Don’t Worry, You Won’t Pay Double!
It wouldn’t be fair to actually pay tax on the same income in both countries, so there is a system of exemptions and tax credits available to US citizens and residents who are living abroad. These exemptions and credits are designed help taxpayers avoid paying income tax in both countries and on the same income. For example, the United States will allow you to exclude up to $92,900 for 2011 (plus certain housing costs) if you qualify for the Foreign Earned Income Exclusion. If your income is higher than this amount, there is a system of Foreign Tax Credits that allows you to take a credit for your foreign taxes against the US taxes on the same income. For non-earned income such as interest, dividends and capital gains, the treaty decides who gets the “first” right to tax this income.
Do You Need To File?
There is a common misconception among American expats that you do not need to file a tax return in the US if you earn less than the Foreign Earned Income Exclusion. This is not true! If your “gross” income (before taking into account the Foreign Earned Income Exclusion) is as low as $3,300 (Married Filing Separately) you may have to file a US tax return and report your worldwide income.
If you are interested in finding out more about the taxation of US citizens and residents living abroad, you can find a lot of information on the IRS web site: www.irs.gov. Some of the key forms and publications are:
Publication 54: Tax Guide for US Citizens and Resident Aliens Abroad Form 2555: Foreign Earned Income Exclusion Form 1116: Foreign Tax Credits Form TDF 90-22.1: Report of Foreign Bank and Financial Accounts.
This article has been submitted by David Colvin, CPA, CFP®. David is a Director at Maxim Global Wealth Advisors (www.maximadvisors.com), an independent firm delivering financial advice to globally oriented families in the U.S. and abroad. David is also President of CLVN (www.clvn.nl), a boutique expat tax and financial planning consultancy based in Amsterdam. David Colvin is a US Citizen and has been a resident of the Netherlands since 1998.