Taxes will always be a headache. No matter how familiar you are with the tax laws you will never really be up for Caesar's gnawing demands. The Brian Walsh in Mahwah NJ, we know how hot it gets when tax bills are in the looming. Do you know your tax liabilities? Well, we here at Brian Walsh know and understand just how to be on the right side of the law. Expatriate taxes don’t sound familiar as such. We are used to common tax heads such as income tax, sales taxes but somehow expatriate taxes are equally important and necessary.
What are expatriate taxes?
These taxes are also referred to as emigration taxes. It is mainly imposed when a person stops being a tax resident in a given country or state or when persons renounce their citizenship. Are you looking forward to start a new life? Alternatively, do you need to start new ventures in some foreign country? Getting out of the US is not about booking a flight and moving miles away from the American dream. Let's have the real talk. Taxes are the building blocks of any economy. The US doesn’t let you off the hook easily.
In the US, your tax liabilities are prone for assessment whenever you decide to change your domicile and or habitual residence. You will need an important manual to understand as well as know what is expected from you after renouncing your citizenship. The Internal Revenue Code 877A states clearly the laws guiding expatriation. You will need to fill a very important form, Form 1040NR (US Nonresident Alien Income Tax Return) just before writing your life story on another page in a different country. Abolishing your citizenship for tax purposes is unheard off, especially when you are an American citizen. Just because you reside in a foreign country does not mean you owe no taxes to your country entirely. Understanding how tax systems operate will save you big-time from tax disputes.
Long term residents also known as legal permanent residents have special exemptions. These are the green card holders. A long term resident is a non-US citizen who has lived in the US for more than eight years. The residents enjoy some sort of protection by the treaty and receive waived tax benefits. However, living in the US for 8 years is not the ultimate test for legal permanent residency.
You might consider finding a tax preparer for expatriate tax as your tax agent in the US. This is quite important for you since they will keep you informed and carry out most of the technicalities of expatriation.
What do I need to know about expatriation?
Before packing up your bags, find a tax preparer that will enlighten you on what you really need to know. Do not leave the country with a trail of tax liabilities and bills trailing behind you.
Income Tax Obligation
Any American citizen living abroad owes the US government an obligation of filing their tax returns on their global income every year. The US must be an economy sovereign since it claims rights to tax income all over the world. The Tax Treaties US has signed with more than 60 countries is complex enough but saves your income from being double taxed through reciprocal foreign tax credits.
Tax Credits
If you earn any income, in a foreign country and you pay foreign taxes you can be able to claim for a Foreign Tax Credit. This amount can be used to settle the US tax debt partially or offset the whole burden. Point is if you are a citizen of the US no matter where you go, the IRS will definitely find you. Tax evasion is now almost totally irrelevant. The 10 years of US tax on US was put in place to lock out any tax evasion motives or interests of the same. By doing so, the thresholds for expatriation were increased to regulate tax equality.
A taxable limit of the total income preceding five years before expatriation is taxable. Individuals earning net income of $124,000 for the five years are eligible for expatriation or more so if by expatriation, one was in possession of $2,000,000 then they are taxable by the law.
People who earned below the threshold but were not tax compliant before renouncing their citizenship are still liable to expatriation. Therefore, before jumping on the next plane to your happy place, get a US tax compliance certificate. Get a copy of the certificate by filing an IRS Form 8854. American citizens who are green card holders are still legible to income taxes of their own country.
Social security, Medical Care and Self employment Taxes
A foreign employee will definitely have their Social Security taxes withheld by the employee. Luckily or unluckily, in case you are a US employee working overseas in one of the many countries in a Social Security Totalization, you may have your salary survive the slashing. When you are a bonafide US citizen on self-employment and working in a foreign estate, alongside the income tax you should pay socials security fees. The two countries, your current residence and United States of America will share the fee. Avoid penalties and interests by filing your returns on the due time. Stick to the deadlines up to the latter. Late filing will attract a fine, which attracts interest overtime.
Brian Walsh EA