applies only to certain foreign-reporting companies registered in the US.

Forms Summary

US-Source vs. Foreign-Source Income

Rule

All income must be categorized as either US-source or foreign-source. This determines:

1. Foreign Tax Credit (Form 1116) — US citizens and residents can claim a credit for foreign taxes paid, but only on foreign-source income. Without foreign-source income, no foreign tax credit.
2. Nonresident alien taxation — Nonresident aliens are generally only taxed on US-source income.

A US citizen or resident is taxed on worldwide income regardless of source — but the sourcing classification determines whether the Foreign Tax Credit applies.

Sourcing Rules by Income Type

Why It Matters — Example

US citizen works remotely for a UK company:
  → Salary is foreign-source (work performed outside US)
  → UK taxes the income
  → US taxes worldwide income, but gives Foreign Tax Credit for UK tax
  → Net result: only pay the higher of the two rates

Foreign Tax Credit — Key Points

• Form 1116 — Claim the credit
• Not a deduction — a dollar-for-dollar credit against US tax (not just reducing taxable income)
• Limited — credit can't exceed US tax on that foreign income: Foreign-source taxable income ÷ Total taxable income × US tax
• Carryback/carryover — unused credits carry back 1 year, forward 10 years
• De minimis rule — may skip Form 1116 and claim credit directly on Schedule 3 if ALL foreign income is passive (interest/dividends reported on 1099-DIV/1099-INT) AND total foreign tax ≤ $300 ($600 MFJ)
• Sanctioned countries — NO FTC for taxes paid to Iran, North Korea, Sudan, or Syria (per IRS Pub 514)
• Credit vs. deduction switching — may take credit one year, deduction the next (whichever is better); may amend within 10 years of original due date to switch from deduction to credit
• Foreign Earned Income Exclusion (§911) — Alternative: exclude up to $130,000 (2025, per OBBBA) of foreign wages instead of taking credit. You choose one or the other, not both

Edge Cases

• Partially US/foreign work: If you travel between countries for work, salary is allocated based on days worked in each location.
• US territories: Different rules — residents of Puerto Rico, Guam, USVI generally don't file US returns on their territory-source income.
• Tax treaties: May override sourcing rules. A treaty might say certain income is sourced differently to avoid double taxation.
• Stock options: Sourcing is based on where services were performed during the vesting period (not when exercised).

Common Traps

• Assuming the payor's location determines source: A US bank paying interest on a foreign branch account may still be US-source. A foreign company paying a US worker for work done in the US is US-source wages. Source follows the activity or property, not the payor.
• Confusing foreign tax credit with foreign earned income exclusion: §911 (exclusion) and §901 (credit) are different elections. You generally can't use both on the same income.
• Nonresident aliens reporting all income: A nonresident alien visiting the US who works remotely for a foreign employer from their hotel room — that's US-source wages because the work was physically performed in the US.

Connected Rules

• Foreign Tax Credit — Form 1116
• Foreign Earned Income Exclusion — §911
• Nonresident Alien Taxation

Scenarios Worked

• US citizen telecommuting for UK company from Paris: foreign-source (work outside US), UK taxes apply, US gives Foreign Tax Credit
• Foreign tourist buying and selling US real estate: US-source (property in US), subject to US tax