US Citizens: FATCA and Tax Filing Obligations

You still file US taxes from Cayman

US citizens and permanent residents (green card holders) must file a US federal tax return every year, no matter where they live. This is not optional. The US is one of only two countries in the world (the other is Eritrea) that taxes based on citizenship rather than residency.

• Filing requirement: applies to all US citizens and green card holders regardless of how long you have lived abroad.
• You must report worldwide income: salary, investment income, rental income, capital gains, pension distributions — everything.
• State taxes: you may also owe state taxes depending on which state you left. Some states (California, New York) are aggressive about claiming former residents.
• Deadline: June 15 automatic extension for Americans abroad (not April 15), but interest accrues from April 15.
• Penalties for non-filing are severe: up to $10,000 per year for failure to file FBAR. Criminal penalties for willful non-compliance.

• Qualifying: you must meet either the bona fide residence test (established residence in a foreign country for a full tax year) or the physical presence test (present in a foreign country for 330 days in any 12-month period).
• Earned income only: salary, wages, self-employment income. Does NOT apply to investment income, capital gains, rental income, or pension distributions.
• Housing exclusion: in addition to FEIE, you may exclude or deduct certain housing expenses above a base amount. Cayman housing costs often exceed the base.
• Self-employed: FEIE reduces income tax but NOT self-employment tax (Social Security and Medicare). You still owe ~15.3% on self-employment income.
• Limitation: the exclusion amount is per person. A couple who both work can each claim it.

FBAR — Foreign Bank Account Reporting

If the aggregate value of your foreign financial accounts exceeds $10,000 at ANY point during the year, you must file FinCEN Form 114 (FBAR). This is separate from your tax return and filed electronically with the Financial Crimes Enforcement Network.

• Threshold: $10,000 aggregate across ALL foreign accounts (not per account). If you have 3 accounts that briefly totaled $10,001, you must file.
• Accounts covered: bank accounts, investment accounts, mutual funds, pension accounts, life insurance with cash value, and any account in which you have signature authority.
• Deadline: April 15 (with automatic extension to October 15).
• Penalties: up to $10,000 per year for non-willful violation. Up to $100,000 or 50% of account balance for willful violation. Criminal prosecution possible.
• This is the form that catches people off guard. Many Americans in Cayman are unaware of FBAR until their accountant asks or they get a notice.

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FATCA — Form 8938

The Foreign Account Tax Compliance Act (FATCA) requires reporting of specified foreign financial assets on Form 8938, filed with your annual tax return. This is in addition to FBAR — yes, you may need to report the same accounts on both forms.

• Thresholds for overseas filers: $200,000 on the last day of the year, OR $300,000 at any point during the year (single). $400,000 / $600,000 for married filing jointly.
• Assets covered: bank accounts, investment accounts, foreign pension plans, interest in foreign entities, foreign-issued life insurance or annuity contracts.
• Filed with your Form 1040: attached to your annual tax return, not separately like FBAR.
• FATCA also requires foreign banks to report US account holders to the IRS. This is why some Cayman banks decline US citizen accounts — the compliance burden is significant.

Capital gains and investment income

Investment income — capital gains, dividends, interest, rental income — remains fully taxable in the US regardless of where you live. The FEIE does not apply to any of these.

• Capital gains: selling property, stocks, or other assets triggers US capital gains tax. Short-term gains taxed as ordinary income; long-term at 0%, 15%, or 20% depending on income.
• Dividends: qualified dividends taxed at capital gains rates. Ordinary dividends at your income tax rate.
• Rental income: if you rent out property (in Cayman or elsewhere), the net income is taxable on your US return.
• Net Investment Income Tax (NIIT): an additional 3.8% tax on investment income for individuals earning above $200,000 ($250,000 married).
• Cayman has no tax on any of these — so there is no foreign tax credit to offset your US obligation.

Retirement accounts

US retirement accounts continue to work from Cayman, but with some important considerations.

• 401(k) and IRA: you can maintain these accounts. Contributions may not be deductible if you claim the FEIE. Distributions are taxed as ordinary income.
• Roth IRA: contributions are not affected by living abroad. Qualified distributions remain tax-free. One of the most powerful tools for Americans in zero-tax jurisdictions.
• Social Security: you continue to earn credits if you are self-employed and paying SE tax. Benefits are payable worldwide.
• Cayman pension: if your Cayman employer contributes to a local pension, the US treatment of this pension is complex. Consult a cross-border tax specialist.

Practical advice

US tax compliance from Cayman is manageable but requires professional help. The cost of a good international tax accountant ($2,000–$5,000/year) is a worthwhile investment.

• Hire a US-qualified international tax advisor BEFORE you move. Exit planning and first-year filings are the most complex.
• Do not assume Cayman's zero-tax means zero obligation. It does not.
• Keep meticulous records of all foreign accounts, investments, income sources, and housing expenses.
• File on time. The penalties for non-filing or late filing of FBAR and FATCA are disproportionately severe.
• Consider Roth conversions: in a year with lower income (e.g., your move year), converting traditional IRA to Roth can be tax-efficient.
• Renouncing citizenship: some Americans consider this to escape worldwide taxation. The process is complex, expensive ($2,350 renunciation fee), and may trigger an exit tax on unrealized gains. This is a last resort, not a planning strategy.