According to a recent New York Times article,[1] the current pandemic in the United States 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—the better informed you are, however, 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 United States need to consider while living abroad.

Working and owning property in two countries creates extra tax reporting requirements. The burden posed by double taxation needs to be weighed against the benefits of a second citizenship and residence. If you consider that the time and outlay associated with your U.S. tax burden is effectively now doubled, you realize that this is a lengthy and complex process. Bound by the laws of two countries also means being bound by an obligation to pay taxes in two jurisdictions. An international tax expert can prove to be of great assistance in this area because he or she would be aware of deductions, credits, and tax treaties to help lighten your tax burdens so as not to be overtaxed. Irrespective of retained professional help, you still need to understand the complexities that being bound by the jurisdiction of two tax systems poses for you.

The recordkeeping burden can be immense. If you are traveling to and from the United States, you need to divide the time spent in and out of the United States 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 comprehensive travel calendar for your records. This is because meeting the requirements for the exclusion requires qualifying for either the bona fide residence (BFR) test or physical presence test (PPT).

U.S. 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 United States 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 United States 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 United States. Other factors considered are the presence of family abroad, whether the U.S. home has been sold or is being rented, U.S. and foreign social ties, and the status of the resident in the foreign country. Because dual citizens retain a passport in the resident country, they 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 dual citizens if they travel back and forth to the United States. 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; yet in Sweden, for example, 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 United States 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 U.S. 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 advisor in the United States.  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 U.S. passports if they become seriously delinquent on their tax debt. Passport confiscation can occur if the taxpayer owes more than $52,000 in back taxes. If a dual citizen should forget to report 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 hypervigilance in maintaining a high level of acquiescence to both countries’ rules and regulations, to avoid impairing 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. 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 United States has prompted individuals to execute their plans to move abroad without further delay. In making the move abroad, many U.S. citizens are reluctant to give up their American 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 sketch of the complexity international taxation poses for the dual citizen who is a U.S. citizen and a citizen elsewhere.  Being informed and retaining experienced professional help are the necessary steps that help you fulfill a desire for global relocation.

 Alicea Castellanos, CPA, is the CEO and Founder of Global Taxes LLC. She has more than 17 years of experience in U.S. taxation of individuals from around the world. Prior to forming Global Taxes, she founded and oversaw operations at a boutique tax firm and worked at a prestigious global law firm and CPA firm. Ms. Castellanos specializes in U.S. tax planning and compliance for non-U.S. families with global wealth and asset protection structures that include non-U.S. trusts, estates and foundations that have a U.S. connection, as well as foreign investment in U.S. real estate property.

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 names or situations have been made up for illustrative purposes — any similarities found in real life are purely coincidental.