The Basics of Capital Gains Tax and Earning Income Abroad

Many individuals are in a similar situation to yours, where they are earning income abroad while also wondering about their capital gains tax rate in the United States. It can be confusing to navigate the tax laws and regulations for both earned income and capital gains, especially when they are earned in different countries. In this blog post, we will discuss the basics of capital gains tax and earning income abroad, as well as the potential impact on your tax rate.

Understanding Capital Gains Tax

First, let's start with the basics. Capital gains tax is a tax on the profit earned from the sale of assets such as stocks, real estate, and other investments. This tax is calculated by taking the difference between the purchase price and the sale price of the asset. If the sale price is higher than the purchase price, then a capital gain has been made and is subject to taxation.

The capital gains tax rate varies depending on the type of asset and how long it has been held. Short-term capital gains, which are assets held for less than a year, are taxed at the same rate as ordinary income. On the other hand, long-term capital gains, which are assets held for more than a year, are taxed at a lower rate.

Earning Income Abroad

Now, let's talk about earning income abroad. As a US citizen or resident, you are required to report your worldwide income to the IRS. This means that even if you are living and working abroad, you are still responsible for paying taxes on your income to the US government.

However, there are certain tax benefits and exemptions available for individuals who are earning income abroad. These include the Foreign Earned Income Exclusion, which allows you to exclude up to $107,600 of your foreign earned income from your US tax return. Additionally, if you pay taxes on your foreign earnings in the country where they were earned, you may be able to claim a Foreign Tax Credit on your US tax return.

The Impact on Your Capital Gains Tax Rate

Now, let's address your specific question about the impact of your earned income abroad on your capital gains tax rate. Since you have no income earnings in the US, your capital gains tax rate for federal level will depend on the length of time you hold your assets. If you hold your assets for more than a year, you will be subject to the long-term capital gains tax rate, which is typically lower than the ordinary income tax rate. However, if you hold your assets for less than a year, you will be taxed at the same rate as your ordinary income.

It's important to note that your earned income abroad may push you into a higher tax bracket, which could potentially increase your capital gains tax rate. It's also important to consider any tax implications in the country where you earned your income, as well as any potential tax treaties between the US and that country.

Talking to a Tax Advisor

As you can see, there are many factors to consider when it comes to your capital gains tax rate and earning income abroad. It's always a good idea to consult with a tax advisor to ensure that you are accurately reporting and paying taxes on your income and capital gains. They can also help you navigate any tax treaties or benefits that may apply to your situation, and ensure that you are taking advantage of all available deductions and credits.

In conclusion, your capital gains tax rate with earned income abroad will depend on a variety of factors, including the type of assets you own, the length of time you hold them, and your overall income level. Be sure to consult with a tax advisor to get a clear understanding of your tax obligations and potential tax benefits.