Dual Citizenship Taxes for U.S. Expats
6 min read
January 17, 2023
January 17, 2023
At a glance
If you have dual U.S. citizenship, you may owe U.S. taxes. Here’s what you should know to avoid tax penalties and stay in compliance.
U.S. taxes can be confusing when you hold more than one passport, and chances are you have a few questions. For example, if you were born in the U.S. but have lived your whole life abroad, do you have a U.S. tax obligation? What if you live in the U.S. and have dual citizenship through a parent?
To make it easier on you, we’ve answered a few of the most common question we get about dual citizenship taxes.
Ready to file your U.S. tax return as a dual citizen? Get started now.
What is dual citizenship?
Before we dive in, let’s clarify what dual citizenship means for tax purposes. Being a dual citizen means that a person is considered a citizen/national of two countries at the same time, and is subject to both country’s tax laws. Something to remember is that each country has its own laws dictating who qualifies as a citizen. For example, some countries (like the U.S.) may consider you a dual citizen if you were born within that country’s borders, regardless of your parents’ nationalities.
Do dual citizens pay U.S. Taxes?
The most common question dual citizens ask is whether they have to pay taxes to both countries if they don’t live in the U.S. The answer is, it’s possible.
As it turns out, as long as you are a citizen or resident alien of the United States, you must file U.S. taxes if you meet the filing thresholds. This applies even if you have dual citizenship and pay taxes to another country or don’t currently live in the States.
The U.S. is one of two countries in the world that taxes based on citizenship, not place of residency. That means it doesn’t matter where you live — if you’re a U.S. citizen, you file taxes. This is true even if you earn no income in the U.S.
Do dual citizens file tax returns in both countries?
It depends. Each country is different, but for the most part, U.S. expats must file both U.S. taxes and taxes for their country of residence.
For example, let’s say you have Canada/U.S. dual citizenship, living in Canada. Since you are considered a resident of Canada and earn Canadian income, you’d likely have to file a Canadian tax return and pay taxes on your Canadian income.
How can a dual citizen avoid dual taxation?
Don’t worry — just because you have a U.S. tax filing obligation doesn’t mean you’ll be double-taxed or subject to dual taxation. The U.S. has a few options designed to ease the tax burden on dual citizens, including tax treaties, the Foreign Tax Credit, and the Foreign Earned Income Exclusion.
The U.S. has entered into tax treaties with more than 50 countries around the world. Among other things, they serve to clarify what income is taxable by which country and therefore they affect whether or not you can take a tax credit, tax exemption, or qualify for a reduced tax rate.
The Foreign Earned Income Exclusion
The Foreign Earned Income Exclusion (FEIE) is the most commonly used tool to lower U.S. dual citizen taxes. It excludes some or all of your foreign earned income on your tax return, therefore lowering (or completely eliminating) your U.S. tax obligation. If you qualify, you’re able to exclude up to $107,600 of foreign earned income in 2020. You qualify if you live and work outside the U.S. and pass either the Bona Fide Residency test or the Physical Presence Test.
For example, say you’re a German/U.S. dual citizen who was born to a German parent in the U.S., now lives and works in Munich, Germany, and has a total German income of $105,000. You would be able to exclude all that income from your U.S. taxes, lowing your U.S. tax obligation to $0 (you may still owe German taxes).
The Foreign Tax Credit
Another important tool for lowering your U.S. tax obligation is the Foreign Tax Credit (FTC). The FTC gives you a dollar-for-dollar credit on taxes already paid to another qualifying country on items of foreign income.
Do I owe U.S. back taxes if I’m an Accidental American or didn’t know I had to file?
If you were born in the U.S. or have a U.S. parent, you may be considered a dual citizen of the U.S. and have a U.S. tax obligation.
Take Boris Johnson, former Prime Minister of the U.K., who is one of thousands of Accidental Americans that had to pay back taxes to the U.S.
Johnson was born in New York while his parents were working there and moved back to the U.K. when he was five years old. He didn’t know he was subject to U.S./U.K. dual citizen taxes until many years later, when the IRS requested that he pay a capital gains tax on the profit of selling his North London home.
To avoid a similar situation, make sure you’re either caught up on your U.S. taxes or verify you don’t have a tax obligation. If you find out you do in fact have a tax liability and you haven’t been paying, you’re in luck.
If you’ve never filed U.S. taxes as a dual citizen and just found out you need to, don’t panic. The IRS is pretty understanding when it comes to not filing because you honestly didn’t know you had to, and they have a program to help you get caught up — Streamlined Foreign Offshore Procedures.
Streamlined Foreign Offshore Procedures helps U.S. dual citizens get compliant with prior year filings while helping reduce penalties. To qualify, you must:
- Have lived in a foreign country for at least 330 days during one of the last three years and not maintained a U.S. abode.
- Confirm that your failure to file U.S. tax returns and FBAR was due to an honest misunderstanding of your responsibilities.
What else should I know about U.S. dual citizenship taxes?
If you’re a dual citizen, filing your U.S. taxes may not be the end of your paperwork. U.S. citizens are required to report money in foreign accounts if the total amount is more than $10,000.
The U.S. enacted the Foreign Account Tax Compliance Act (FATCA) to increase transparency of U.S. citizens with foreign bank accounts, and your FBAR serves a similar purpose. One difference between the two is you submit FATCA Form 8938 to the IRS while you submit your Foreign Bank Account Report (FBAR) with FinCEN, the U.S. Treasury Department’s Financial Crimes and Enforcement Network.
If you’re confused about your FBAR and FATCA filing requirements, it’s best to leave your tax filing to the experts at H&R Block.
Need help? Trust the dual citizenship tax experts at H&R Block Expat Tax Services
Paying taxes in one country is enough to give anyone a headache, and it only gets more complicated for dual citizens. That’s why it’s crucial you leave your U.S. expat taxes to seasoned pros who will dig into your specific tax situation to find the most beneficial filing options. No matter how complicated your dual citizenship taxes are there’s an expert Tax Advisor waiting to help. Start your U.S. taxes today!
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