Dual Citizen Needing US Tax Help? Here’s a Guide
Dual citizens, or dual nationals, are citizens of two different countries. Dual citizenship was prohibited in most countries in the nineteenth and early twentieth centuries, however the United States has allowed Americans to be dual citizens since 1967. Dual nationality is most often acquired either through parentage, or through naturalization (obtaining a second citizenship through living in another country).
Do dual US citizens have to file US taxes?
Dual citizens must obey the laws of both of the countries they are citizens of, including tax laws. For American dual citizens, this means that they are subject to United States taxation of all US citizens’ global income.
For American dual citizens who live in another country where they are also subject to national taxes, this often raises the possibility of double taxation on the same income.
When American dual citizens living abroad file their US taxes, they have an automatic two month filing extension until June 15, and they can request a further extension until October 15, if they need one.
The US also requires all US citizens to report their non-US registered bank, financial and investment accounts, and business interests, depending on minimum balance, value and ownership thresholds.
How dual citizens can avoid double taxation
American dual citizens living abroad often assume that a tax treaty protects them from filing taxes in both their country of residence and to the US, however this isn’t the case.
“Dual nationals owe allegiance to both the United States and the foreign country. They are required to obey the laws of both countries, and either country has the right to enforce its laws.” – the US State Department
Instead, the tax treaties the US has signed stipulate that American citizens living abroad must still file US taxes, but when they do so, they may claim one or more provisions to avoid double taxation.
Some tax treaties contain provisions that can mitigate double taxation of some types of income, such as retirement or investment income, in which case these provisions must be claimed as part of the federal US tax return.
Otherwise, American dual citizens can most often claim tax credits from one country to offset taxes paid in the other, depending on where the income was earned.
Another measure called the Foreign Earned Income Exclusion, which may be claimed on Form 2555, allows Americans abroad to simply exclude the first $107,600 (in 2020) of their earned income from US tax.
A separate set of international treaties called Totalization Agreements prevent double social security taxation.
American dual citizens abroad most often seek assistance from a US expat tax specialist to ensure that they file in the most beneficial manner possible given their individual circumstances.
Advantages and disadvantages of being a dual citizen
The biggest advantage of dual citizenship is the right to live and work in two countries. In some cases, this may extend to more countries, for example citizenship of an EU country gives the right to work and travel in all EU countries.
Furthermore, some passports allow visa free travel to countries that others don’t, so dual nationality can open up new visa free travel opportunities.
Other advantages include access to two healthcare and social security systems, and the right to vote and the ability to run for office in two countries.
Disadvantages of dual citizenship are having to meet the obligations of two countries, such as those relating to taxation, and other obligations such as military service, depending on the country.
Should dual citizens renounce US citizenship?
Most people consider the benefits of dual citizenship to outweigh the advantages, however some dual citizens consider renouncing their US citizenship, most often to try to avoid catching up with missed past US tax filing.
To renounce US citizenship however, you must be fully caught up with your US tax filing already, and then go through an expensive administration process.
IRS amnesty programs
A better alternative to renunciation is often compliance via an IRS amnesty program such as the Streamlined Procedure.
Most American dual citizens don’t end up owing any US tax when they file, so the only obligation for them and their descendents to retain the advantages of US citizenship is filing as a reporting exercise every year.
American dual nationals should always seek advice from a US expat tax specialist to realize their optimum outcome.