The Ultimate Guide to Dual Citizenship Taxes for Expats

We all know about Dual Citizenship. It means that people can have more than one nationality. It gives individual country-specific benefits and rights. For instance, you may study, reside, and even work in both countries with dual Citizenship. But, when you reside, work, or study in these countries, you have to pay taxes. So, Are you aware of the laws related to dual citizenship taxes for expats? Do you wish to know more about dual citizenship taxes? Then, your wait is over! Stay tuned and read more details through this blog at USTAXFiling.in. 

There is no doubt that Dual Citizenship comes with advantages. It can also complicate your income taxes. But, at the same time, it makes travel fun and allows you to work abroad, and provides you a voice in different elections. In this blog, we will discuss what income taxes dual citizens have to pay and how you will reduce your tax bill. Here is something that you must know:

Key Takeaways

  • Dual citizens staying overseas risk being taxed twice on income
  • All United States citizens have to file a United States income tax return regardless of where they stay.
  • The Internal Revenue Service has different tax benefits in place to assist dual citizens in eliminating double taxation.

Do you know anything about double taxation? Don’t worry! We at USTAXFiling.in are there to give you all the updates!

What is double taxation?

Double taxation is nothing but a tax principle that refers to income taxes paid twice on the same income source. It is also an investment or international trade when the income amount is taxed in two countries. It may occur when income is taxed at both personal as well as corporate levels. It is applicable with 401k loans too.

Key takeaways

  • Double taxation is applicable when income is taxed at both the personal and corporate levels, as in the case of stock dividends too.
  • It means income tax is paid twice on the same income source.
  • While critics say that double taxation of dividends is unfair, advocates say that without it, stakeholders might avoid paying any income tax return.
  • Also, paying taxes for the same income source for two countries

Do Dual Citizens pay US income taxes?

The simple answer to this question for US citizens staying overseas is yes. The United States of America is among the only three nations across the globe with Citizenship based taxation. The others are North Korea and Eritrea. Many countries impose either territorial or residential taxation.

  • Territorial taxation means citizens are taxed on only income from a local employer or local source.
  • Residential taxation means that all citizens are taxed on their income across the globe for as long as they stay in that country.

Do dual citizens pay income tax in both countries?

As a United States resident staying overseas, you may have to file income taxes with both the United States government depending on your Citizenship and your country of residence. The United States taxes income across the globe of its citizens is not just a United States source income. Several dual citizens are also at high risk for double taxation.

For instance, let us consider if you are a dual citizen of the United States of America and Canada. You stay in Canada and work for a Canadian employer. As you are a Canadian resident earning income from a Canadian resource, you have to file a Canadian income tax return and pay income taxes on your income. As you are a citizen of the United States, you have to file a United States income tax return, too, reporting your Canadian income to the Internal Revenue Service. It means that you might be taxed twice on the same income.

The best thing is that the United States has a number of deductions and tax treaties in place to assist dual citizens in eliminating double taxation. Using these techniques, most expats may erase their United States tax bill completely. However, you have to file an annual income tax return even if you don’t have anything.

What If You Are an Accidental American? 

Under the United States citizenship policy, you will become a citizen of the United States without even trying and without being aware of it at all. These are called Accidental Americans. You will be considered a citizen of the United States automatically if either of the following implies:

  • One of your parents was a resident or citizen of the United States when you were born
  • You must be born within the borders of the United States

For instance, let us say you had lived your entire life in the United Kingdom but were born when your parents went on a holiday in New York City. It might make you a citizen of the United States, even if you would never set foot in the United States since infancy. Let us say you were born in Germany and you have never left the country, but your father was a citizen of the United States. This will make you a citizen of the United States. 

In both scenarios, the same tax regulations imply to you as any other dual citizenship of the United States. You have to file a United States income tax return every year, and you have to pay income taxes on any income you get. The only option to escape this obligation is to renounce your Citizenship.

How do dual citizens eliminate double taxation?

Here is the solution how dual citizens eliminate double taxation:

Tax Treaties 

The United States has signed income tax treaties with more than 60 nations across the globe. These treaties consider which nation has a right to tax a given income source, expats from double taxation, and protect dual citizens.

For instance, if you were a dual citizen of both Canada and the United States, as in the example shown above, you would not have to pay income taxes to both the Canadian and United States governments. As a citizen of Canada earning income from a Canadian resource, the Canada-US tax treaty might bar the internal revenue service from taxing your income.

For dual citizens staying in a country with a United States tax treaty, this is the tool for eliminating double taxation. Also, not every nation has a tax treaty with the United States. If your country has not agreed to a treaty, you might have to depend on one of the tax advantages the Internal Revenue Service offers.

Foreign Earned Income Exclusion or FEIE

The FEIE or Foreign Earned Income Exclusion allows Americans staying overseas exclude a specific amount of foreign income from United States taxation. The maximum exclusion amount changes every year depending on inflation. Expats may exclude up to $112, 200

 Foreign Tax Credit 

The FTC, or Foreign tax credit, is a dollar-for-dollar credit depending on income taxes paid to a foreign government. For instance, if you have $15000 in United States income taxes but may claim a $10000 credit depending on income taxes paid to a foreign nation, you may owe $5000 to Sam’s Uncle.

Take note

You cannot claim the FTC or foreign tax credit and the FEIE or Foreign Earned Income exclusion in a similar year. You may prefer one or the other. 

Foreign Housing Exclusion or FHE

The FHE or Foreign Housing Exclusion might be used to exclude specific foreign housing-related expenses from your tax bill in the United States. It implies regardless of whether you own or rent a house.

Take Note

You can use the FHD or foreign housing deduction if you are a self-employed person rather than Foreign Housing Exclusion.

What If You Are Behind Your United States Income Taxes? 

As Citizenship based taxation is rare, several Americans think that their United States obligations end as soon as they shift abroad. By the time they know the fact, they might be several years behind in filing and paying the taxes they owe.

If it sounds like you, you don’t have to panic. The Internal Revenue Service provides an amnesty program to assist dual citizens in coming into compliance without having any usual penalties. It is named the Streamlined filing compliance process. To use the dual citizenship taxation program, all you have to do is:

  • File FBARs for the previous six years
  • You can file the last three delinquent income tax returns and pay any of the taxes you owed during that time
  • Self-certify that you failed to file as you didn’t know you were supposed to.

Once you finish these steps, you can be in compliance with the Internal Revenue Service regulations. In a few scenarios, you might even get a refund for past years.

Take note 

You don’t have to wait to use the Dual Citizenship program. If the Internal Revenue Service contacts you about your delinquency before you begin the process yourself, they might withdraw the privilege of amnesty. In that scenario, you have to pay the complete penalties for failing to file as needed.

We May Take the Hassle Out of Your Dual Citizenship Income Taxes

This ultimate guide has aided you in knowing how Internal Revenue service dual citizenship income taxes might apply to you. At USTAXFiling.in tax consultant, we are experts in aiding expats to manage their income tax obligations in the United States. Our talented team of CPAs and IRS agents have prepared income taxes for hundreds of citizens of the United States worldwide. Let us know how USTAXFiling.in can help you!

If you are ready to be matched with a USTAXFiling accountant, you can connect with us anytime. For any doubts about expat income taxes or working with USTAXFiling, you can connect with our team. Our talented team has rich years of experience and is highly educated, so you don’t have to worry, as our tax accountants at USTAXFiling are there to help you with dual citizenship income tax filing.

FAQ

Q. Can dual citizens vote in both countries?

There are several advantages of having dual Citizenship, with citizens getting the privileges and advantages that each country has to provide. Dual citizens also have the right to vote in both countries as they have Citizenship and the advantage of being able to access both the social security systems of both countries.

Q. What are the requirements for dual Citizenship?

As far as the United States is concerned, there is no status of dual Citizenship. To become a dual citizen of the United States, you have to get a second citizenship. There is no particular form of application in the United States for dual citizens, and you have to file for naturalization.

Q. Can dual Citizenship expire?

So, if there are any changes in the regulations, the citizens get sufficient time to take the needed action to remain the citizens of the nation. So, dual Citizenship never expires.

Q. Which countries allow dual Citizenship on the basis of descent?

Cambodia, Croatia, Netherlands, Bulgaria, Hong Kong, South Korea, and the Netherlands are a few countries that help dual Citizenship depending on the descent. So, if you have valid proof of your ancestor’s Citizenship in these nations, you may get dual Citizenship.

Q. Can I use two different passports for entering and leaving a country?

Specific countries might also have dual nationals to use the passport to enter and leave that nation, so determine both your United States passport and any other passports that you hold when traveling. Having passports from two nations is possible for United States passport holders, also in several countries.

Q.Which country has the highest dual Citizenship?

The United States of America is among the most notable nations that help dual nationality. Under United States regulations, American citizens have to hold Citizenship in another nation without losing their American citizenship status. 

Q. How powerful is dual Citizenship?

With the power of dual nationality, you can work anywhere in the nation without any work visa. You don’t have to re-apply for a visa. If you are planning to stay in another country for some time, let us assume a year or more, you don’t have to need any permission for re-entry into the nation.

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