The Widget Grab Bag

OPINION ORLANDO

By Orlando Gotay

Just when I was wondering what to write about, staring at the dreaded blinking cursor, in comes news of the proposal to make adjustments to the capital gains rules. What is causing the latest uproar? A proposal to take into account inflation when the time comes to figure the gain (and thus the tax) on the sale of a capital asset.

Capital asset 101: What is a capital asset? It can be stock, a home, a lawnmower, or anything that is not inventory. When you sell one of these “widgets,” let’s say, your gain is generally the difference between what you sell it for and what it cost. If you bought an item for US$50 and sell it for US$99, your gain is US$99–50=US$49.

However, with indexing, that $50 may be adjusted somehow for inflation. Instead of US$50 it could be US$55 or US$60…who knows? It is true this affects mostly those in upper brackets, and it may not be enacted at all, but how modern of them. Did you know? Mexico indexes the cost of a home for inflation at the time of a later sale and when figuring the tax.

Another item that caught my eye is an article on Bloomberg (“US Expats Face Hammering From New Tax Rules”) that says that the new tax law actually hurts American business owners overseas. That may be just partly true, and those alarmist headlines may be reminiscent of yellow press. If you are a US person, if you own enough shares in a foreign corporation, and if that foreign corporation had profits left over at the end of the year—and the corporation became a sort of piggy bank—then you are on the hook for all kinds of new taxes. That’s true, but it’s a far stretch from suggesting all expats are in for it. Say what? You have a foreign corporation you have not told the IRS about? Then you could be in trouble, even before the new tax law changes—and even before owing a single penny in federal tax.

Meanwhile, states keep trying to pull you in. Do you blame them? Minnesota just tried—and lost—in an effort to say, “Once you are mine, you are always mine”… like a bad lover. The details are technical, but the message is the same to us all. Pay attention to whatever contacts you have north of the border. The nice thing is that most of these factors and contacts can be managed. Forewarned, forearmed!

Orlando Gotay is a California licensed tax attorney (with a Master of Laws in Taxation) admitted to practice before the IRS, the US Tax Court and other taxing agencies. His love of things Mexican has led him to devote part of his practice to federal and state tax matters of US expats in Mexico. He can be reached at tax@orlandogotay.com or Facebook: GotayTaxLawyer. This is just a most general outline. It is informational only and not meant as legal advice.

 

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