Do Dual Citizens Pay Taxes in Both Countries?
If you’re a US citizen with dual citizenship, you’re required to file taxes with the US government, even if you live abroad. Does this mean you will have to pay taxes in both countries? It might — but it doesn’t have to.
This guide will help you understand the rules of dual citizenship taxes so you can navigate potential challenges to avoid paying taxes twice.
Key Takeaways
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- Dual citizens are often required to file tax returns in both countries.
- However, tax treaties and other benefits can be used to avoid double taxation.
- Using these benefits, most US dual citizens who live abroad can erase their US tax liability.
Tax Obligations for Dual Citizens
As a US citizen, your worldwide income is subject to US taxation, regardless of where you live. This is because the US is one of the few countries with citizenship-based taxation rather than residency-based taxation. In addition, most dual citizens who live abroad will also have tax obligations in their country of residence. This can lead to double taxation—being taxed by both countries.
For example, let’s say you’re a dual citizen of the US and Mexico. You are a resident of Mexico earning income from a Mexican employer. Because of this, you will have to file a Mexican tax return and pay taxes on your income. But because you are a US citizen, you will also have to file a US tax return reporting your worldwide income. In theory, this means you will be taxed twice on the same income — once by Mexico and again by the US.
The good news is that the US has a number of tax treaties and benefits in place to help dual citizens avoid double taxation. Using these methods, most dual citizens are able to erase their US tax bill entirely.
Tax Treaties and Their Impact
The US has agreed to tax treaties with many foreign countries. These treaties clarify which country has the right to tax dual residents and expats on different streams of income. This helps prevent dual citizens from being taxed twice on the same income. For example, under the US-Canada tax treaty, income earned in Canada may be exempt from US taxation.
When there is no tax treaty — or the treaty does not protect you from double taxation — there are other IRS benefits in place. These include:
- Foreign Earned Income Exclusion: Allows US citizens living abroad to exclude a certain amount of foreign income from US taxation (up to $126,500 in 2024).
- Foreign Tax Credit: A dollar-for-dollar credit based on any income taxes paid to a foreign government.
- Foreign Housing Deduction (or Exclusion): Allows expatriates to deduct or exclude housing-related expenses, such as rent, from their taxable income.
Using these benefits, most US dual citizens are able to reduce their US tax bill to zero. (Though you still have to file a US tax return every year, even if you don’t owe anything.)
If you have dependent children and are living abroad, you may still qualify for the Child Tax Credit. This credit can reduce your US tax liability, and in some cases, you may even get a refund.
Filing Taxes in Both Countries
If you’re an American citizen living outside of the US, you will likely need to file tax returns in both the US and the country where you reside. While the US taxes its citizens on worldwide income, many countries tax based on residency. Here’s a step-by-step guide.
1. Determine Your Residency Status
Your tax obligations vary depending on whether you’re classified as a resident or non-resident in your country of residence. For example, if you’re a dual citizen living in the UK, you’ll need to file a UK tax return for income earned there, in addition to your US return.
2. Complete US Tax Forms
US citizens must file a tax return every year using Form 1040. In addition to this, there are several other forms you may need (or choose) to file:
- FinCen Form 114 (Foreign Bank Account Report/FBAR): Required if you have over $10,000 in one or more foreign accounts at any point during the year.
- Form 8938 (FATCA Report): Required for disclosing foreign financial assets valued above certain thresholds.
- Form 2555: Used to claim the Foreign Earned Income Exclusion.
- Form 1116: Used to claim the Foreign Tax Credit.
3. File Taxes in Your Country of Residence
In addition to your US filing, you must follow the tax laws of your country of residence. Most countries use a residency-based tax system, meaning they tax the worldwide income of all residents. Each country’s tax filing requirements will vary, so it’s important to understand the local tax laws to ensure compliance.
4. Consider Working with an Expat Tax Professional
Navigating dual citizen taxes can be complex and time-consuming. Even a minor mistake could lead to costly penalties. An expat tax professional can help you:
- Ensure you are compliant with both US and foreign tax laws
- Maximize tax-saving opportunities like the Foreign Earned Income Exclusion and Foreign Tax Credit
- Avoid costly mistakes and penalties by accurately reporting foreign accounts and assets (e.g., FBAR and FATCA requirements)
- Gain peace of mind
Common Challenges (and How to Overcome Them)
Filing taxes as a dual citizen comes with several unique challenges that can complicate the process.
Double Taxation
One of the primary concerns for dual citizens is the risk of being taxed twice. By using the tax benefits mentioned above, you can avoid double taxation and protect your finances.
Complex Filing Requirements
Navigating multiple tax systems can be overwhelming. It’s easy to make a mistake. To avoid this, work with tax professionals. They can help ensure all forms are filed accurately and on time, avoiding penalties and fines.
Currency Exchange Complications
Converting foreign income and assets into US dollars for tax reporting can be complicated, especially with fluctuating exchange rates. Inaccurate reporting can lead to errors that result in audits or penalties. Always use IRS-approved exchange rates for conversions and keep detailed records of how foreign income was converted into US dollars.
Different Tax Years
The US tax year runs from January 1 to December 31, but not every country does the same. Not every country uses April 15 as their tax filing and payment deadline, either. This can create a mismatch in reporting timelines and make dual filing even more complex. Make sure you know the tax deadlines for both countries and seek extensions when needed.
FAQs
What happens if I don’t file a US tax return as a dual citizen?
Failure to file can result in significant penalties, especially for FBAR and FATCA reporting. In severe cases of intentional tax evasion, criminal charges may apply.
Do dual citizens pay taxes in both countries?
While US citizens must report their worldwide income, tax treaties and tools like the Foreign Earned Income Exclusion and Foreign Tax Credit can help prevent double taxation. Most countries, including the US, allow for foreign tax credits.
What are the filing deadlines for expats?
For most Americans, tax returns are due on April 15. Americans living abroad get an automatic two-month extension, pushing the filing deadline to June 15. However, an extension to file is not an extension to pay. Taxes owed are still due by the regular deadline of April 15.
What if I’m behind on my US expat taxes?
The IRS offers a tax amnesty program for US expats called the Streamlined Filing Compliance Procedures. This program allows Americans living abroad to catch up on their taxes without facing the usual penalties. To qualify, you must demonstrate that your failure to file was non-willful and file tax returns for the past three years, along with FBARs for the past six years.
What is an Accidental American?
An accidental American is someone who holds US citizenship but may not realize it and has lived most or all of their life outside the US. Despite having little to no connection to the US, accidental Americans are still required to file US tax returns and report foreign accounts under the same rules as other US citizens.
Will I always have to file a US tax return?
As a US citizen, you are always required to file a tax return on your worldwide income as long as your income is above certain thresholds, no matter where you live. The only way to avoid this obligation is by renouncing your US citizenship, which is a major decision with lifelong consequences (and is generally considered unwise for most individuals).
Get Help with Your Dual Citizen Taxes from Greenback!
Do dual citizens pay taxes in both countries? Sometimes, but not always. By using the right tax tips, you can reduce your US tax bill and avoid double taxation. Best of all, we can help.
No matter how complex your situation may be, Greenback can make it easy. Our team of CPAs and IRS Enrolled Agents — many of whom are expats themselves — will give you the one-on-one tax support you need. You’ll benefit from transparent, flat-fee pricing and a stress-free onboarding process, giving you peace of mind knowing that your taxes are done right.
If you’re ready to be matched with a Greenback accountant, click the get started button below. For general questions on expat taxes or working with Greenback, contact our Customer Champions.
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