Federal Income Tax Obligation Follows United States Citizens

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Wherever you go a United States Citizen carries their federal income tax obligation. It follows you anywhere in the world.

Ones annual tax return you file with the IRS is not any different from the one you filed before you took off for foreign shores. If you’re retired on a pension or Social Security, earning interest and dividends from your investments, or drawing down on your 401(k) or IRA, your move to another country is a tax-neutral one as far as Uncle Sam is concerned.

As a U.S. citizen, you’re taxed on your worldwide income no matter where you live. This means that all of these income is taxed the same as if you retire in the United States.

Rental income, depreciation, and expense deductions are all treated the same from a U.S. tax point of view no matter the location of the property. You can even do a 1031 like-kind exchange of one foreign investment property for another.

U.S. tax return gets more complicated when you start earning income outside the United States. The Foreign Earned Income Exclusion (FEIE) for 2010 is $91,500. This means you can earn up to $91,400 while living and working outside the U.S. and have it excluded from your U.S. taxes.

This exclusion doesn’t apply to interest, dividends, or any other passive investment income, such as rental income. Therefore, most U.S. retirees abroad don’t qualify for the FEIE. It’s a big advantage for anyone living outside the States and earning income abroad…but that leaves most retirees out. You don’t work.

But if one does find a way to work, the FEIE exclusion took your foreign-earned income off the top of your total taxable income, and your tax bracket was calculated using the reduced income total. If you had total earned income for the year of US$120,000, between the exclusion amount and other deductions, you may have had taxable income US$10,000. Originally, the IRS taxed on that US$10,000 at rates for US$10,000, you enjoyed the lowest tax bracket. But no now.

IRS changed how they make this calculation. Now, your tax bracket is figured before the exclusion is applied. that, now, if your total earned income is US$120,000, that’s the tax bracket brought to bear. Bottom line, your $10,000 of taxable income is now taxed at a much higher rate.

Some may end up having to pay more in taxes on passive income, because earned income puts one in a higher tax bracket…even though that earned income isn’t taxed directly.

If you’re an American, Uncle Sam wants to know about every non-U.S. financial account you hold if the total value of the accounts is US$10,000 or more. This also means like 3 different accounts that total over $10000. You have to report all.

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