Americans living abroad are required to file US taxes and it can be confusing. Hugo Lesser of Bright!Tax gives some pointers on how to make the best of no-one's favorite chore – filing taxes!
Living in the Netherlands is a wonderful experience, thanks to the laid-back culture, the friendly people, the architecture and history. And let’s not forget the rest of Europe is on your doorstep!
Americans living abroad are still required to file US taxes though, reporting their worldwide income. Many expats aren’t aware of this requirement, so they find themselves having to catch up to avoid fines. In this article, we’ll outline six, well, perhaps five-and-a-half, strategies to help American mamas and papas living in the Netherlands not only to avoid fines, but also to reduce their US tax liability (often to zero), and hopefully claim some tax refunds or credits, too.
Americans living abroad are still required to file US taxes though, reporting their worldwide income. Many expats aren’t aware of this requirement.
1. Know the rules
The US taxes on citizenship rather than residence, so if you are an American citizen or green card holder, you still have to file and report your worldwide income if you earn more than $10,000 a year (or just $400 in self-employment income), wherever in the world you live.
Expats have until June 15th to file though, and they can request a further extension until October 15th, if need be.
Expats in the Netherlands may also need to report their foreign bank or investment accounts by filing a Foreign Bank Account Report (FBAR) if they had at least $10,000 in total in foreign bank and investment accounts (including any accounts they have any control over or may benefit from, such as business, joint or trust accounts) at any time during the tax year.
2. Avoid fines by catching up if you’re behind
Penalties for not filing, and in particular not filing FBARs, are steep, and since FATCA (the 2010 Foreign Account Tax Compliance Act), foreign banks and investment firms are reporting their US account holders directly to the IRS. So the IRS knows which expats should be filing and reporting, meaning it makes sense to catch up voluntarily before they come to you.
Expats can simply back-file up to 2 years of tax returns and FBARs. Expats who are more than 2 years behind though should consider catching up using the IRS Streamlined Procedure Amnesty Program.
3. Avoid paying US taxes by claiming one or more exemptions
While the US has a tax treaty with the Netherlands, it only protects American students, teachers, and researchers from double taxation, although there is a separate Totalization Agreement that prevents expats paying both US and Dutch social security contributions.
Expats can claim one or more exemptions that prevent double taxation when they file.
The Foreign Earned Income Exclusion allows expats who can prove either that they are a permanent resident of the Netherlands, or that they spent at least 330 days outside the US in a tax year, to exclude around the first $100,000 of their earned income from US taxes.
The Foreign Earned Income Exclusion isn’t applied automatically but must be claimed by filing form 2555 with your federal return. But it isn’t necessarily the best option.
Expats who pay more tax in the Netherlands than they owe to the US may be better off claiming the Foreign Tax Credit instead, which gives a $1 US tax credit for every dollar of tax paid abroad.
4. What to do if you’re married to a foreigner
If you’re married to a foreigner, whether you check "married filing jointly" or "separately" on your federal tax return can make a big difference.
If you check "married filing jointly", your spouse becomes a US taxpayer. This is sometimes advantageous and sometimes not. If, for example, your spouse isn’t earning and doesn’t have income or assets that could become liable to US taxes (and they won’t inherit any later), filing jointly gives you double the Standard Deduction (which is going to increase anyway as part of the new Tax Reforms), and double the Foreign Earned Income Exclusion limit.
If on the other hand, if your spouse is the main earner, or has (or will have) assets that may be liable to US taxes, it’s better to check "married filing separately" and leave them out of the US tax system altogether.
5. Claim child credits
Child Tax Credits can’t be claimed in addition to the Foreign Earned Income Exclusion, so working expats may consider claiming the Foreign Tax Credit instead, assuming that they’re paying taxes in the Netherlands and that this will also eliminate their US tax liability.
If so, and so long as their children are US citizens with either a US social security number or ITIN (Individual Taxpayer Identification Number), expat parents can claim the Additional Child Tax Credit, which gives a $1,000 dollar refund payment per child, even if no taxes were paid.
Parents with children aged 12 or under can also claim the Child Care Credit, giving a further $600 tax credit per child per year.
6. If in doubt, consult an expat specialist CPA firm
Expat specialist CPA firms typically save expats more money than they charge. Dealing with the ins and outs of expat taxes every day, they know how to file most beneficially for each situation.
Hugo Lesser works at Bright!Tax, a leading provider of US tax services to Americans living abroad. If you have any questions regarding your situation, don't hesitate to get in touch and Hugo and the Bright!Tax team will be happy to help.