Tax Liability in the US - Essay Example

? Avoiding Taxes Tax liability: Effects of renouncing US citizenship The efforts on reduction of tax liability has increased in the recent years as the tax payers feel that they are unfairly taxed on the income earned by them. The US income tax returns have become lengthy and tiring in recent times. The US tax returns process requires the US citizens to pay tax on the incomes they earn all over the world. The US citizens are required to pay income taxes on their world-wide income irrespective of the fact whether they visited the US land in recent times or in the recent decades. This led to the renouncing of US citizenship by the US people which has increased from 231 in 2008 to 1781 in 2011. By giving up US citizenship, the people of US or people residing abroad are able to reduce their tax liability as they are not required to follow the lengthy process of US tax returns (Yoshov, 2007). The tax liability is also reduced as the taxes on worldwide income are reduced as an effect of renouncing the US citizenship. Thus the overall tax liability is reduced as a result of renouncing of US citizenship by people especially in US and also by people holding US citizenship and residing abroad. Tax liability: Effects of dual citizenship Many people having US citizenship have migrated to other countries where they also hold a citizenship of that country. England and Wales constitutes the highest number of US citizens all over the world. These people have dual citizenship in both the US as well as in another country like England. The effect of dual citizenship is, however, complicated as the people are required to pay taxes to both the US government as well to the Inland Revenue System of the country of residence. Thus the effect of dual citizenship does not help the people in reducing their tax liability. Because of the US citizenship, the people are required to pay taxes for the worldwide income. Apart from this, the US citizens are also required to pay taxes to the host country where they have migrated and are earning their income (Patterson, 2006). Apart from this, the dual citizenship would also enforce the US citizens to pay capital gains tax to the US government if they sell their properties in another country which is their main residence. Thus dual citizenship would make the tax liability more complicated. Comparison: Effects of renouncing US citizenship to establishing dual citizenship The effect on tax liability of the income earned by the people having US citizenship could be compared to the people having dual citizenship. The act of renouncing the US citizenship is a much more acceptable option as the people would not be required to pay taxes for more than once for only one income. By giving up the US citizenship, the people would not be required to pay taxes on their worldwide income. They would only be required to pay taxes to the host government for the income that they have earned on their land. The renouncing of US citizenship, however, involves a one time cost as the US citizens should complete a US tax return for five years. There are also legal costs involved for the process of immigration. On the other hand, dual citizenship would make the tax liability much more complicated (CCH Incorporated, 2007). The citizen would have to pay income taxes to the US government irrespective of where they have earned their income. The sale of properties in the country of residence would require the citizens to pay capital gains tax to the US government. Apart from this, the citizen would also require to pay taxes to the host government for the income earned in the host country which is their actual residence. Thus from the perspective of reduction of tax liability, dual citizenship would be more complicated as compared to renouncing of US citizenship. Decision on renouncing citizenship versus dual citizenship From an individual perspective, renouncing US citizenship would be much easier as compared to taking up dual citizenship. From the view point of reduction of tax liability, renouncing of US citizenship would entail one time costs of filing US tax returns for a period of five years. The individual would also need to undertake legal costs for the purpose of immigration. However, in the subsequent stages the individual would not require to pay taxes to the US government if the income is earned in a country outside the US. The individual would require paying taxes only to the host country where they have earned the income. The dual citizenship is a complicated option as the tax liability would not be reduced. There would requirement of tax payments both to the US government as well as the country where the income has been earned. Reduction of tax liability: Other alternatives of renouncing citizenship The alternatives of renouncing the US citizenship for reducing the liability of tax payments takes into consideration of the tax policies of other countries. There are several countries which are tax havens and have favorable policies for taxing the income of the citizens. Panama is an example of such country. Thus the individuals should look to move to countries like Panama which are tax haven or has a policy of very low rates of income tax. The individuals would need to pay minimal amount of tax in the country of residence. This would neutralize the length of US tax returns that the individuals are required to pay on account of their US citizenship (Potgens, 2006). As compared to the dual citizenships where the individuals are required to pay taxes to the US government as well as the Inland Revenue System of the country where the income is being earned, this option of moving to countries considered as tax haven would provide tax relief to the individuals against the income earned. Considering all the above mentioned options, the US citizens could look to reduce their tax liabilities without renouncing their citizenship which could be a sensitive issue. References Yoshov, B. L. (2007). Taxation and Tax Policy Issues. New York: Nova Publishers. Patterson, J. A. C. (2006). When Families Cross Borders: A Guide for Internationally Mobile People. USA: Cross Border Publishing Ltd. CCH Incorporated. (2007). U.S. Master Tax Guide. USA: CCH. Potgens, F. P. G. (2006). Income from International Private Employment: An Analysis of Article 15 of the OECD Model. USA: IBFD. Read More