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Dual citizenship comes with many perks, like unrestricted permission to live and work in a particular country. It also often lets you benefit from that country’s social programs, vote, and pass citizenship onto your children.
The not-so-great part? Dual citizenship taxes can be complex.
Those with dual citizenship between the United States and another country often have unique tax and reporting obligations. But the more you learn about this topic, the better prepared you’ll be to navigate taxes as a dual citizen. Read on to discover how the US government taxes dual citizens, which tax breaks they can access, and more.
Understanding US tax & reporting obligations for dual citizens
Citizenship-based taxation & requirements to file
You might wonder if being a citizen of another country eliminates your US tax obligations — but unfortunately, it doesn’t. The US has a unique system of taxation called “citizenship-based taxation,” which stipulates that all Americans are subject to US taxes, even if they move abroad or hold a second passport.
Any US citizen or permanent resident who meets the minimum income reporting threshold has to file a US tax return and potentially pay US taxes. If you’re unsure whether you need to file, the IRS has a handy tool to help you figure it out.
What to include in your tax return
As a US citizen filing taxes, the main form you’ll fill out is Form 1040. Depending on your circumstances, you may need to attach additional schedules and forms to the Form 1040.
For instance, self-employed expats must fill out Schedule SE (Self-Employment Tax) and Schedule C (Profit or Loss from Business), while investors in rental properties might need to complete Schedule E (Supplemental Income and Loss).
This is far from a complete list of required documents, however. To ensure full compliance, it’s best to consult a tax professional.
Keep in mind that your tax return must disclose your worldwide income, not just US-sourced income. You must include both earned income (income you actively work for, like salary and business income) and unearned income (income you don’t actively work for, like rental income, interest and dividends).
Fortunately, expats get an automatic two-month extension on filing. Americans abroad have until June 15th to file their taxes, and this deadline can be extended even further to October 15th upon request. However, you must still pay any taxes you owe by the standard April 15th deadline to avoid accumulating interest on your tax due.
Note:
If a tax deadline falls on a weekend, it automatically falls to the next business day afterward.
Other reporting obligations
Living abroad often adds to or changes Americans’ reporting obligations. Two of the most common reports US expats have to file include the:
Foreign Bank Account Report (FBAR)
Americans with over $10,000 across all foreign financial accounts (e.g. bank accounts, mutual funds, brokerage accounts) must file the Foreign Bank Account Report, or FBAR. To do so, submit FinCEN Form 114 with the Financial Crimes Enforcement Network (FinCEN).
Filing the FBAR on time is critical, as there are serious penalties for missing reports. Accidentally failing to file an FBAR can cost you up to $10,000 for each year that you should have filed but didn’t.
Intentionally failing to file, meanwhile, can cost you up to $100,000 or 50% of the account’s balance at the time the violation occurred (whichever’s greater). You may even face criminal charges.
Statement of Specified Foreign Assets (Form 8938)
The Statement of Specified Foreign Assets (Form 8938) is mandatory for individual-filing US expats with either:
- Over $200,000 in foreign financial assets on the last day of the tax year, OR
- Over $300,000 in foreign financial assets at any point during the tax year
The reporting thresholds double for married couples who file jointly:
- Over $400,000 in foreign financial assets on the last day of the tax year, OR
- Over $600,000 in foreign financial assets at any point during the tax year
B!T note: Americans living within the US may also need to file Form 8938, but the thresholds are significantly lower ($50,000 and $75,000, on the last day or any day of the year, respectively).
Failing to file Form 8938 can also come with a steep cost. Form 8938 violations carry financial penalties — starting at $10,000 and maxing out at $50,000 for continued failure to file — as well as criminal charges.
Note:
Since the passage of the Foreign Account Tax Compliance Act (FATCA) in 2010, the US has been able to enforce FBAR and Form 8938 compliance better than ever. FATCA required foreign financial institutions to share their American clients’ account information, giving them greater visibility into expats’ finances.
Avoiding double taxation as a dual citizen
In addition to US taxes, you may need to pay foreign taxes if you meet the tax residency definition in another country. Being a citizen of another country doesn’t automatically mean you owe taxes there, though — citizenship-based taxation systems only exist in the US and Eritrea.
That said, you may be a tax resident in the country where you hold citizenship (or any other foreign country) if you:
- Maintain a permanent home there
- Spend over 180 days per year there
- Maintain significant social or economic ties there
Each country has a different definition of tax residence, so it’s important to check the rules in the country or countries relevant to you.
If you are indeed a tax resident in another country as well as in the US, you may technically be subject to taxation on the same income by both countries. Fortunately, the right tax strategy often eliminates this risk.
Expats can claim almost all of the same tax credits while living abroad as they would living in the US (e.g. the Child Tax Credit). What’s more, you can claim a few tax breaks that are only available to Americans abroad, including the following:
Foreign Tax Credit (FTC)
The Foreign Tax Credit (FTC) allows you to claim dollar-for-dollar tax credits on any foreign income taxes you’ve paid, thereby reducing your US tax liability. If you’re a tax resident in one of the many countries where taxes are higher than in the US, this will result in surplus tax credits you can apply to future years.
Let’s say you owe $15,000 in US taxes to the IRS for your income earned in Portugal. As a dental surgeon, you’ve already paid $22,000 in Portuguese income taxes, so by claiming the FTC, you can earn $22,000 in US tax credits. This not only eliminates your US tax bill but also gives you a $7,000 credit toward future US tax bills (up to three years).
If you live in a country with low or no taxes, however, the FTC may not fully eliminate your US tax bill.
To qualify for the FTC, foreign taxes must be:
- Based on income
- Legal
- Paid or accrued
- Due by you, an individual taxpayer, specifically
Foreign Earned Income Exclusion (FEIE)
The Foreign Earned Income Exclusion (FEIE) is another provision that can offer tax relief for US expats. It allows you to exclude a portion of your foreign-earned income from taxation. For tax year 2023 (the taxes you file in 2024), the maximum exclusion is $120,000. For the 2024 tax year, the exclusion will increase to $126,500 to account for inflation.
Let’s say that you’re a web developer in Germany making $80,000 a year. Under the FEIE, you can exclude all of that foreign income from income tax — if you meet at least one of the following two tests:
Physical Presence Test
To pass the Physical Presence Test, you must prove that you’ve spent at least 330 full days outside of the US (within any consecutive 365-day window). Note that the IRS considers a whole day to be 24 hours, beginning and ending at midnight.
Bona Fide Residence Test
The Bona Fide Residence Test requires you to prove you’ve lived in a foreign country for at least one calendar year through official documentation. Some documents you can use to confirm your residency status include residence permits, foreign tax returns, and utility bills.
The FEIE has a few limitations:
- It doesn’t exclude self-employed expats from having to pay 15.3% in social security taxes
- It doesn’t apply to passive income (hence the “earned” in Foreign Earned Income Exclusion)
However, it is often a great option for those whose income is a) primarily earned and b) not subject to income tax abroad, or c) subject to lower income tax rates than in the US.
Foreign Housing Exclusion (FHE)
The Foreign Housing Exclusion (FHE) — or the Foreign Housing Deduction (FHD) if you’re self-employed — is a provision that allows expats’ housing expenses to increase their excludable foreign income. This makes it a great tool for US expats who earn more than the annual FEIE limit.
A few expenses that qualify for the FHE include:
- Rent
- Utilities
- Rental insurance
- Parking
To be eligible for the FHE, you must pass either the Physical Presence Test or Bona Fide Residence Test.
Tax treaties
Yet another option US expats have to minimize their tax liability are tax treaties. The US has signed tax treaties with dozens of other countries (including Canada, Mexico, and the UK) that prevent double taxation, at least in theory.
In practice, a “saving clause” that gives the US government the right to tax Americans as if the treaty didn’t exist renders most of it useless to US citizen taxpayers.
Many treaties outline exceptions to the saving clause, preserving certain benefits from the agreement. For example, an exclusion to the saving clause in the US-UK tax treaty, for example, allows US expats living in the UK to take a one-time, tax-free pension lump sum withdrawal. Other times, treaty benefits for students, teachers, researchers, and trainees survive the savings clause.
Totalization agreements
Totalization agreements can also help reduce the risk of double taxation. Like tax treaties, the US has totalization agreements with several other countries, including Canada, the UK, and most of the EU. These agreements prevent nationals of one country living in the other from having to pay social security taxes to both.
Which country you pay social security taxes in generally depends on how long you plan to stay there, but varies by the terms of each country’s specific agreement.
- 5 years or less: Pay US social security taxes
- Over 5 years: Pay social security taxes in your country of residence
In some situations, though, expats choose to pay social security taxes in their country of residence regardless — like if doing so gives them healthcare or pension benefits.
Pros & cons of dual citizenship from a tax perspective
As with anything, there are pros and cons to dual citizenship — especially if you’re a tax resident in your other country of citizenship.
When it comes to US expat taxes, some of the advantages include:
- Excluding foreign-earned income from taxation with the FEIE
- Getting dollar-for-dollar US tax credits on foreign income taxes
- Increasing the amount of income you can exclude from taxation with the FHE
- Claiming tax treaty benefits and totalization agreements
Some downsides include:
- Filing two tax returns
- Potentially paying taxes to two different countries
- Increased reporting requirements and more paperwork (e.g. FBAR, Form 8938)
File US expat taxes without the headache
Taxes for dual citizens can be tough.
Beyond potentially having to file tax returns and pay taxes in two different countries, navigating new foreign reporting obligations and tax breaks adds another level of complexity. The good news is that a skilled US expat CPA will help make the process as smooth as possible.
