Know Your Types of Taxes – Expatriation Tax

The United States government, unlike other governments, expects its citizens to pay U.S. taxes regardless if the citizens lived and earned their income in other countries.  If you live abroad for a year and make a living in another country, you are responsible for paying taxes to the United States on that income.

When You Become an Expatriate Makes a Difference

Furthermore, if you became an expatriate between June 3, 2004 and June 16, 2008, you are subject to pay U.S. taxes for the next 10 years on any U.S. based income or capital gains.  However, if you had a net worth of less than $2 million on the date of expatriation or if you had less than a net annual income tax liability of $124,000 for the five years before you became an expatriate, you do not have to pay 10 years’ of taxes.

If you became an expatriate on or after June 17, 2008, the rules changed thanks to the HEROES Act.  Under this Act, the U.S. government assumed you sold all of your belongings on the day you left for fair market value and will charge you at the capital gains rate for the money they assume you made selling your belongings.  However, you can avoid this tax if the fair market value of your belongings is less than $627,000 (as adjusted for inflation in 2010).  This amount will continue to be adjusted for inflation each year.

Time Your Visits to the U.S. Carefully

If you visit the United States for more than 30 days in any given year within your first 10 years as an expatriate, you will be treated as a U.S. citizen during that year and taxed on your income for the entire year.

Clearly, if you are looking to leave the United States to avoid taxes, you will be unable to do so.  If you are a U.S. citizen living and working abroad, you need to be aware of your U.S. tax responsibilities under the expatriate tax.

For more information, visit Forbes – 10 Facts about Expatriation Tax.