An American abroad: Beware of the double taxation trap

American citizens are sometimes surprised when they realise that even if they are not living in the United States, they must still file tax returns there. Blue Umbrella tells us what to look out for.

If you are a U.S. citizen or what they call a “resident alien”, you must still file your income, estate and gift tax returns with the Internal Revenue Service (IRS). Your worldwide income is subject to U.S. income tax reporting, regardless of where you live, and you must file the required documents even if you do not have to pay any tax. 

Not only do you need to let the IRS know about your income, investments and transactions outside the United States - you may also have obligations in your former state and even the city where you used to live.

Rulings

Fortunately, the U.S. tax system has some special possibilities for excluding or deducting certain costs based on double taxation treaties with the Netherlands, and you have an automatic extension of two months to file your returns each year. This means that you have until June 15 to file without incurring a penalty on any payments due, instead of April 15 (although interest will be calculated from that April deadline).

As an expat, you are eligible to claim a foreign earned income exclusion (FEIE), or section 911 exclusion. This means that you can exclude income earned abroad up to a threshold of 107.600 USD in 2020 (with the amount adjusted annually for inflation). You may also be able to exclude your foreign housing expenses from the income that is liable for American tax if you meet certain requirements.

For this benefit, you must have income earned abroad, your “tax home” must be somewhere outside the United States, and you must meet either a “residence” test or a “physical presence” test: you need to be an official resident of a foreign country or countries for a full, uninterrupted tax year as a minimum, or you need to be present there for 330 full days during 12 consecutive months.

Investments

Income isn’t the only thing you need to think about: you will also need to provide information about foreign bank accounts if they are worth more than 10.000 USD at any time in a calendar year. You may also need to fill in a statement about specified foreign investments if they exceed certain thresholds, measured on the last day of the tax year, or at any time during the year. Fortunately, another agreement between the Netherlands and the United States means that if you pay social security tax here, you are exempt in the States.

Penalties

What if you’ve missed previous years? Again, this is not a disaster if you employ the services of a tax advice expert with knowledge of both the Dutch and American systems. There are Streamlined Filing Compliance Procedures so that you can correct any unreported offshore and foreign assets, and you may qualify for a special penalty relief or waiver and avoid a stiff fine.

Having past due tax returns is a serious issue with the IRS. The IRS keeps a record of taxpayers who are required to file but don’t. Based upon prior tax records, the IRS may file a return for you without any credits or deduction in your favour and this so-called substitute tax return will result in (additional) taxes and fines.

Blue Umbrella offers fixed-fee services to help you work out and file your U.S. taxes, from a 299 euros basic fee for federal taxes (including VAT) and 150 euros per state.