In today’s increasingly internationalized society, many people hold dual citizenship. However, there are unique tax complications associated with dual citizenship. In particular, U.S.-born dual nationals often face complex tax issues because they are required to follow the U.S. tax system based on their citizenship.
Tax Issues Caused by U.S. Citizenship
The U.S. tax system imposes taxation based on citizenship. This means that U.S. citizens are obligated to report income earned around the world in the United States. Therefore, dual citizens born in the U.S. must file a tax return with the U.S. tax authorities (IRS), even if they live outside the U.S.
Even if you are not specifically required to pay taxes, the reporting requirements under the Foreign Account Tax Compliance Act (FATCA) and the Foreign Bank Account Report (FBAR) require you to report information about your financial accounts outside the U.S., even if you are a minor. This means that dual nationals are required to report to the U.S., even if they are minors. This requires dual nationals to go to great lengths to meet their obligations to the U.S. tax authorities.
Concerns about Opening a Financial Account
When opening a financial account outside the U.S., you will be asked the question “Are you a U.S. Citizen?”. This is due to the requirements of the U.S. tax system. This is because the U.S. Internal Revenue Service requires financial institutions in various countries to report their income and other information on U.S. citizens around the world. If you answer that you are a U.S. citizen, financial institutions must report this information to the U.S. tax authorities, which can make opening an account more complicated. Some financial institutions may be unwilling to open accounts for U.S. citizens.
This is not to say that U.S. citizens living abroad cannot open an account. In general, however, there may be restrictions on opening accounts online, opening foreign stock trading accounts, and trading certain products such as foreign stocks, foreign mutual funds, and foreign bonds.
The Complexity of Filing Tax Returns in Multiple Countries
Another major concern faced by dual nationals is the procedure for filing tax returns not only in their country of residence but also in the United States. The tax systems of the country of residence and the U.S. are different, and tax returns must be filed according to each system. For example, two different tax returns must be prepared, taking into account the impact of exchange rates.
There is also the risk of double taxation. Even if you pay income tax in your country of residence, you may have to pay tax on the same income to the U.S. tax authorities. To avoid this, it is important to take advantage of the tax treaties between the two countries and claim the foreign tax credit.
Some dual nationals living abroad may be puzzled as to why they would owe taxes to the U.S. if they are living abroad and paying taxes in that country and not working in the U.S. However, it is important to understand that the two countries are completely different. What must be understood is the difference in the taxation systems of the two countries. For example, if you live in the UK, Japan, or most EU countries, you will be taxed on a “country of residence” basis. In contrast, the U.S. has a “country of birth/nationality” taxation system. This is the difference between “Residency-Based Taxation” and “Citizenship-Based Taxation”.
A country such as Japan, which uses “Residence-Based Taxation,” collects taxes only from Japanese residents and not from Japanese citizens who live and work outside of Japan. However, the U.S. does not use residency-based taxation like Japan.
In countries such as the U.S., where taxation is based on citizenship, i.e., “Citizenship-Based Taxation,” as long as you are a U.S. citizen, you are required to pay taxes to the U.S. on your worldwide income, regardless of where in the world you reside. Therefore, a person born in the U.S. and living in Japan has the right to be taxed by both countries. This is troubling for dual citizens who may be subject to double taxation.
However, it is also important to understand that having the right to be taxed in both countries does not mean that the taxes paid by dual citizens are double. This is because, as mentioned above, there are “tax treaties” that are unique to today’s increasingly internationalized world. Japan and the United States have concluded the Japan-U.S. Taxation Convention. Dual nationals of Japan and the United States can benefit from the Japan-U.S. Tax Treaty and avoid double taxation. There are reasons to eliminate vague concerns such as “I don’t want to pay double taxes, so I might as well not file a tax return to one country…”.
Conclusion
The right information can allay your fears and anxieties. First, try to understand the tax systems in both countries. This will give you a sense of security. Regardless of the tax system, a country’s laws can change frequently. You may not have been able to choose which country you were born in, but you can choose how you want to live your life from now on. What country do I want to be a citizen of? In which country do I want to live? In which country do I want to build my wealth? What is my identity? To ask yourself these questions, you need to have a high-level understanding of both countries. Adults have a responsibility to each country. Dual citizens should remain calm and take the necessary steps to comply with any new laws or reporting requirements in both countries.
Reference:
U.S. Department of State – Bureau of Consular Affairs, Dual Nationality https://travel.state.gov/content/travel/en/legal/travel-legal-considerations/Relinquishing-US-Nationality/Dual-Nationality.html
Social Security Office: https://www.ssa.gov/
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CDH Cross-Border Practice specializes in tax consulting and filing services for Cross-Border individuals involved in the United States or abroad. Our mission is to address and clarify the myriad issues faced by these individuals daily. The challenges they encounter are diverse and intricate, encompassing not only the tax laws of their own countries and the United States but also immigration policies, life insurance, and retirement regulations. Our articles aim to demystify complex tax laws and regulations, making them accessible and understandable. However, it’s important to note that exceptions abound, and there is always the possibility that rules may have changed by the time you read this. For the most current practices, please visit our website. We also strongly advise consulting with tax and legal experts before taking any action.
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