How does the IRS tax capital gains made in the UAE?
If you’re a US citizen or Green Card holder, expect the IRS to tax any capital gains you’ve made, even if you’ve made them in the United Arab Emirates. The amount taxed depends on a few factors.
Let’s take a look at a scenario: Consider a US expat in Dubai who received stock as part of their employment package with a UAE company. Years later, they decide to sell these stocks when the market is favorable. How does the US tax system treat this transaction?
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Is my stock short-term or long-term?
The IRS differentiates between short-term and long-term capital gains:
Short-Term Capital Gains: If the stocks are held for less than 12 months, any profit from the sale is considered a short-term capital gain. These gains are taxed at marginal tax rates, which vary based on the individual’s filing status and income level.
- Top Marginal Tax Rate (for 2024): The highest tax rate remains at 37% for single individuals with incomes greater than $609,350.
- Other Tax Brackets for Single Taxpayers (for 2024):
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- 35% for incomes over $243,725
- 32% for incomes over $191,950
- 24% for incomes over $100,525
- 22% for incomes over $47,150
- 12% for incomes over $11,600
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- For married couples filing jointly, the rates are as follows (for 2024):
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- 37% for incomes over $731,200
- 35% for incomes over $487,450
- 32% for incomes over $383,900
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Long-Term Capital Gains: For stocks held for more than a year, the gains are taxed at a lower rate, generally around 15-20%. Additionally, a net investment income tax of 3.8% might apply depending on the income level.
What does this mean for my income?
The capital gain is added to the individual’s overall income for the year, which affects the tax rate applied to the gain.
Even if the capital gain is the only income for the year, the individual might still be eligible for the standard deduction on their US tax return.
Additionally, for those with higher incomes, the capital gains tax rate and the net investment income tax could lead to a higher tax burden.
What should I do before selling my investments?
- Timing of Sale: Deciding when to sell investments like stocks can significantly impact the tax liability. Holding the investment for more than 12 months can qualify it for long-term capital gains tax rates, which are generally lower.
- Tax Calculations: Before selling, it’s advisable to perform an estimated tax calculation to understand the potential tax implications. This can help in deciding whether to sell now or wait for a more favorable tax treatment.
- Seek Professional Guidance: US expats unsure about their specific tax situation, especially concerning capital gains, should consult with a tax professional. This ensures they make informed decisions and remain compliant with US tax laws.
Why partner with a specialist Expat accountant?
Living outside of the US can make your tax filing requirements complicated. To ensure you pay the minimum amount of taxes, it’s critical to work with an accountant who understands every aspect and avenue for reducing your tax liability. We have a dedicated team of tax accountants who work exclusively with US expats earning and investing in the UAE. Partnering with a specialist expat accountant can help you navigate complex tax regulations and optimize your tax situation.
