November 04, 2020
Many people wonder whether or not they have to file taxes if they have a dual citizenship. First, let’s start with what this means. If are you are a citizen of both the United States and another country, like Canada or the United Kingdom, then you have what’s called dual citizenship. Unfortunately, when it comes to filing taxes, things may get a bit more complicated for you though. Do dual citizens need to file a U.S. tax return? Is it common to end up paying taxes in a country that you don’t live in? It’s important to answer these questions and clear up any misconceptions, so you do right “tax-wise” to maintain your dual citizenship.
Citizenship Is Important
Any citizen of the United States, regardless of their current location overseas, must file a U.S. tax return. They may not owe the IRS any money, due to the treaties in place with foreign countries in order to prevent double taxation from occurring, but they are still required to file a tax return – even if their income was earned in the country in which they reside.
This rule applies to people with dual citizenship as well. As long as one of those citizenships is the United States, then a tax return must be filed. You may have to file a tax return in the other country as well, keeping in mind that they may have different deadlines than the IRS. Plus, the laws that govern how much you owe and to which government you owe the money can change every year, so checking with a tax expert or having an experienced tax preparer assist with your taxes is a good idea.
Are You Allowed Deductions and Credits on a U.S. Income Tax Return?
Dual-status citizens are required to follow certain rules when they file a U.S. Income Tax Return. Due to the nature of the money earned, especially if they are living and working in a foreign country, they must:
- Not Use the Standard Deduction – This deduction is on the Form 1040 and only applies to those who are only citizens of the United States, not dual citizens. However, they can use a number of itemized deductions listed on the form.
- Avoid the Personal Exemption Deduction – The 2016 tax year was the last year that dual citizens could use this deduction on their U.S. tax returns. Currently, dual citizens cannot use this deduction on themselves, their spouses, or their dependents.
- Not Use Certain Tax Tables – The IRS Head of Household Tax Table and the Tax Rate Schedule do not apply to dual citizens.
- Check If They Can Claim a Dependent – Depending on the circumstances, a dual citizen may be able to claim a dependent or two on their U.S. tax return.
- Avoid the Personal Services Exemption – Starting in 2019, dual citizens are no longer allowed to apply the personal services exemption, which was previously used by nonresident aliens.
These are just a few examples of the deductions and credits that a dual citizen residing in another country and filing a U.S. tax return cannot use. Other deductions and credits, particularly itemized ones, may be allowed, depending on the circumstances. In most cases, many of the same ones apply. However, it’s always best to check with a tax expert in order to find out which exemptions are applicable to your individual tax situation.
If You Pay Taxes in a Foreign Country, Do You Need to Pay U.S. Taxes?
There are many circumstances to consider when answering this question, as it depends on the country and the type of taxation system that they have in place. There are four main options that you’ll see:
- Citizenship-Based Taxes – Under this system, anyone who is considered to be citizen of the country needs to file a tax return and pay any amount due, regardless of where they live. Examples of countries that use this system are Eritrea and the United States.
- Residence-Based Taxes – With residence-based taxes, if you’re currently residing in the country, regardless of your citizenship, then you will need to file a tax return and pay any taxes due. If you are a dual citizen of the United States and live in France or Germany, two examples of countries that use this taxation system, then you may end up paying the French or German government at the end of their tax year.
- No Taxes – Certain countries, like Qatar, Monaco, and Oman do not tax their citizens or residents. There are many reasons for this, but it most often occurs in countries where their population is either very small or they have large amounts of oil revenues that are used to fund their governments and public works projects.
- Territorial-Based Taxes – A territorial-based taxation system, such as the one in Lebanon or Singapore, requires people to pay taxes on money made while living in that particular country. If you are a dual citizen of the U.S. and Lebanon, but live and work in Lebanon, then you may have to pay taxes to that country. Additionally, you will definitely have to file two tax returns, one for each country.
So, what does all this mean for dual citizens living abroad? If this is your situation, you may need to pay taxes to the country that you are currently residing in and are a citizen of. However, the United States has tax treaties in place with many countries that prevent citizens from having to pay double taxes – both to them and to the foreign country. Because of this, you may not need to pay U.S. taxes if you pay taxes in a foreign country. In fact, you may not need to pay taxes in either country, depending on the agreement in place; however, consulting a tax expert to ensure you file and pay taxes correctly is a responsible next step.
What Roles Do U.S. Tax Treaties Play?
U.S. tax treaties are designed to prevent people from paying taxes to two different countries on the same income. Basically, they prevent double taxation from occurring. The U.S. currently has these treaties in place with a number of other countries, including New Zealand, the United Kingdom, and Australia, among others. The treaties apply not just to those with dual citizenship who choose to live and work in a foreign country, such as having U.K. and U.S. citizenship, yet choosing to reside in and hold down a job in London, but also to U.S. citizens who live in a foreign country, even if their own citizenships lies with the U.S.
Why were U.S. tax treaties put into place? Under them, a person will end up paying a lower amount of taxes in the foreign country that they live in and/or are a citizen of, and possibly, depending on their income levels, no taxes in the Unites States. This doesn’t prevent them from having to file multiple tax returns, however. One must be filed with the IRS, as well as with the other country. The difference is that the amount of taxes owed is lower, thanks to the treaties.
What is the Foreign Earned Income Exclusion?
Under the Foreign Earned Income Exclusion, U.S. citizens are exempt from having to pay taxes on a certain amount of their income. For 2020, that amount is $107,600. However, there are a number of guidelines and rules that must be followed in order to qualify for the exclusion, such as:
- The person must be a resident of the foreign country for the entire tax year.
- They must have a physical presence in the foreign country for at least 330 days of the last 12 months
- They must hold dual citizenship with the U.S. and a country that has a tax treaty with the U.S. government and live in that foreign country
If you qualify under these regulations, then you can file the Foreign Earned Income Exclusion, making that portion of your income exempt. There are additional exemptions that you also may qualify for as well, such as the Foreign Housing Exclusion and the Foreign Housing Deduction. Of course, even if you are eligible for these exclusions and deductions, you still must file a U.S. tax return with the IRS on the same timeline as the current residents of the United States.
Is Your Foreign Earned Income Below the Threshold Amount?
Dual citizens who have a foreign income that’s below the threshold amount, which is currently $107,600 for 2020, are able to deduct that portion of their income on their U.S. tax return. So, any money that they make over that amount can have their foreign taxes – those paid to the government of the country in which they’re residing – deducted, leaving them with little to no tax responsibilities in the United States. With that said, just because they have no tax responsibilities does not mean that they are exempt from filing a tax return. A U.S. tax return must be filed anyway.
Checking the Rules
The rules, regulations, and even the tax treaties with other countries change every year. The amounts of the Foreign Earned Income Exclusion are usually updated yearly as well. Because of this, it’s crucial to have a tax advisor that is well-versed in both the tax code of the United States as it applies to dual citizens who live overseas, as well as the tax code in the country in which you currently live, or two different tax advisors, if possible, one for each country. Otherwise, you may end up having to pay more than necessary to the IRS or end up in trouble for having paid too little.
What Happens When You Fall Behind on Your U.S. Taxes?
If you fall behind on U.S. taxes, which, according to many of tax treaties that the U.S. Government has with other nations may only happen if you’re residing in the United States or under other particular circumstances, like that accrued before you moved overseas and obtained dual citizenship, then you have an obligation to clear up your debt. You cannot hide from your U.S. tax debt in another country, because the IRS will find a way to place a lien on any property that you own in the U.S., such as vehicles or homes, as well as bank accounts. In addition to this, the IRS can place a hold on your U.S. passport, U.S. driver’s license, or work-related licensing, preventing you from being renewed or even to keep you from legally being able to work. All of these actions can create quite a few headaches for you while you’re living and working abroad, so it’s best to pay any debts owed to the IRS as soon as you can.
If you have tax-related questions about filing your taxes with dual citizenship, the Foreign Earned Income Exclusion, or the U.S./U.K. tax treaty, the tax advisors at the Enterprise Consultants Group can answer your questions, discuss your rights, and provide actionable options. Please contact us online or at (800) 575-9284 today to schedule a free and confidential consultation to see how we can help you.
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