In last month’s column we discussed the introduction by the Internal Revenue Service of new Form 8938 which will be used to report Specific Foreign Financial Assets that have an aggregate value over $50,000 for calendar 2011 tax returns. This column will discuss exceptions to the law regarding the filing of Form 8938.

Specific Foreign Financial Asset Reporting

Individuals who are a U.S. citizen, a resident alien of the United States or a nonresident alien who has elected to be taxed as a U.S. resident must file Form 8938 if they have an interest in one or more foreign financial assets that have an aggregate market value exceeding $50,000 on the last day of the taxable year or $75,000 at any time during the taxable year.

In the case of married individuals who live in the United States and file a joint tax return,  the reporting threshold increases to an aggregate market value exceeding $100,000 on the last day of the taxable year or $150,000 at any time during the taxable year.

In the case of an individual working and/or residing outside the United States who is qualified to elect the foreign earned income or housing exclusion, the reporting threshold increases to an aggregate market value exceeding $200,000 on the last day of the taxable year or $300,000 at any time during the taxable year.

In the case of married individuals working and/or residing outside the United States who file a joint tax return, if either spouse is qualified to elect the foreign earned income or housing exclusion, the reporting threshold increases to an aggregate market value exceeding $400,000 on the last day of the taxable year or $600,000 at any time during the taxable year.

The penalty for failure to file Form 8938 is $10,000 plus a penalty up to an additional $50,000 for continued failure to file.

The temporary regulations that cover the reporting requirements for Form 8938 are 61 pages in length. The above is a simple explanation of a complex matter. If you have a foreign financial account in 2011 or have one in 2012 and going forward, you will now need to keep very precise records of the fair market value of your foreign assets, not only at year end, but on everyday during the year to ascertain if you meet the filing requirement.

The filing of Form 8938 with the 2011 tax return does not relieve the individual of having to separately file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts with the U.S. Department of Treasury on or before June 30, 2012.

Bermuda and Other Foreign Pensions and U.S. Social Security Benefits

It is likely that most U.S. citizens who live and work outside the United States have never heard of the Windfall Elimination Provision as it applies to Social Security Benefits. The Windfall Elimination Provision will affect U.S. citizens who worked in the U.S. for a number of years where Social Security was withheld from their compensation and who also work outside the United States where Social Security is not withheld from their compensation and where they will receive a foreign pension upon retirement.

Social Security benefits are intended to replace only a percentage of a worker’s pre-retirement earnings. Lower paid workers get a higher return than highly paid workers. Lower paid workers receive a benefit equal to about 55% of their pre-retirement compensation and higher paid workers receive a benefit equal to about 25% of their pre-retirement compensation.

Prior to 1983 individuals who worked in a job not covered by Social Security received benefits calculated as if they were low paid workers. In 1983 Congress saw an inequity between low paid workers who were receiving a private pension plan and also a Social Security benefit calculated at the highest rate. Hence, the Windfall Elimination Provision to eliminate the perceived “windfall”.

U.S. citizens who are dual nationals of Bermuda and U.S. citizens married to Bermuda nationals are covered under the Bermuda pension plan. If you are also eligible to receive U.S. Social Security benefits upon retirement and if you will also receive a pension from a Bermuda (or other foreign) pension plan, you will need to disclose this information to the U.S. Social Security Administration so that they can compute your reduced benefit. Your Social Security benefit can be reduced by up to 50%.

The above information was copied from the U.S. Social Security website: (www.socialsecurity.gov).

A question we frequently are asked is “how will they know?” We have a client who worked in the U.S. from about 1970 to 1990 and paid U.S. Social Security tax and is thus eligible to receive Social Security benefits next year. From 1990 to 2000 the client worked in Bermuda. In 2001 the client returned to the United States where the client is still employed. Even though the client has yet to apply for Social Security benefits a letter arrived at the client’s residence last week asking if the client will receive a foreign pension. As you all know, each year Social Security sends each person who ever paid into Social Security a form that acknowledges what they have paid into Social Security from the day that they began to have Social Security withheld and their projected benefit.  We are guessing that since the years 1990 to 200 showed zero social security payments that the Social Security Administration accessed the client’s U.S. tax returns for 1990 to 2000, saw the name of the foreign employer and have assumed that the client will receive a foreign pension. Our client must now certify, under oath, acknowledging that criminal and civil penalties will apply if they perjure themselves, the amount of the foreign pension.

Pursuant to the requirements relating to practice before the Internal Revenue Service, any tax advice in this communication is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties imposed under the United States Internal Revenue Code, or (ii) promoting, marketing or recommending to another person any tax related manner.

The tax advice given by this column is, by necessity, general in nature. You should, of course, check with your own U.S. tax consultant as to how specific transactions affect you since tax advice varies with individual circumstances.