Ines Zemelman, EAJul-1-2016
It is good news that there has been a smooth increase in the number of clients with foreign accounts over the past few years. Filing requirements for FBAR tend to be fairly routine for clients, but occasionally there are issues that are unusual enough to excite me! Tax nerds will understand this, or maybe in tax season I just don’t have much of a social life!
One example is the family subject to FATCA regulations who brought us a letter sent to them by a foreign financial institution. Their minor son was the named owner of the account. The parents had forgotten about the account for many years because they did not think it mattered for any tax calculations.
There are many reasons why a parent would create an account in their native country under their minor child’s name. It may be to hold funds from gifts, to be used for future education, et cetera. If, for tax purposes, they become “US persons”, and if the balance of the account exceeds certain reporting limits, a requirement to report can be triggered. Becoming a “US person” can happen for any number of reasons, including becoming a citizen, having Green Cards, or simply being in the United States for a significant period of time.
A parent can choose to include their child or dependent’s income from investments on the tax return they submit, but if they do there are certain US Income Tax regulations that apply. Filing separate Form 8938 and FBARs for children can be burdensome, so parents can include this income by attaching a Form 8814 to the tax return they file. This is only allowed, however, if ALL the following conditions are met:
- If the child’s income was not included on the parent’s tax return, a Form 1040 would have had to be filed by the child.
- Federal income tax was not withheld by the child.
- An over-payment from previous years has not been applied by the child.
- The child had no earned income (only passive investment income).
- Taxes aren’t filed jointly with another person by the child.
- The gross income of the child was less than $10,500.
- Estimated tax payments were not made by the child.
- The child was a full time student under the age of 24, or was under the age of 19.
If the child’s parent is not eligible to include the income on their own tax return, or chooses not to, the child must file their own Form 1040 with an attached Form 8615.
So, if the account balance in the foreign account exceeds the reporting limits, the child’s parent must file Form 8814 with their tax return; or, the child must attach Form 8615 to their own Form 1040 filing:
- Report the foreign income using a Form 1040.
- Indicate the existence of foreign accounts by checking “Yes” on Form 1040 Schedule B, and note the location.
- Attach Form 8938.
This all applies to filing Form 1040, as well as the associated schedules (e.g., Schedule B) as well as forms (e.g., Form 8938).
How does FBAR apply?
In June of 2014, the instructions for FBAR rules were updated. Regardless of whether investment income for the child is disclosed on the parent’s tax return or the child’s, the FBAR must be in the name of the child.
Responsibility for Child’s FBARGenerally, a child is responsible for filing his or her own FBAR report. If a child cannot file his or her own FBAR for any reason, such as age, the child's parent, guardian, or other legally responsible person must file it for the child.
Signing the child's FBAR
If the child cannot sign his or her FBAR, a parent or guardian must electronically sign the child's FBAR. In item 45 Filer Title enter “Parent/Guardian filing for child.”
If there are any questions about this information, or if it applies to your situation, please consult a tax specialist who concentrates on foreign accounts, or an Enrolled Agent.