Dual citizenship taxes: Guide for US expats

As a US citizen living abroad, you may find the complexities of dual citizenship taxes about as easy as practicing Brazilian Jujitsu, while covered in baby oil. Whether you've acquired citizenship in another country or you're an "accidental American," understanding your tax obligations is the only way to get a grasp on that slippery opponent.

This guide will walk you through the intricacies of dual citizenship taxes, helping you overcome the challenges of international taxation and ensuring you remain compliant with both US and foreign tax laws – giving you a Michelin-tire quality grip on things.

What is dual citizenship?

First, it's important to be clear, what do we mean by dual citizenship? Also known as dual nationality – it is the status of being a citizen of two countries simultaneously. You might have acquired dual citizenship through various means:

• birth in a foreign country to US citizen parents
• naturalization in another country while retaining US citizenship
• marriage to a foreign national
• ancestry or descent-based citizenship 

Regardless of how you obtained it, dual citizenship comes with both benefits and responsibilities, particularly when it comes to taxes.

Do dual citizens have to pay US taxes?

Yes, as a US citizen, you're required to file US taxes regardless of where you live or work. The United States is one of the few countries that taxes its citizens on their worldwide income, irrespective of their residence. This means that even if you're living and working abroad, you must report your global income to the Internal Revenue Service (IRS) annually.

It’s important to know that this obligation applies even if you're paying taxes in your country of residence or if you haven't stepped foot on US soil in years.

Pro tip: The US tax year runs from January 1 to December 31, but expats get an automatic extension to June 15 to file their returns. You can request additional extensions if needed.

Do dual citizens pay taxes in both countries?

In many cases, yes – dual citizens may be required to pay taxes in both countries. However, the tax situation for dual citizens is complex and depends on several factors. It really pays to understand some of the key nuances of international tax law.

The primary factors that determine a dual citizen's tax obligations include:

• Country of residence. Where you primarily live and work can significantly impact your tax responsibilities.
• Source of income. The origin of your earnings, whether from employment, investments, or other sources, plays a role in determining tax obligations.
• Tax treaties. Agreements between countries can affect how dual citizens are taxed and may provide relief from double taxation.
• Specific financial situation. Your income level, assets, and potential deductions all factor into your overall tax picture.

For example, if you're a US-UK dual citizen residing and working in the UK, you'll likely need to file tax returns in both countries. The US, unlike pretty much most other nations, taxes its citizens on worldwide income regardless of residence. However, this doesn't necessarily mean you'll be double-taxed on the same income.

Pro tip: While you may need to file in both countries, various mechanisms are in place to help you avoid or reduce double taxation. TFX can help you with this.

What if I'm an accidental American?

"Accidental Americans" are individuals who acquired US citizenship by being born in the US to foreign parents or born abroad to at least one US citizen parent, but who have lived most of their lives outside the US. If you fall into this category, you might be surprised to learn that you have US tax obligations.

As an accidental American, you're still required to:

1. File annual US tax returns reporting your worldwide income.
2. Report foreign bank accounts if they meet certain thresholds (FBAR filing).
3. Comply with other US tax regulations, such as FATCA (Foreign Account Tax Compliance Act).

Pro tip: Some accidental Americans choose to renounce their US citizenship to avoid ongoing tax obligations. However, this is a serious decision with potential consequences, including exit taxes for high-net-worth individuals.

How can dual citizens avoid double taxation?

While dual citizenship taxes can seem daunting, several mechanisms are in place to help you avoid or reduce double taxation:

1. Tax treaties

The US has tax treaties with many countries to prevent double taxation. These agreements determine which country has the primary right to tax certain types of income. Check if a tax treaty exists between the US and your other country of citizenship.
Key benefits of tax treaties may include:

• reduced withholding rates on investment income
• exemptions for certain types of income, e.g., pensions, social security
• tiebreaker rules for determining tax residency

2. Foreign Tax Credit

The Foreign Tax Credit (FTC) is a valuable tool for US taxpayers who have paid income taxes to a foreign country. This credit provides a dollar-for-dollar reduction of your US tax liability based on the taxes paid abroad. Here's a more detailed explanation of how it works:

The FTC allows you to claim a credit for income taxes paid to a foreign country on income that's also subject to US tax. This mechanism helps prevent double taxation on the same income. However, it's important to note that the credit is limited to the amount of US tax you would owe on that foreign income.

If you've paid more in foreign taxes than you can claim as a credit in a given year, keep in mind that the IRS allows you to carry over unused foreign tax credits for up to 10 years, providing flexibility in managing your tax liabilities over time.

3. Foreign Earned Income Exclusion

The Foreign Earned Income Exclusion (FEIE) is a provision of the tax code, designed to prevent American residents/citizens from being double taxed on income earned while living/working abroad. For the exclusions on the 2024 tax year, the IRS has given its guideline amounts here.

Here’s what you need to know:

• What's the purpose of FEIE? The FEIE allows qualified individuals to exclude a portion of their foreign-earned income from their US taxable income.
• Who is eligible for FEIE? To qualify, you must meet either the bona fide residence test (living in a foreign country for an uninterrupted full tax year) or the physical presence test (physically present in a foreign country for at least 330 full days during any 12-month period).
• What income does it apply to? The exclusion applies only to earned income – that is wages, salaries, professional fees, and other amounts received as compensation for personal services. It doesn't apply to passive income like dividends, interest, capital gains, or rental income.

Bonus tip: In addition to the FEIE, you may also be able to exclude or deduct certain foreign housing costs.

But, be aware – even if all your foreign-earned income is excluded, you still need to file a US tax return if you meet the filing threshold.

4. Foreign Housing Exclusion

In addition to the FEIE, you may be eligible for the Foreign Housing Exclusion or Deduction. This allows you to exclude or deduct certain housing expenses from your US taxable income.
The amount you can exclude or deduct is based on:

• your location (higher cost areas allow for higher exclusions)
• your qualifying housing expenses (rent, utilities, property insurance, etc.)
• the maximum amount allowed for your specific location

Pro tip: The Foreign Housing Exclusion can be claimed in addition to the FEIE, potentially increasing your total exclusion amount significantly.

What if I owe US taxes?

If you find yourself owing US taxes, don't worry. The IRS offers several payment options:

1. Pay in full: If you can afford it, paying your tax bill in full by the due date is the simplest option.
2. Short-term payment plan: If you need a little more time, you can apply for a short-term payment plan for up to 180 days.
3. Long-term payment plan (Installment Agreement): For larger tax bills, you can set up a monthly payment plan.
4. Offer in Compromise: In some cases, you may be eligible to settle your tax debt for less than the full amount owed.

Pro tip: If you're struggling to pay your taxes, it's crucial to communicate with the IRS. They're often willing to work with taxpayers who show a good-faith effort to comply.

If you've fallen behind on your US tax filings, the Streamlined Filing Compliance Procedures may help you catch up without facing hefty penalties. This program is designed for taxpayers who have not willfully avoided their tax obligations.

Conclusion

Remember, dual citizenship taxes can be complex. While this guide provides a solid starting point, you must consult a tax professional specializing in expatriate taxation to ensure you're compliant, as well as making the most of available benefits. TFX is here to help you navigate these complexities and optimize your international tax situation.