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From college students studying abroad to family members who have emigrated for work, there are plenty of reasons for sending money overseas. However, the more complicated an individual’s tax affairs become as a result of international transactions, the more important it is to accurately file his or her tax returns.
“With so much scrutiny about international affairs, you want to make sure you aren’t tripping over any rules that could get you in trouble,” says Sandi Bragar, CFP, director of planning at Aspiriant, a wealth management firm based in Los Angeles.
To avoid conflict with the Internal Revenue Service (IRS) in the United States, Her Majesty’s Revenue and Customs (HMRC) in the U.K., and the Canada Revenue Agency (CRA), it’s wise to consider the potential tax implications of sending money overseas.
When sending money abroad, the biggest concern is often gift tax. While it differs from country to country, the same basic principle applies: When individuals send more than a predetermined amount to the same individual within a year, they must file a return with their respective governing body.
Starting in 2013, U.S. citizens sending money overseas can transfer up to $14,000 in U.S. currency as a gift, without regards to the gift taxes, says Katherine Gragg, an enrolled agent at Greenback Expat Tax Services, an expat tax advisory headquartered in New York. Once a sender goes over that threshold, they may be subject to gift taxes on the amount over $14,000.
In the U.K., the monetary limit on what they call inheritance tax is £3,000 pounds for 2012 and 2013. Canada, however, doesn’t have a tax on monetary gifts for senders.
The tax requirements for senders vary depending on who is receiving the foreign exchange funds. Each of the following categories carries with it a different tax implication for the sender, Gragg says.
· To a dependent child: In the U.S. and the U.K., if the recipient is a dependent child, no gift or inheritance tax applies because the money is essentially supporting the minor. But if the child isn’t a dependent, the tax applies.
· To family: If the money transfer is to family, a gift or inheritance tax applies in the U.S. and the U.K. However, individuals are allowed to divide the total annual funds by the number of people they are supporting, thereby avoiding the tax. “Let’s say someone sent $30,000 for the year to gift to four people,” Gragg says. “That person would be able to divide it so it’s four gifts of $7,500, instead of being taxed on the amount exceeding $14,000.”
However, it’s important to remember that splitting a transaction could potentially trigger a red flag for regulators — especially if it is done to avoid presenting personal identification when sending cash.
· To the sender’s own accounts: Individuals who do banking overseas must report the existence of a bank account to their respective governing body once it exceeds a certain amount — even if it’s just for a day, Gragg says. In the U.S., a Report of Foreign Bank and Financial Accounts (FBAR) does not get taxed because it’s an informational document.
In addition to gift tax, individuals should also be mindful of their country’s guidelines around international money transfers.
“As part of the Bank Secrecy Act, the U.S. government may launch investigations when large sums of money are transferred,” Gragg says. “If the actions are determined to be illegal — money laundering — then a criminal investigation may be launched. Individuals should be smart about their transfers, and if they are planning on sending large amounts of money, they should speak with a financial advisor who is knowledgeable about government regulations regarding money transfers.”
By working with an international tax advisor, individuals can become more aware of their tax liabilities when making money transfers, while limiting the costs associated with sending money overseas.
Example: 1USD = xx INR
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