“Underneath her clothes,” Shakira, the Colombian singer, finds herself in a legal battle with the Spanish government over tax evasion charges. Born to a Lebanese father and a Spanish mother, Shakira’s residency journey took her from Colombia to Miami, then the Bahamas, and back to Miami. The Spanish authorities accuse her of evading taxes between 2012 and 2014 when she claimed residency in the Bahamas. Shakira’s case sheds light on the increasing relevance of tax issues as more taxpayers opt to relocate to countries where their dollars can stretch further.
Taxation Based on Citizenship:
Apart from Eritrea, a small African country known for its dictatorship, the United States is the only nation that taxes its citizens based on citizenship rather than residency. This practice dates back to the Civil War era when the country struggled to fund its domestic conflict and began taxing citizens abroad. Congress imposed a duty on overseas citizens to support their home country in times of need.
The Era of Remote Work and International Relocation:
Fast forward to the 21st century, where advancements in technology have enabled more workers to relocate internationally. The 2020 pandemic and subsequent stay-at-home orders prompted many employers to embrace remote work, allowing employees to work from anywhere. As a result, Zoom meetings across different time zones have become increasingly common. However, beyond selecting Airbnb accommodations, individuals must consider the tax implications of their moves, whether temporary or permanent, domestically or internationally.
Tax Considerations for U.S. Citizens:
For U.S. citizens, the general rule is that they must file taxes regardless of their location worldwide. This includes income, estate, and gift tax returns. Although there are income exclusions and tax credits available to citizens living abroad, they still need to file taxes; otherwise, the IRS considers all gross income as taxable. Compliance with tax filing requirements is crucial.
Tax Implications for International Relocation:
Income Source – If you work for a U.S.-based employer while living abroad, your wages will be subject to Medicare and Social Security tax. However, income received to cover meals and lodging for the employer’s convenience may be exempt from these taxes. Freelancers or self-employed individuals living abroad must still pay self-employment tax as if they were in the United States.
If you work for a foreign company with no U.S. ties, you may qualify for the foreign earned income exclusion. This exclusion applies to income received for services performed, regardless of where or how the payment is received. However, if the U.S.-based bank where you hold an account pays interest on your deposit, that interest is subject to U.S. taxation. It’s important for U.S. citizens living abroad to keep their address updated with the IRS to ensure they receive important notices and comply with tax obligations.
Residency-Based Taxation and the Role of Tax Attorneys:
Tax laws become more complex when different countries employ residency-based taxation, unlike the U.S.’s citizenship-based taxation. Spain, for instance, considers individuals residents if they spend more than 183 days in the country, which triggers tax obligations. Shakira’s case revolves around this issue. Navigating presence and residency tests for tax purposes in different countries can be challenging, and seeking assistance from a tax attorney can be invaluable in such situations.
Tax Treaties and State-Specific Considerations:
Tax treaties between countries aim to prevent individuals and businesses from paying taxes twice to different jurisdictions. These agreements typically involve federal taxes, although specific state requirements may exist. Even minor ties to a particular state, such as owning a registered car, can trigger tax filing obligations.
Embracing the Era of Global Mobility:
We live in fascinating times where geographical limitations no longer confine us. The pandemic in 2020 showcased the possibility of remote work while fulfilling our dreams of travel and exploration. With retirees enjoying longer lives, mobility in terms of residency and work is expected to increase in this digital age. While there is an ongoing debate about whether the U.S. should shift from citizenship-based taxation, the ability to track citizens globally through the tax system offers advantages for the country. Non-compliance with tax obligations can result in significant penalties and interest. For more insights into the unforgiving nature of the IRS, read about the tax nightmare of an American reporter held hostage abroad (insert link to Brian’s article).
The Role of Tax Attorneys:
Tax attorneys can assist individuals by working directly with federal and state agencies in their absence. They can represent clients, receive tax notices on their behalf, and ensure ongoing tax compliance while they enjoy their travels. If you’re fortunate enough, like Shakira, to live “whenever, wherever,” it’s advisable to contact a tax attorney for valuable tax planning.
Shakira’s tax evasion case highlights the complex world of international taxation. As global mobility and remote work become more prevalent, individuals must carefully consider the tax implications of their moves, whether domestically or internationally. Staying informed about tax laws, seeking professional guidance, and remaining compliant are essential in this era of increasing global connectivity. If you are facing any tax issues contact the law office of Pietro Canestrelli today!