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Complicated situation with relatives. Essence is this: Relatives own property in a European country, have rental income, and capital gains from regular sales of said property. They are trying to gift property to other relatives. All said relatives are US citizens residing in this country. It is claimed, by those who own the property, that all rental income and cap. gains are not subject to US tax, since the money is all kept in accounts in the country overseas, and since they are paying taxes to said foreign country. I've tried to explain that, AFAIK, ALL income earned by US citizens, regardless of where it is earned, is POTENTIALLY subject to US taxes, and that professional advice should be obtained as to this situation. They claim its not taxable here until the money is brought here, and "everybody knows that."

I guess my question is, while it is never wrong to pay for professional advice, isn't it true that a safe default position is that ALL income is reportable to the IRS, and while their may be credits for foreign taxes paid depending on the country, the IRS taxes a dim view of not reporting income.

any help appreciated
jaloti
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I've tried to explain that, AFAIK, ALL income earned by US citizens, regardless of where it is earned, is POTENTIALLY subject to US taxes, and that professional advice should be obtained as to this situation. They claim its not taxable here until the money is brought here, and "everybody knows that."

You are correct. Your relatives are not.

--Peter
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Complicated situation with relatives. Essence is this: Relatives own property in a European country, have rental income, and capital gains from regular sales of said property. They are trying to gift property to other relatives. All said relatives are US citizens residing in this country. It is claimed, by those who own the property, that all rental income and cap. gains are not subject to US tax, since the money is all kept in accounts in the country overseas, and since they are paying taxes to said foreign country. I've tried to explain that, AFAIK, ALL income earned by US citizens, regardless of where it is earned, is POTENTIALLY subject to US taxes, and that professional advice should be obtained as to this situation. They claim its not taxable here until the money is brought here, and "everybody knows that."

I guess my question is, while it is never wrong to pay for professional advice, isn't it true that a safe default position is that ALL income is reportable to the IRS, and while their may be credits for foreign taxes paid depending on the country, the IRS taxes a dim view of not reporting income.


Situation not complicated at all. All income earned by US citizens ANYWHERE IN THE WORLD is subject to US income tax in the year earned. Period. Certain forms of income and income from certain countries may be excluded from US income tax on the basis of tax treaties negotiated between the two countries or on the basis of certain exclusions within the current US tax law (such as the earned income exclusion), but the starting point is 100% taxable to the US. Where the cash is located is totally irrelevant.

Ira

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Thanks for your responses.

jaloti
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Jaloti,

Others have answered the question about reporting.

I live and work and have investment property outside the US. I have a US passport.

It is a common misunderstanding by non-US tax payers that income earned outside the US is not taxable in the US.

Put differently, almost no other country taxes overseas income when the income is earned by a non-resident. Some do tax the overseas income for residents (UK being an example of both). The UK has a rule that lets someone be resident physically but be non-resident for tax purposes (depends on where your grandparents are from, if you say you expect to move back out of the UK, that you have not moved all your assets to the UK - another example of decisions based on 'intent').

So, be gentle with the relatives who are trying to be generous. They just do not understand how aggressive the IRS can be when it comes to income produced anywhere on the planet earth. Most folks outside the US are surprised at the way the US system works as there are few other examples of tax codes that operate the same way.

BTW - If you seek professional advice understand that you really will end up paying a bit more as a competent tax advisor who understands non-US sourced income is in the minority. If you use a big firm they might end up pulling in someone from their non-US offices). You may end up paying for two people's time.

John
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John,
thanks for your response. I appreciate your advice and your perspective. I think you are absolutely correct about those from other systems not appreciating the "aggressive" nature of the US IRS.

jaloti
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Just to add a positive note here, I think they would be able to deduct from their tax liability to the U.S. INCOME taxes paid to the foreign government where the property is located. In other words, overseas income is not usually tax twice. With this being a passive activity, I'm not sure of the rules but I know that the rules apply to income.

And I don't think it will be complicated or more expensive to hire a tax accountant. Most understand the basic of foreign income and it just requires a few more forms. The only area that would have to be research is the treatment of passive income as opposed to earned income.

That's my thoughts anyways.

ToroBravo2003 whose total income is foreign.
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