The Dual Citizenship Taxes Rules (Expat Reference Guide)

Do Dual Nationals File U.S. Tax Returns?

It is not uncommon for U.S. Taxpayers to have dual citizenship in a foreign country. In a common scenario, a foreign taxpayer who is a citizen of another country comes to the United States on a work visa, transfers to lawful permanent resident status, and then becomes a US citizen. Unfortunately, there are many IRS tax traps to consider when someone is a dual citizen. It is also important to note that there are two aspects of dual citizenship. There is the immigration issue of becoming a United States citizen and then there is the tax implication of being a dual citizen and there are also international reporting requirements as well (FBAR, FATCA, etc). We have several articles on our websites regarding tax issues impacting dual citizenship, but we wanted to provide some introductory material for taxpayers who may have just become a dual citizen or are considering becoming a dual citizen.

Worldwide Income

Unlike other countries, the United States follows a worldwide income taxation model for taxpayers who are considered US persons for tax purposes. That means that US persons are required to report their worldwide income on their U.S. tax return. Thus, for taxpayers who reside overseas and are earning primarily foreign-sourced income, depending on the foreign tax rate and other issues they may have a significant tax liability in the United States that they would not otherwise have. Also, having US citizenship status vs. having permanent resident or other foreign resident (SPT) status may limit the ability to use certain treaty elections to be treated as a foreign person in a foreign country.

Reporting Foreign Assets and Accounts

As a US person for tax purposes, an individual is required to report their worldwide income and the value of their assets abroad to the US government on several different international information reporting forms, such as FBAR and FATCA. For dual citizens living in the United States, there are not many exceptions that would apply. If instead of being a dual citizen of the United States, the person was a foreign national/U.S. Resident who lives overseas, they may qualify for certain exceptions, exclusions, and treaty elections that would limit the ability of having to file a U.S. tax return for their worldwide income as well as the international reporting forms that are required.

1040 vs 1040-NR

As a dual citizen, even if the taxpayer lives overseas, they’re still required to file a Form 1040 each year instead of a Form 1040-NR (unless certain treaty elections are made). With a 1040-NR, the taxpayer is only required to report US source income to the United States and not their foreign sourced income, since foreign source income is not taxable in the United States if the person is not a US person for tax purposes.

Foreign Tax Credits

When a person is a dual citizen but is earning income from overseas, they may be able to reduce or eliminate their U.S. tax liability if they have certain foreign tax credits available to them for income taxes they paid overseas on income generated from abroad.

Foreign Earned Income Exclusion

Taxpayers who are dual citizens and work overseas may also qualify for the Foreign Earned Income Exclusion (FEIE) so that they can exclude upwards of $110,000 of their income from their US tax return — along with certain housing expenses. When combined with foreign tax credits, oftentimes dual citizens working abroad may have little to no US tax liability.

Immigration and Expatriation Issues to Consider

Here are two very important immigration and expatriation issues to consider as well:

U.S. Citizenship Makes Travel Easy but Renouncing Hard 

When a person is a U.S. citizen instead of a lawful permanent resident or foreign national who qualifies for a US visa such as the B1/B2, L-1, or H-1B, they do not have to worry about renewing their US status. This can be a great benefit for taxpayers who want easy access to the United States. With that said, it is important to note that renouncing US citizenship is much more complicated than relinquishing a green card or simply not meeting the substantial presence test; it is something taxpayers must carefully consider, especially depending on the value of their assets and whether they may become subject to the exit tax.

Some Countries Do Not Allow Dual-Citizenship

One very important fact to consider is that some countries do not allow dual citizenship. For example, if a taxpayer is a citizen of Singapore and then wants to become a citizen of the United States they are unable to do so past the age of 21. For dual citizens in this type of situation, the complexities can become far-reaching especially if the taxpayer has investments and Central Provident Fund pension/retirement plans because once they relinquish their Singaporean status, they may have certain tax implications and there may not be sufficient foreign tax credits sufficient to offset those taxes in the United States. Likewise, because there is no treaty between the United States and Singapore this is a very important factor for Singaporean citizens considering becoming a US person must contend with.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

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

Contact our firm today for assistance.