November 15, 2020 – New York, United States

A Tale of Two Citizenships: Taxation of American Citizens with Dual Citizenship Living Abroad 

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According to a recent New York Times article,[1]the current pandemic in the US has created an uptick in the number of citizens applying for dual citizenship in other areas of the world.  With a focus on Europe, the author of the article notes that the laws for obtaining citizenship in European countries are favorable to those descended even several generations from their original ancestor immigrants.  Nonetheless, individuals contemplating such a move are faced with many challenges and obstacles that need consideration.  Each privilege offered by dual citizenship has a corresponding responsibility.  Complying with two countries’ rules and regulations can be a daunting undertaking.  However, the better informed you are, the better you are able to effectively handle balancing simultaneous allegiances.  A thorough treatment of all the challenges posed by dual citizenship is well beyond the scope of this essay.  Addressed here are solely those tax issues dual citizens from the US need to consider while living abroad.

The recordkeeping burden can be immense.  If you are travelling to and from the US, you need to divide the time spent in and out of the US for purposes of the foreign earned income exclusion and foreign housing deduction.  (In 2020, the exclusion is $107,600.)  It is vital to maintain a precise and all comprehensive travel calendar for your records.  This is because to meet the requirements for the exclusion requires qualifying for either the bona fide residence (BFR) test or physical presence test (PPT).

US citizens who establish a bona fide residence abroad for a certain uninterrupted period that includes a full taxable year, while maintaining their tax home in the foreign country, can claim the exclusion.  Further, a dual citizen needs to reference the tax treaty between the US and their resident country because a nondiscrimination clause may exist that qualifies them for the bona fide residence test.  As such, a taxpayer who falls under this treaty clause can claim the benefits of the foreign earned income exclusion.  Parenthetically, a list of these countries appears in Revenue Ruling 91-58, 1991- 2 C.B. 340.  Further, uninterrupted does not necessarily require an actual physical presence.  This is because the taxpayer can make trips back and forth to the US as long as there is a clear intention to maintain the foreign residence.  However, factors such as the nature, extent, and reasons for the temporary absence from the foreign home are taken into account.

One’s intent is measured on a facts and circumstances case by case basis.  A bona fide residence does not include domicile, which is a legal word meaning fixed and permanent.  A dual citizen can therefore maintain a bona fide residence in the second country abroad while retaining domicile in the US.  Other factors considered are the presence of family abroad, whether the US home has been sold or is being rented, US and foreign social ties, and the status of the resident in the foreign country.  Since the dual citizen retains a passport in the resident country, he or she would not be hard pressed to prove intent and as a consequence, qualify for the exclusion.

Qualifying for the physical presence test may pose a greater burden to prove for the dual citizen if they travel back and forth to the US.  This is because the test requires residency in the foreign country for 330 full 24-hour days in a 12-month period.  It is almost definite that a person who obtains dual citizenship and moves abroad will remain there for the requisite period of time.  But it can be very easy to fail the test if the 330-day period is broken up even if the reason is for illness, family problems, a vacation, or an employer’s orders.

Dual citizens who become self employed in their second country may be under the false notion that they will be allowed to include self-employment earnings as income earned abroad to qualify for the earned income exclusion.  Yet, a dual citizen residing abroad and working as a freelancer, independent contractor, or sole proprietor still needs to pay for Social Security and Medicare taxes if earnings are $400 or more.  The main issue affecting the amount of the self-employment tax owed is the country of residence.  Deadlines differ greatly from country to country.  Self-employment tax rates also differ such that if you live as a citizen of United Arab Emirates you owe nothing, and in a country like Sweden your self-employment comes with a 40% tax bill.  It behooves a self-employed dual citizen to investigate whether a totalization agreement exists between the US and the resident country because in such an instance, there is allowance for the coordination of both countries’ social security and benefit payment tax provisions.

Another complicated aspect of moving abroad is the purchase of property.  In general, the purchase of real estate abroad is not a taxable event.  Additionally, an expat can deduct mortgage interest and points as long as the amounts are converted to dollars.  In purchasing the property abroad, a US dual citizen should consider exchange rates of the dollar and the local currency.  This is because money will go further in a country with a weak currency exchange rate against the dollar.  In coordinating the purchase of a property in the foreign country, it is best to retain a local tax expert to work with your tax adviser in the US.  In this way, a correct determination will be made whether such an ownership triggers a filing requirement and needs to have withholdings done.

As presented so far, it can be reasoned that the dual burden of taxation and its associated compliance requirements leaves room for errors.  To that end, the IRS has cracked down on persons holding US passports if they become seriously delinquent on their tax debt.  Passport confiscation can occur if the taxpayer owes more that $52,000 in back taxes.  If a dual citizen should forget to report their foreign accounts by not filing a form called the FBAR, there is the potential to be penalized $10,000 for each violation.  The extra compliance burden for a dual citizen requires a hyper-vigilance in maintaining a high level of acquiescence to both countries’ rules and regulations so as not impair citizenship status in either country.

By way of explanation, FBAR stands for Foreign Bank Account Reporting and was introduced by the Bank Secrecy Act of 1970 with the intent of discouraging tax evasion by taxpayers hiding of their assets overseas.  The form is filed with the Financial Crimes Enforcement Network if assets during the year at any given time in foreign bank accounts exceed $10,000.  Another form, entitled Statement of Foreign Financial Assets Form 8938, and in endearment referred to as the FATCA form which stands for the Foreign Tax Compliance Act, requires reporting of foreign assets to the IRS with the filing of the income tax return if the total value of those assets is more than $200,000 on the last day of the year or $300,000 at any point during the year for a single taxpayer living abroad, there are other thresholds to keep in mind and that is why it’s important you check with an expert in this area.

The precarious time we are experiencing during this pandemic here in the US has prompted individuals to execute their plans to move abroad without further delay.  In making the move abroad, many US citizens are reluctant to give up their US citizenship while at the same time becoming a citizen of their resident country.  There is nothing intrinsically wrong in being the citizen of two countries and this is demonstrated by the fact that countries have allowances for just such arrangements.  Nevertheless, relocating within a global environment has associated logistical, legal, and tax complications that must be considered before making such a move.  The information presented here is a thumbnail’s sketch of the complexity international taxation poses for the dual citizen who is a US citizen and a citizen elsewhere.  Being informed and retaining experienced professional help are the steps necessary to not deter you from fulfilling a desire for global relocation.

About the Author 

Alicea Castellanos is the CEO and Founder of Global Taxes LLC. Alicea provides personalized U.S. tax advisory and compliance services to high net worth families and their advisors. Alicea has more than 17 years of experience. Prior to forming Global Taxes, Alicea founded and oversaw operations at a boutique tax firm, worked at a prestigious global law firm and CPA firm. Alicea specializes in U.S. tax planning and compliance for non-U.S. families with global wealth and asset protection structures which include non-U.S. trusts, estates and foundations that have a U.S. connection.

Alicea also specializes in foreign investment in U.S. real estate property, and other U.S. assets, pre-immigration tax planning, U.S. expatriation matters, U.S. persons in receipt of foreign gifts and inheritances, foreign accounts and assets compliance, offshore voluntary disclosures/tax amnesties, FATCA registration, and foreign companies wanting to do business in the U.S. Alicea is fluent in Spanish and has a working knowledge of Portuguese.

Alicea is an active member of the Society of Trusts & Estates Practitioners (STEP), the New York City Bar, the New York State Society of Certified Public Accountants (NYSSCPAs), the American Institute of Certified Public Accountants (AICPA) and the International Fiscal Association (IFA).  She is the New York/Northeast Regional Representative of the Women of IFA Network (WIN). Distinctly, in 2020, Alicea was awarded with a prestigious NYSSCPA Forty Under 40 Award. She was selected as someone that has notable skills and is visibly making a difference in the accounting profession.

Please note: This content is intended for informational purposes only and is not a replacement for professional accounting or tax preparatory services. Consult your own accounting, tax, and legal professionals for advice related to your individual situation. Any copy or reproduction of our presentation is expressly prohibited. Any names or situations have been made up for illustrative purposes — any similarities found in real life are purely coincidental.