Americans Living in Dubai and US Taxes, Account Reporting

American in Dubai and US Taxes, Foreign Accounts, and More

For taxpayers living in Dubai, they do not have the same personal income tax requirements in the UAE (United Arab Emirates) that they do in the United States (since there are not income taxes similar to the IRS). Unfortunately, if the person is still considered a US Person for tax purposes, they are still subject to US Tax on earned and passive income that they generate in Dubai. Unlike almost every other country across the globe, the United States utilizes a Citizenship-Based Taxation (which includes resident aliens/permanent residents) and not Residency-Based Taxation. In other words, as long as a person is considered a US Person for tax purposes, they are still required to report their worldwide income on a U.S. tax return, whether or not they reside in the United States or overseas – and whether or not the income is sourced in the United States or outside the United States. Americans living in Dubai may be able to qualify for the Foreign Earned Income Exclusion and Foreign Tax Credits from third-party countries they may have paid taxes to to reduce or eliminate tax liability, but it does not change the fact that the income generated in Dubai is taxable in the United States. Likewise, foreign accounts, assets, investments, gifts, trusts, and entities in Dubai — or anywhere outside of the United States — are also reportable by Americans living in Dubai. Let’s go through some of the basics for US taxpayers living in Dubai.

Worldwide Income

The United States Tax System is one of the only tax systems across the globe that follows a Citizenship-Based Taxation model. Therefore, unlike other countries that tax individuals on their worldwide income only when that person qualifies as a resident of that country –– the United States taxes individuals on their worldwide income simply because they are a US Person. In fact, citizenship-based taxation is actually a misnomer because in reality, a person can be a US Citizen or Resident of the United States and still be considered to have the United States as their tax home.

US Taxes Until Formal Expatriation

One of the most common misconceptions that US Expats have is that if they relocate overseas, they are no longer required to pay U.S. tax on foreign earnings — but that is incorrect. Unless a person formally expatriates and relinquishes their green card — or renounces their US citizenship — they are still considered a US Person and are still required to pay U.S. tax on their worldwide income.

Foreign Earned Income & Housing Exclusion (FEIE)

US persons who reside overseas and qualify for either the Physical Presence Test or Bona-Fide Residence Test can qualify to exclude up to about $108,000 of their US income from their U.S. tax return — as well as claim a housing credit for a portion of the rent and other costs associated with foreign housing. If a person qualifies for the Foreign Earned Income Exclusion they must still file the tax return and include a Form 2555 — couples filing joint tax returns can each claim the earned income exclusion but cannot double-dip on the housing exclusion.

Foreign Tax Credits (FTC)

When a person pays tax overseas on income they earned abroad, they may be able to claim a foreign tax credit against any taxes that would otherwise be due on the same income on a US tax return. It is not always a dollar-for-dollar credit — and if a person claims the foreign earned income exclusion for earned income they cannot double-up on the same dollar using both the credit and the exclusion — but they may still have some remaining credit available depending on how much income they earned after applying the earned income exclusion. In other words, if a person earns significant income from employment — above the foreign earned income exclusion amount — they may be able to still claim a foreign tax credit on the additional income for the portion not exempted by the FEIE.

UAE Pension Plan/Superannuation & US Tax

While a UAE Pension Plan may grow tax-free in the UAE, the same rules would not apply under U.S. tax law since there is no treaty between the UAE and US . 

Totalization Agreement

Currently, there is no Totalization Agreement between the United States and the UAE.

UAE Pension & US Reporting

TheUAE pension Plan is reportable as a foreign financial account that must be disclosed on various different international information reporting forms such as the FBAR and FATCA Form 8938.

FATCA and Form 8938

FATCA is the Foreign Account Tax Compliance Act. US taxpayers generally comply with FATCA by filing Form 8938 (above). The Foreign Financial Institutions (FFI) may send expats and other US persons a FATCA letter or KYC Letter to ascertain whether the individual is a US person even if they are residing outside of the United States as an expat. This may lead the FFI to report the Taxpayer to the IRS.

Foreign Account Reporting & FBAR (FinCEN Form 114)

When a US person has foreign bank accounts and other financial accounts with an annual aggregate total that exceeds $10,000 on any given day in any year, they have to report the accounts on the FBAR (aka FinCEN Form 114). The form is filed electronically directly on the FinCEN website.

Foreign Gifts from the UAE & Form 3520 

Here is a common scenario: A US citizen has moved back to their home country. They may possibly have dual citizenship but their immediate family resides overseas. They receive a large gift or bequest from a family member who is a nonresident alien, such as when a grandparent or parent passes away and leaves a gift to multiple siblings — and the US Expat may be the only US person sibling. The expat is still required to report the gift on Form 3520 and the failure to do so can lead to some steep penalties.

Expat Tax Amnesty for UAE Residents

The US government has developed various voluntary disclosure and amnesty programs designed to assist expats and other taxpayers with getting into compliance for unreported income, accounts, investments, or assets. There are various different programs and although some of the programs have been recently closed, other programs have been updated and for expats who can meet the foreign residence test and prove they are non-willful, they may still qualify for the Streamlined Foreign Offshore Procedures  — and a complete penalty waiver.

About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure and expatriation.

Contact our firm today for assistance.