Today's Global Tax Forum is devoted to reader questions. We'll look at renouncing your citizenship as a method of avoiding U.S. taxes, hear about two women in Mexico who haven't filed tax returns in a long time, and deal with an onshore/offshore joint-brokerage-account quandary.
Any other offshore tax issues we should address? Send your thoughts and questions to
email@example.com. Please include your full name and resident country. The Global Tax Forum appears every other Wednesday.
You Can't Hide From the Taxman
If you become a resident of one of the exotic places you mention in your offshore tax shelters column, can you escape income tax? For instance, could you trade from a remote location and beat the taxes? Would residency eliminate the need for the trust? -- Laura Cotterman
Unless you give up your U.S. citizenship, you'll be taxed on your worldwide income regardless of where you live, says Timothy Kay, an estate-planning and trust lawyer at
Gibson, Dunn & Crutcher
in Irvine, Calif.
And if you decide to expatriate or give up your U.S. citizenship for the purpose of avoiding taxes, you'll still owe taxes on your income from U.S. sources for 10 years, according to
Section 877 of the tax code.
The decision to continue imposing taxes on expatriates used to be made on a case-by-case basis. But now, as long as your average annual income for the five taxable years before renouncing your citizenship is greater than $100,000, or your net worth is $500,000 or more, the law automatically assumes you are expatriating to avoid taxes.
By keeping your citizenship and taking up residency in another country, you may change the tax characteristics of an overseas trust you originally created, Kaye notes. Some tax perks apply only when you're a nonresident. For example, a country's privacy laws may not apply to residents. So you might not even need your trust anymore. Be sure to check the country's laws for specifics before you pack up and move.
Filing Returns From Mexico
I have a friend who lives full time in Mexico with her daughter. Both are U.S. citizens but have no income from U.S. sources apart from the older lady's Social Security. Neither has filed a tax return here in some years. Should they start? Wouldn't the very act of filing open a Pandora's box? Does the IRS still consider them residents due to their citizenship? -- Steve Saker
Since your friends are U.S. citizens with income, including Social Security, they should be filing a U.S. tax return. As noted above, U.S. citizens are taxed on worldwide income, regardless of where they reside.
Assuming your friend is over 65, if her Social Security income is at least $8,100, she must file a U.S. tax return. If her daughter will allow her to file as head of household, the income amount would be $10,150. (See this previous
Tax Forum for the lowdown on the head of household filing status.)
Internal Revenue Service
can come after them at any time for not filing in past years. But if your friends begin to file and the IRS does decide to investigate, it generally will go back only three to five years. But it could go back even further. Either way, your friends will owe the tax for those previous years plus interest and penalties.
Taxing a U.S.-Overseas Joint Account
My father, a nonresident, opened a brokerage account for trading stocks. To facilitate administration of his trades, I, a U.S. citizen, joined his account as joint owner. Based on what I read in your column, all the trades in this account with capital gain or losses are not subject to U.S. income tax. Does the joint-account ownership with a U.S. citizen change the tax status? -- Alex Chao-Chiang Meng
I've got to tell you -- your question stumped my sources. It all depends on the facts and circumstances.
To start, if the only reason you're joining your dad's account is to help him administratively, your father should've just given you power of attorney, Kaye notes. That would authorize you to carry out all the necessary account transactions as your dad's representative. Then you wouldn't have to worry about any of the tax consequences. You could control things here while all the tax stuff remains on your dad's return.
Now here's a question: Is your Social Security number on the account? If so, the IRS will expect you to report the income on your U.S. tax return. "The tracing rules go to the person's Social Security number," notes Daniel Orchant, a partner in the international executive services group at
in New York.
Your dad may not have a Social Security number. He may have a
taxpayer identification number, the foreigner's equivalent. If that's the sole number on the account and your dad puts all the money in and takes all the money out, the tax implications should all flow to him. If that's the case, he would not be subject to capital gains tax on his trades, but there would be withholding on any dividends.
If he allows you to withdraw and keep some of the money, that would constitute a gift under U.S. tax law. That money would be subject to U.S. gift tax.
Obviously, there are many variables you need to work out with a tax professional before you file your tax returns.
Global Tax Forum aims to provide general tax information. It cannot and does not attempt to provide individual tax advice. All readers are urged to consult with an accountant as needed about their individual circumstances.