Are you an American for tax purposes or who needs to file a U.S. tax return?

Mar 12, 2018

Are you an American for tax purposes?

The U.S. law has different classifications of who and what is considered to be an American (officially, a U.S. person) for tax purposes and it’s important to check if you fall into any of the categories below, hence obliged to report your worldwide income to Uncle Sam.

The official term is “United States person” and it includes:

1. A U.S. citizen by birth:

  • You were born in the United States
  • You were born outside of the United States with at least 1 parent who is a U.S. citizen*

2. A resident alien of the United States if you meet one of the two tests:

  • A Green Card test
  • The substantial presence test for the calendar year

3. A dual citizen of U.S. and foreign country

4. Naturalised U.S. citizen

5. Any other person who isn’t a foreign person

Am I a U.S. citizen if I never lived in the U.S. but I was born there?

The U.S. citizenship laws are very complex and in most situations, anyone who was born in the United States or one of its territories will automatically receive U.S. citizenship. There is an exception to diplomats and other recognized government officials from foreign countries. Their children born on American soil are not subject to U.S. citizenship.

Case #1: Let’s talk about Emily. She was born to German parents in the U.S. while they were residing there for a work assignment. Once the work was over, they moved back to Germany and took 3-year old Emily and lived there ever since. Now Emily is a 25-year-old woman, who always considered herself to be German. When she decided to open a bank account, her financial institution informed her about FATCA law. They surprised her with the news that she is an American! Upon researching more on this subject, Emily learned that she indeed has tax obligations to the IRS.

Emily, in fact, is a U.S. citizen, so-called Accidental American, when an individual was granted U.S. citizenship by birth, but has never acquired a U.S. passport nor never really lived in the U.S.

Case #2: Rico was born outside the U.S. to an American father and Spanish mother. His parents decided to give him a dual citizenship. Even though he has never lived in the U.S., Rico is still obligated to report and pay U.S. taxes until he renounces his citizenship.

Even if Rico’s parents decided not to give him U.S. citizenship, children born abroad to Americans are generally automatically granted U.S. citizenship and hello there to tax burden!

Contact us if you want to get help with your tax situation or download free e-book “U.S. Taxes for Americans abroad”.

I am a Green Card holder, who doesn’t live in the U.S. anymore, am I still taxable?

You are a U.S. person for tax purposes if you are a Green Card Holder and you haven’t officially surrendered your residence card. It doesn’t matter if your Green Card is expired. If you haven’t given it up following all procedures, then you still have to file a U.S. tax return. And should do that until you perform one of the following actions depending on your status:

  1. To officially abandon your Green Card, an individual needs to file USCIS Form I-407 (Abandonment of Lawful Permanent Resident Status).
  2. If you are a long-term permanent resident (eight years or more), then you must file IRS Form 8854 (Initial and Annual Expatriation Information Statement) and you may be subject to Exit Taxes under IRC § 877A.

If you are a Green Card holder, who is residing abroad outside the U.S., you may qualify for Foreign Earned Income Exclusion and the Foreign Tax Credit to lower your tax bill.

So now as you learned about term “U.S. person for tax purposes”, you may have recognized yourself being in a similar situation or know someone who might be “pleasantly surprised” to hear that they actually have had tax obligations to Uncle Sam for a few years!

What about penalties then? The U.S. government is aware that there are tons of people who should be filing and paying taxes. They also take in consideration these guys simply might not even know about U.S. tax obligations. Therefore it lets Americans citizens come off clean to the IRS without any fines and penalties and in most cases even without any tax owed!

What should I do if I want to renounce U.S. citizenship?

It’s not surprising statistics that more than 4 in 10 Americans abroad wouldn’t rule out renouncing U.S. citizenship. And the main reason is the burden of U.S. tax rules. Even when U.S. expats don’t owe any tax, the obligation to file the annual U.S. expat tax return is burdening. It’s hard to keep up with so many different reporting requirements that come along, such as FBAR, FATCA etc.

There are more and more U.S. citizens who decided to renounce their U.S. citizenship: in 2016 the number was 5,411 versus 4,279 in 2015, which shows a 26% increase.

But even giving up your U.S. citizenship isn’t an easy or cheap process:

  1. You may need to pay an exit tax. It requires you to estimate your assets at fair market value and treat them as if you sold them the day before you became an expatriate.
  2. There is a renunciation fee. The process was free until July 2010, when a $450 fee was established. In September 2014, they increased the fee to $2,350. And it was justified as a “true reflection of the processing costs”.

In order to renounce your U.S. citizenship, you need to have a second passport (citizenship of another country). You need to bring this with you to the renunciation appointment. What if you don’t have a second passport? The State Department will deny anyone the right to renounce their U.S. citizenship.

You need to seek a professional expat lawyer’s help to start the process and book your appointment. Renouncing your U.S. citizenship is a serious, life-affecting step to take. Therefore, you need to look at all the pros and cons that you will have afterward. 

If you have any further questions, contact us now and we will get back to you within 24 hours.

Remark: *You were born outside of the United States with at least 1 parent who is a U.S. citizen 

It is important to mention the time requirement as it does not always apply:

“Birth Abroad to One Citizen and One Alien Parent in Wedlock”

A child born abroad to one U.S. citizen parent and one alien parent acquires U.S. citizenship at birth under Section 301(g) of the INA. It happens provided the U.S. citizen parent was physically present in the United States or one of its outlying possessions for the time period required by the law applicable at the time of the child’s birth. For birth on or after November 14, 1986, a period of five years physical presence, two after the age of fourteen, is required. For birth between December 24, 1952, and November 13, 1986, a period of ten years, five after the age of fourteen, is required for physical presence in the United States or one of its outlying possessions to transmit U.S. citizenship to the child.) The U.S. citizen parent must be the genetic or the gestational parent and the legal parent of the child under the local law at the time and place of the child’s birth to transmit U.S. citizenship.”

U.S. Taxes For American Expats E-book

FREE U.S. Tax Guide for Americans Abroad

The only e-book about U.S. Expat Taxes you need to read! Covers

1. Foreign Tax Credit vs. Foreign Earned Income Exclusion

2. The Additional Child Tax Credit. Get a $1,400 refund!

3.  What happens if I don't file?

and more...

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