Do expatriates pay capital gains in the US?

Question

I am an American who has moved to Japan. I have owned stock since before moving to Japan. I moved here several years ago, and kept my stock without realizing any of the gains. This year, however, I realized some of the gains.

The company I use to buy and sell stock is based in America. Do I pay capital gains taxes in the US? I've heard conflicting reports. I've been told that I would pay in the US, but I don't know how to do this. Especially since I have no income in the US.

Another issue is I am married, and since my spouse and I got married in Japan, and have never been to the US, she has no social security number.

Anyway anyone who has any information they can help with, or someplace I could go for information, please tell me!

Answer 1

There are several different issues here. I'll try to address them in turn.

1. US citizens are subject to US taxes on their world wide income from all sources. It does not matter where you live. The very short answer on the CG is yes, that's fully taxable income in the US.

2. You may be able to exclude all or a portion of your foreign earned income from US taxes. The maximum exclusion amount is $82,400. Anything above that is fully taxed at the same marginal rate that would have been in effect if the excluded income was taxable. You must file a timely return to claim the exclusion -- if you're one day late it's lost forever.

3. If you cannot claim the Foreign Earned Income Exclusion, you may opt to take a credit against your US tax liability for the foreign income taxes that you did pay.

4. Or, if the credit works out better for you, you may take it INSTEAD of the exclusion. You cannot take both. If you pay high foreign taxes or if you have high unearned income, the credit may well work out better than the exclusion.

5. Since you are married your filing status is either Married Filing Jointly or Married Filing Separately. To file a joint return with your non-resident alien spouse you both must jointly agree to have her world wide income taxed by the US. You attach a joint statement, signed by both of you, attesting to this fact. You need to attach that statement to every joint return you file. For this reason, a paper return is required; you cannot e-file.

6. If your spouse does not agree to have her income taxed by the US, you cannot file a joint return and must file Married Filing Separately. If you file this way, write "Non-Resident Alien" where her SSN would go on your tax return.

7. If you file a joint return as noted above, your spouse must have either a SSN or ITIN. She's probably not eligible for an SSN so she'll need an ITIN instead. You can attach Form W-7 to your first joint return and mail it to the Austin, TX service center. They'll process the W-7, apply her ITIN to the return, and process the return.

That should address the items in your question. There are many other considerations as well. Go to the IRS website and grab copies of IRS Pub 54 and IRS Pub 519. They address issues for US citizens overseas and alien taxpayers respectively.

One important note: I note that you have lived outside the US for some time. Hopefully you have been filing your tax returns every year. If not, you need to play catch up immediately! You may or may not have any tax liability depending upon your exact circumstances but you still are requied to file. If you do owe, you need to file and set up a payment plan with the IRS to clear your tax debt.

Answer 2

You pay capital gains taxes when you file your US tax return. You are subject to the same rules for filing a tax return as citizens living in the US.

Here is a general IRS publication for you to read about filing requirements for US citizens living abroad.

http://www.irs.gov/businesses/small/international/article/0,,id=96796,00.html