Taxes When Living Aboard

[BandB]

Originally Posted by Pelagic

I think that is where everyone gets confused.
What does "equitable" mean when you are paying land taxes and others anchored in a nice cove on a $500k yacht pay nothing.

Perspective is a strange bedfellow.

Wow.....so true. I'm thrilled that Florida has no property tax on boats. Actually I was shocked by that fact when I moved here and started thinking of a boat. Now we do pay plenty of property tax on our home.

But along the lines of Pelagic's post. The owner of a $5 million dollar home would pay $100,000 in annual property taxes in Fort Lauderdale. The owner of a $5 million dollar boat would pay none and it can be sitting at a dock, doesn't have to be anchored.

Reality there is no equitable or fair tax system in the world. Someone will always feel overtaxed. And the structure generally came about for a specific reason, (although that need might have long ago changed). Example: No property taxes on boats in Florida. Reason: To make it a huge boating state. Done for the business. If Florida had property taxes on boats like California, can you imagine the boats that would be moved to Georgia or other states or to the Bahamas or places like Grand Cayman?

[jmschmidt]

Yes, a lot of people did it in the 70's, 80's and early 90's but since the law was changed it's a useless tactic. Why not just disappear and never set foot on US soil again. At least you'd save the fee.

[valhalla360]

Originally Posted by jmschmidt

Sorry again Black Tiger but a US citizen who renounces his US citizenship is considered a US Tax Person for ten years after renunciation. There are exceptions to that which are considered by the IRS on a case by case situation. Example: A parent or close relative becomes ill in your country of origin and has absolutely nobody (and I mean freaking body) to care for them and no means to support themselves. If you can prove this to the IRS by documentary evidence you may, I say may, be able to renounce without the ten-year thing hanging over your head. In this case you would also have to sign an agreement that you are absolutely not taking this action to avoid US taxes. Good luck with that. Even a US Green Card holder is on the hook for US taxes for ten years even if they turn in there Green Card and move back to their home country. Exception: A Green Card Holder may turn in their Green Card no harm, no foul, and no ten-year tax obligation, if done within two years of receiving the card. This may be absurd but it is the law. I have first-hand experience at this. Send me a private message if you would like more information.

On the surface that all sounds horrible until you look at the typicall user of the system:
- Those renouncing citizenship are typically wealthy and looking to shelter income and profits outside the USA. The 10yr rule is mostly to ensure that deals that take time to wind down are accounted for. Basically you can't game the system by shifting profits outside the country to avoid taxes.
- If you are just average joe or a green card holder, and you renounce/turn in your green card, you don't have anything to worry about. Since you are presumably outside the USA the vast majority of the year, you get the exemption (something like $95k before any tax implicaitons last time I checked). There is a bit of a hassle filing but otherwise it's unlikely you will pay any taxes.

I haven't looked into it but I suspect the rules are even more liberal for those who are truely leaving where they are more concerned with the source of the income to ensure again that you aren't just gaming the system to get out of taxes.

Now there probably are occasional individuals who get caught up by making too much of the wrong kind of income but if you are really picking up and leaving, there is nothing paticularly nefarious about it (at least no worse than for what those who stay deal with)

[Pelagic]

Originally Posted by BandB

Actually about 3,000 people a year renounce US citizenship and many of those are wealthy. ..........Some also renounce in anticipation of aging and to avoid their estates being subject to high estate taxes.

I think that is a very valid reason for those who have developed multinational assets and wish to assure they remain in the family

[cwyckham]

Originally Posted by valhalla360

First, I believe you have misquoted. Most nations demand taxes of thier citizens even if they live outside the country. What taxes and when they are applicable vary. I suspect you are thinking of ordinary income earned outside the country and that isnt' even entirely true depending on how much is earned and how much time is spent outside the country.

Second, so any law that coincides with a nation run by a dictator, is intrinsically evil or bad? The Code of Hammurabi was instituted by a dictator and that is often considered the root of our legal system. Most of our system is based on European roots instituted by various dictators (from the Roman Emperors thru the various monachies).

I'm not saying it's right or wrong but if you are going to knock a law, please share a rational reason rather than simply attempting guilt by association.

It is true that the US is one of only two countries (the other is Eritrea) that taxes based on citizenship and not just residency. In any other country in the world, if you leave and gain no income from your home country, then you don't pay taxes there.

[BlackTiger]

Originally Posted by valhalla360

- If you are just average joe or a green card holder, and you renounce/turn in your green card, you don't have anything to worry about. Since you are presumably outside the USA the vast majority of the year, you get the exemption (something like $95k before any tax implicaitons last time I checked). There is a bit of a hassle filing but otherwise it's unlikely you will pay any taxes.

Does that include income from within the United States, even though you are outside? Ie: Internet.

I probably already know the answer.

[cwyckham]

Originally Posted by valhalla360

On the surface that all sounds horrible until you look at the typicall user of the system:
- Those renouncing citizenship are typically wealthy and looking to shelter income and profits outside the USA. The 10yr rule is mostly to ensure that deals that take time to wind down are accounted for. Basically you can't game the system by shifting profits outside the country to avoid taxes.
- If you are just average joe or a green card holder, and you renounce/turn in your green card, you don't have anything to worry about. Since you are presumably outside the USA the vast majority of the year, you get the exemption (something like $95k before any tax implicaitons last time I checked). There is a bit of a hassle filing but otherwise it's unlikely you will pay any taxes.

I haven't looked into it but I suspect the rules are even more liberal for those who are truely leaving where they are more concerned with the source of the income to ensure again that you aren't just gaming the system to get out of taxes.

Now there probably are occasional individuals who get caught up by making too much of the wrong kind of income but if you are really picking up and leaving, there is nothing paticularly nefarious about it (at least no worse than for what those who stay deal with)

It all sounds really easy until you need to comply. My wife and I are thinking of starting a business and of buying a house. Now I need to hire a tax accountant to tell me how I even do either of those things given that I need to comply with both US and Canadian tax law and they're different.

Classic example: I buy a house for $500k. After a year I decide to sell the house for whatever reason. I sell it for $500k. I didn't make any money on it so I don't pay any taxes in Canada. But wait... In that time, the CAD/USD exchange rate shifted by 15%. Since I declare everything to the IRS in USD, I made a 15% profit, or $75k and I need to pay tax on that. It just so happens that this is considered a short term capital gain so I pay at the normal marginal income tax rate. Call it 30% for argument's sake.

So the final conclusion is that I can accidentally owe $22k if I don't keep very close track of what I'm doing. And that isn't a $22k reduction in my profit. There was no profit! I can take a loss on the house and still owe money to the IRS!!!

This is not a fat-cat problem. It affects everyone at all income levels. Most just pretend the problem doesn't exist, but that's gotten a lot harder since FATCA came in and now our banks are reporting to the IRS. In some countries, US citizens have trouble even finding a bank that will give them an account because of the reporting requirements to the IRS.

[valhalla360]

Originally Posted by cwyckham

It is true that the US is one of only two countries (the other is Eritrea) that taxes based on citizenship and not just residency. In any other country in the world, if you leave and gain no income from your home country, then you don't pay taxes there.

You are making the same mistake. This only applies to "income" tax. There are other taxes that other countries can and do apply for people not living in the country. Own a piece of property and most countries will continue to assess property tax regardless of where you live. Then again, the USA has a sizeable exemption, so for most it's a non-issue. When you say other countries, you also have to consider what they considered earned income vs investement income along with property taxes, etc... You almost have to take an individual and run the full tax scenario to tell who will fare better in which country.

Reality is it hits up very few individuals worse than most any other country.
- Let's say you make the Amreican national averge household income (around $50k), you are completely exempt and will pay NO income tax.
- If you make double the average income (around $100k), you have around $5k in taxable income but with the standard deduction, you will pay NO income tax.
- You have to get up around 3 times the average income ($150k) before you start paying any significant income tax: after dropping the first $95k off, then taking the standard deduction for a couple of $11k (?), assuming they put say $15k in a 401, that's around $30k in taxable income. Assuming the 10% bracket it's a whopping $3k (or a 2% overall tax rate). Hardly a repressive regime.
- By the time you get much higher, they are usually cutting deals so that it doesn't show up as earned income anyway.

By the time you are at 3 times the average you are dealing with only around 3% of the population. The vast majority don't have to worry about the evil empire stealing all their money.

I'd have a far bigger issue with a country that would have a sales tax in excess of 20%.

[valhalla360]

Originally Posted by BlackTiger

Does that include income from within the United States, even though you are outside? Ie: Internet.

I probably already know the answer.

Of course not, money earned inside the USA is taxed as income regardless of citizenship, residency, technically even if you are illegal.

[valhalla360]

Originally Posted by cwyckham

It all sounds really easy until you need to comply. My wife and I are thinking of starting a business and of buying a house. Now I need to hire a tax accountant to tell me how I even do either of those things given that I need to comply with both US and Canadian tax law and they're different.

Classic example: I buy a house for $500k. After a year I decide to sell the house for whatever reason. I sell it for $500k. I didn't make any money on it so I don't pay any taxes in Canada. But wait... In that time, the CAD/USD exchange rate shifted by 15%. Since I declare everything to the IRS in USD, I made a 15% profit, or $75k and I need to pay tax on that. It just so happens that this is considered a short term capital gain so I pay at the normal marginal income tax rate. Call it 30% for argument's sake.

So the final conclusion is that I can accidentally owe $22k if I don't keep very close track of what I'm doing. And that isn't a $22k reduction in my profit. There was no profit! I can take a loss on the house and still owe money to the IRS!!!

This is not a fat-cat problem. It affects everyone at all income levels. Most just pretend the problem doesn't exist, but that's gotten a lot harder since FATCA came in and now our banks are reporting to the IRS. In some countries, US citizens have trouble even finding a bank that will give them an account because of the reporting requirements to the IRS.

Most buisness owners even if they never leave the USA pay for tax advice (at least early on in the buisness). Then again, this is common in many countries. I'd love a flat tax but so far there is no political will to set one up. Regardless of which country you move from or too, you would be foolish to do so without getting profession advice so you don't mess up on the taxes and regulations (even if the USA is in no way involved). Yes, there is a bit of a hassle filling the paperwork and the first few times, it's probably worth paying a professional until you have it down.

Your housing example has nothing to do with income tax (other than to set the capital gains rate). That is an investement gain and really no different than if you went to the bank, converted $500kUSD into canadian and then a couple years later converted it back at a 15% gain or you bought some canadian stock. Then again if you had kept it for 2 yrs or you reinvest the money into another house, there is no tax due if it's your primary residence.

By the way, there very much was a profit in the house sale. If you start with $500kUSD, buy a house, sell the house for $500kCd and then convert the money back to USD, you will in your example have around $575kUSD. Sure looks like there is an extra $75kUSD floating around. Just because you didn't convert if back to USD doesn't mean it wasn't a profit. This is a capital gain pure and simple and a great many countries continue to pursue you over investement gains. The example touted is about earned income.

[cwyckham]

Originally Posted by valhalla360

You are making the same mistake. This only applies to "income" tax. There are other taxes that other countries can and do apply for people not living in the country. Own a piece of property and most countries will continue to assess property tax regardless of where you live. Then again, the USA has a sizeable exemption, so for most it's a non-issue. When you say other countries, you also have to consider what they considered earned income vs investement income along with property taxes, etc... You almost have to take an individual and run the full tax scenario to tell who will fare better in which country.

Reality is it hits up very few individuals worse than most any other country.
- Let's say you make the Amreican national averge household income (around $50k), you are completely exempt and will pay NO income tax.
- If you make double the average income (around $100k), you have around $5k in taxable income but with the standard deduction, you will pay NO income tax.
- You have to get up around 3 times the average income ($150k) before you start paying any significant income tax: after dropping the first $95k off, then taking the standard deduction for a couple of $11k (?), assuming they put say $15k in a 401, that's around $30k in taxable income. Assuming the 10% bracket it's a whopping $3k (or a 2% overall tax rate). Hardly a repressive regime.
- By the time you get much higher, they are usually cutting deals so that it doesn't show up as earned income anyway.

By the time you are at 3 times the average you are dealing with only around 3% of the population. The vast majority don't have to worry about the evil empire stealing all their money.

I'd have a far bigger issue with a country that would have a sales tax in excess of 20%.

No, I'm not making a mistake at all. I don't know what your example of property taxes has to do with the discussion. All countries will tax income made in that country and most will tax property in that country. Only two will tax the worldwide income of a person with no other ties other than citizenship. It doesn't even matter if you've never seen the US before, you are still required to report all accounts and file your taxes to the IRS.

[cwyckham]

Originally Posted by valhalla360

...
Your housing example has nothing to do with income tax (other than to set the capital gains rate). That is an investement gain and really no different than if you went to the bank, converted $500kUSD into canadian and then a couple years later converted it back at a 15% gain or you bought some canadian stock. Then again if you had kept it for 2 yrs or you reinvest the money into another house, there is no tax due if it's your primary residence.

By the way, there very much was a profit in the house sale. If you start with $500kUSD, buy a house, sell the house for $500kCd and then convert the money back to USD, you will in your example have around $575kUSD. Sure looks like there is an extra $75kUSD floating around. Just because you didn't convert if back to USD doesn't mean it wasn't a profit. This is a capital gain pure and simple and a great many countries continue to pursue you over investement gains. The example touted is about earned income.

I don't know when you converted this to a discussion around earned income. The title of the thread is just taxes and your claims that the US tax laws on taxing citizens doesn't hurt anybody has to do with all types of tax.

Congratulations, the USD has gained 100% compared to the dinar. You are rich. Oh wait, you don't live in Iraq so it doesn't matter. Likewise, I don't live in the US, so the fact that my Canadian house was worth more in US dollars doesn't mean I turned a profit. I didn't. I bought and sold in Canadian dollars. I walked away with zero Canadian dollars. Zero Canadian dollars is worth (wait a minute, got to check xe.com...) Yep, zero US dollars.

Why would I care what the profit would have been if I bought and sold the same property in USD? That only matters to the IRS who know want to tax me on a gain that I didn't have.

[hellosailor]

Sailorchick-
Even if your income was zero, you should file an IRS return. No, you are not required to do so, but it is a very simple and cheap DEFENSIVE action.


The reason is that "failure to file" in itself is illegal, and if at some point in the future someone in the IRS decides "Eh, this chick must have made Something, let's bring her in with fines, penalties, and interest for failure to file in the last ten years". Now, you MUST pay whatever they demand, when they demand it, and then file to get it back, or else the penalties keep growing. It can be a mess. But by simply mailing in (or emailing) the zero return...you ensure that you can't be charged with failure to file. Sure, they can still question the zero income, but they can't use one of their favorite intimidation (terrorism?) tactics against you.


Pretty much any tax professional (CPA, EA) probably would tell you the same thing. Five minutes, free filing, and you ensure you'll never have that problem. Do make sure to keep the electronic acknowledgements, or your mailing receipts. call it cheap insurance.

[hellosailor]

Oh, the US is terribly repressive about citizens who want to leave, yes. Compared to the old USSR perhaps, where first you had to repay everything the government had invested in you, including all of your education, and essentially, you could leave after you were penniless and had borrowed every ruble you could find?


Or East Germany, where anyone could leave, especially in Berlin, if you could dodge the landmines and machine guns?


I knew a professor who had been a "supreme court" justice in part of the USSR. He was invited to join The Party and he cleverly said "But Comrade, I am not worthy of joining the party." Then he was told all judges were party members, which did he prefer to be, a member and judge? Or not?" And he graciously accepted. Even as a judge, he could find no legal way to leave, so he and his wife literally walked out in the dead of winter, cross-country in the snow.


On the global scale of things, folks who complain how hard or expensive it is to leave the US? Have got nothing to complain about. Except perhaps their own ignorance of the process.

[valhalla360]

Originally Posted by cwyckham

I don't know when you converted this to a discussion around earned income. The title of the thread is just taxes and your claims that the US tax laws on taxing citizens doesn't hurt anybody has to do with all types of tax.

Congratulations, the USD has gained 100% compared to the dinar. You are rich. Oh wait, you don't live in Iraq so it doesn't matter. Likewise, I don't live in the US, so the fact that my Canadian house was worth more in US dollars doesn't mean I turned a profit. I didn't. I bought and sold in Canadian dollars. I walked away with zero Canadian dollars. Zero Canadian dollars is worth (wait a minute, got to check xe.com...) Yep, zero US dollars.

Why would I care what the profit would have been if I bought and sold the same property in USD? That only matters to the IRS who know want to tax me on a gain that I didn't have.

It's about earned income because most countries will come after citizens for investment earnings even if they move out of the country and the complaint here revolves around the USA taxing earned income earned outside the country when most countries don't do this.

You are confusing profits from currency trading with the housing transaction. You've muddled the issue by incorporating the house in the example but it changes nothing.

If you convert $500k USD to $500kCanadian, stick it under your matress and sit on it while it goes up 15%, your cash is worth 15% more in USD. The fact that you had $500kC at the begining and at the end doesn't mean you didn't have an increase in value. Since it is in cash, the fact you haven't converted it back to USD is irrelevant. You played the currency market and won. The fact you did it unintentially is irrelevant. You had a capital gain.

The IRS only accepts USD so everything has to be converted to USD for the calculation purposes (just like canada will want everything converted to canadian dollars for thier purposes and any other country will want it converted to the local currency for thier purposes). You stared with $500kUSD and ended with the equivilent of $575kUSD, that's an extra $75kUSD that must be accounted for.