When you are a citizen of the United States, Uncle Sam expects you to pay taxes – no matter where you live. It is also true of dual citizens. If you have dual citizenship, even if you aren’t a US resident, you are still supposed to file a tax return and pay taxes in the United States. The United States is one of the few countries to tax their citizens living abroad. It has lead to some giving up their US citizenship.
Filling a Tax Return as a Dual Citizen
The chances are that you will have to pay taxes in your country of residence, as well as in the United States. If you have US citizenship in any form, you are required to file a federal income tax return (Form 1040) for tax years in which your gross income is equal to or greater than your exemption amount and standard deduction.
To determine what exemption amounts apply, as well as what the standard deduction is, you can check with IRS Publication 501. You are required to report your entire income, no matter what country it comes from. So, you add up all of your income, from all sources, and figure out how much you owe to the US government as a citizen.
If you don’t file a tax return, or pay taxes, you will be assessed tax penalties. There are cases in which you can avoid penalties, but, for the most part, you are required to file your tax return or face the penalties. Only when your gross income is less than the amount of the applicable exemption and standard deduction can you avoid filing a tax return.
In some cases, you might not be charged a penalty, even though they should have paid. When determining whether to assess the penalty for failing to file as a dual citizen, the IRS will consider the following:
- Reasons offered for not meeting your obligation
- Whether you have been subject to the tax before
- Past compliance with US tax law
- Circumstances you can’t control
- Former penalties for failure to file or pay
- Whether you should be expected to know about specific tax changes
- The complexity involved with the particular tax issue
Foreign Income Exclusion, Tax Credit, and Housing Deduction
The good news is that, even though you have to report all of your worldwide income, Uncle Sam isn’t necessarily going to tax you on all of it. You do receive some credits and exclusions for income from other countries. There is a foreign earned income exclusion, which means that you might not be taxed on some of your foreign income, up to certain amounts, which are adjusted for inflation (for 2012 you can exclude up to $95,100 in foreign income).
In addition to the income exclusion, you might also be eligible for a foreign tax credit. The foreign tax credit applies when you pay taxes on your foreign income to another country. This tax credit can reduce what you owe to the United States. There is also a foreign housing deduction if your tax home is in a different country, and you meet the requirements for a residence test.
While you do owe taxes to the United States as a dual citizen, the IRS does make allowances for the fact that you might have foreign income, and pay taxes in another country as well. Double-check with the IRS or a knowledgeable tax professional to find out what your requirements are as a dual citizen.