This week I am going to highlight the “constructive ownership” rules in U.S. tax law. This means that the IRS can pretend that you own something — we will talk about stock of foreign corporations — even though you don’t really own it.
We will talk about U.S. citizens married to noncitizens. First, a simple example, then a more complicated (and realistic) example. The realistic example — one I have seen many times — yields a “Who knows what the answer is!” conclusion.
Here is the practical advice:
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If you are a U.S. citizen living abroad, married to a noncitizen, look out for the combination of foreign corporations owned by trusts.
Here is a real life problem we1 are solving right now for a real life couple: an American citizen married to a noncitizen, living abroad.
Americans living abroad will frequently do a sensible thing, and invest in foreign mutual funds. That’s a good investment strategy.
But when that American is a kid? Foreign mutual funds make trouble. They may require the child to file a U.S. tax return, even if the child has trivial amounts of income:
This is for the self-employed Americans living abroad who want to enjoy some of that tax-free goodness that comes from the foreign earned income exclusion.
Perhaps you are a digital nomad — an American abroad earning a living online by building websites. You have not organized your business as a corporation. You are a sole proprietor.
Watch out for “gross” and “net” income. It is easy to assume (because it is logical) that the foreign earned income exclusion applies to net income. Not so.
As soon as a self-employed person grosses more than the exclusion amount for the year, there is an assurance of income tax and self-employment tax no matter what the net profit really is — unless you are in rounding error territory.... continue reading
The United States has a wealth tax that is imposed at the time of death, called the “estate tax”. In round numbers, the first $5,500,000 of a person’s wealth (measured at the time of death) is tax-free, but everything above that is taxable. The top tax bracket is 40%.
You might have accumulated significant wealth before becoming a U.S. resident. You might wonder why the U.S. government should be entitled to take 40% of that away from your spouse, children, and grandchildren when you die.
It is not polite to say this out loud, but the estate tax is largely optional.... continue reading