Avoiding Taxes Essay example

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Avoiding Taxes
1. Analyze the effects of renouncing your citizenship on your tax liability.

The Immigration and Nationality Act gives every person the right to renounce their US citizenship at any time. This is a simple process by which a person must “appear in person before a U.S. consular or diplomatic officer, in a foreign country (normally at a U.S. Embassy or Consulate); and sign an oath of renunciation” (2008, February 1st) Some view this right as a way to avoid or escape their tax liabilities. This may help on future taxes but you will still have to pay your current taxes and may even have to pay taxes on your estate before you expatriate. For the majority of people renouncing your citizenship will not cause you any more taxes than what you already are obligated to. However if you have assets greater than $2,000,000 or your average annual net income over the past five years is over $147,000 then you will probably have to pay an expatriation tax or exit tax. Even if you fall below this you will still have to file with the IRS and go through the legal and palatal aspects of renouncing your citizenship. Another issue is that of tax-deferred accounts for retirement like a company sponsored 401K account. At the day before your expatriation the IRS will consider these funds fully distributed. They may waive any penalties for early distribution of these accounts but you will still have to pay income tax at your regular income tax level on the funds. One other issue is the property and assets you own. If you liquidate all your assets you may have gains that you need to pay income tax, again at your regular income tax level. If you choose not to liquidate your assets then you will be required to post a bond equal to the potential tax liability. The IRS then will charge you interest on the tax balance until you sale the assets at which time the tax is due in full. In short if you renounce your citizenship then you will not reduce or escape your current tax liabilities and you may even account for additional taxes you didn’t have before.

2. Analyze the effects of establishing dual citizenship on your tax liability.

When a person establishes dual citizenship with the US and another country they may increase or decrease their tax liability. Most individuals that consider this live in a foreign country for the majority of time during the year. ” As a United States citizen, you must file a federal income tax return for any tax year in which your gross income is equal to or greater than the applicable exemption amount and standard deduction.” (2011, December 13th) This is on all income no matter where in the world it comes from. Then they are forced to file US expat taxes with the federal government each year. Many are also required to file an informational return on all their assets held in any foreign bank account. This reporting can be a very cumbersome process and very costly. Another problem is the feeling of double taxation with dual citizenship. The US is one of only a few countries that tax its citizens on their worldwide income. This sometimes causes the person to pay taxes in the country they live in and also pay taxes in the US on the same income. The good news is that the US government does have special provisions to help protect us from double taxation. The Foreign Earned Income Exclusion allows you to decrease your taxable income by the first $95,100 on US expat taxes in 2012. A Foreign Housing Exclusion that allows an additional exclusion from income for household expenses. Also, a foreign tax credit that allows you to lower your liability on US expat taxes by amounts paid to a foreign government. Inheritance issues are another problem with dual citizenship. At the time of your death if your spouse is not a US citizen and your assets are held mainly outside the US then due to the tax implications it is advantageous to have expatriated. Unlike if your spouse and you are both US citizens then you can