- 1 Digital Nomad Visa US Tax Implications
- 2 Worldwide Income and reporting
- 3 Foreign Country Tax Laws
- 4 Expat vs Expatriate
- 5 Second Citizenship May Increase Tax
- 6 Foreign Tax Credit (FTC) and Foreign Earned Income Exclusion (FEIE)
- 7 Exit Tax if you Are a Covered Expatriate
- 8 About our International Tax Law Firm
Digital Nomad Visa US Tax Implications
There is a common misconception that if a US person has multiple citizenships, then they are only subject to Tax in the actual country they reside, but this is incorrect for US citizens. That is because the United States is one of only a few countries that follows a worldwide income model based on US person status. In other words, if a person is considered a US person such as a US citizen, Lawful Permanent Resident, or Foreign National who meets the Substantial Presence Test then they are subject to tax on their worldwide income. It does not matter if the taxpayer resides in a foreign country or in the United States, and even if all of the income is generated from foreign sources, they are still taxed on their worldwide income. Here are a few important facts about becoming a global citizen.
Worldwide Income and reporting
As indicated above, the United States follows a worldwide income tax model. This means that the United States taxes US persons on their worldwide income. Thus, if you end up getting additional citizenship and consider yourself a global US citizen, due to the disparity in foreign tax categories — that may not receive a foreign tax credit in the United States as an income tax — you may have actually increased your tax liability instead of decreasing it
Foreign Country Tax Laws
Each foreign country has its own set of tax laws. Where some of the confusion lies is in the fact that the United States is one of the only countries that taxes individuals on their worldwide income based on their US person status. But that does not mean foreign countries do not tax income outside of their borders. In several other countries, in which a person is considered a permanent resident of that country –– which typically means the person has resided in that foreign country for at least six months in a day –– they are also taxed on their worldwide income as well. While some taxpayers may try to plan around becoming a permanent resident in any one country by, for example, residing in three different countries for four months at a time — many foreign countries have their own failsafe written into the different tax treaties (similar to the US Tax Treaties) to prevent this type of triangular setup.
Expat vs Expatriate
If you are a US citizen, then you are subject to US tax on your worldwide income. If you relocate overseas but remain a US citizen then you are considered an expat — and you are still taxed on your worldwide income, no matter how many different citizenships you have and where you reside. If instead, you formally renounce your US citizenship then you are considered an expatriate — and then you will no longer be subject to US tax on your worldwide income. But, you may be subject to an exit tax and if you are a covered expatriate you may be subject to other taxes down the line.
Second Citizenship May Increase Tax
When you obtain second third and fourth citizenship, you become subject to tax in those different countries as well. Most other countries only tax you on your worldwide income if you are a permanent resident of the country, but even if you are not a permanent resident but maintain assets in those foreign countries then you may still be subject to wealth tax and other types of taxes in which there is no comparable tax in the United States, and thus no foreign tax credit.
Foreign Tax Credit (FTC) and Foreign Earned Income Exclusion (FEIE)
When a person is a US person who resides overseas and pays taxes, they may still be able to reduce or avoid their US tax by using the foreign earned income exclusion, foreign housing exclusion, and foreign tax credits. Noting, that these tools are available to all US persons who reside overseas and are earning income overseas — and they do not require a US Person to obtain citizenship in a foreign country — although if a person does not pay tax in a foreign country and made certain tax elections in that foreign country about how to be treated for tax purposes, it may impact their ability to claim the foreign earned income exclusion.
Exit Tax if you Are a Covered Expatriate
By the time you reach this paragraph, you may be thinking it may just be better to give up your US citizenship altogether and formally expatriate. It is important to note that once you perform the expatriating act such as renouncing citizenship you cannot go back and undo that act. Therefore, if you are considering giving up your US citizenship you have to consider the exit tax implications and consequences if you are a covered expatriate. This is something you should assess before performing the expatriating act and you should speak with an experienced Board-Certified Tax Law Specialist firm that specializes in these types of international offshore tax matters.
About our International Tax Law Firm
Golding & Golding Expat Tax Lawyers specialize exclusively in international tax, and specifically IRS offshore disclosure and compliance.
Contact our firm today for assistance.