Case Study: Taxation of Dual Citizens

IRS Dual Citizenship Taxes

Many expats wonder how much dual citizenship taxation can be impacted depending on where you live. To help answer this age-old question, our accountants developed a hypothetical tax comparison of two expats with the same salary to find out how much where you live affects your taxation of dual citizens.

US Citizenship: Keep or Drop?

The underlying issue for expats is: how does my location affect my taxation of dual citizens? The answer can be complicated but is best illustrated by reviewing the tax filings of two different dual citizens. One of our hypothetical taxpayers, Joan Q. Taxpayer, is a dual citizen of the UAE and the US. Her cousin, Jane Q. Taxpayer, is a dual citizen of the UK and the US.

Taxes for Dual Citizens in the UAE

First, we’ll tackle Joan’s scenario. Something to note: there is currently no personal income tax in the UAE. As such, there are no individual tax registration or reporting obligations. However, in the case of a dual citizen (or even expatriate), the US taxes the income of its citizens and residents without regard to where they are working or living, meaning you could have a US tax liability arising from the income you earned in the UAE.

Assume Joan is single, works for a company in the UAE, and earns the equivalent of $150,000 annually. For 2019, Joan’s US taxation would be as follows:

After taking into consideration the $105,900 Foreign Earned Income Exclusion (for 2019), and the $12,000 standard deduction for the single filing status, Joan’s taxable income would be $32,100. The resulting tax (and that amount due in the US) would be $7,704.

In the UAE, Joan would pay no income tax. In this instance, the “cost” of US citizenship is nearly $8,000 for the year.

Taxes for Dual Citizens in the UK

Now, assume that cousin Jane Q. Taxpayer is also single, and a dual citizen of the US and UK. Her US tax liability would be the same as the above example. Now, hold that thought as we evaluate the UK tax.

The UK, unlike the UAE, will tax Jane. After taking into consideration the UK tax-free allowance (similar to the US standard deduction) of approximately $8,333 (varies by exchange rate), the UK tax on the remaining income will be roughly $47,000, which doesn’t include the UK National Insurance tax, which is another approximately $8,300 more!

So you may be thinking that dual citizen Jane will have a huge tax bill on both sides of the pond. However, that isn’t the case. Since the US offers a Foreign Tax Credit which can be used to offset tax due in the US with tax paid abroad on the same income, the US tax owed will be reduced to $0.

In this instance, the “cost” of US citizenship is effectively nothing.

As you can see, the tax-related cost of US or dual citizenship is complex. However, in most situations, the foreign tax rate is higher, so through the FEIE or the foreign tax credit, no US tax is typically due—but the tax return must be filed to report the income.

Greenback Accountants Are Experts on the Taxation of Dual Citizens

Tax calculations for dual citizens can be complex, and they vary based on individual circumstances. If you’d like professional guidance on your unique situation, please get started with Greenback today!