- 1 How Becoming a Global Citizen is a Tax Trap
- 2 Worldwide Income/Citizenship-Based Taxation
- 3 Low-Taxed Country, Insufficient Tax Credits
- 4 FEIE is only for Earned Income & Housing
- 5 FBAR
- 6 FATCA
- 7 Current Year vs Prior Year Non-Compliance
- 8 Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
- 9 Golding & Golding: About Our International Tax Law Firm
How Becoming a Global Citizen is a Tax Trap
With political unrest around every corner, it is become more common for US taxpayers to consider obtaining a second citizenship or even a third citizenship as part of their Plan B. Unless a person has lineage or is being sponsored in whichever country they are considering additional citizenship, US citizens will often seek a golden visa through a citizenship-by-investment program in order to obtain additional citizenship. These CBI programs allow taxpayers to obtain citizenship in a foreign country without having to work or otherwise being associated with that country beyond purchasing the citizenship. The United States actually offers this type of program called the EB-5 Visa, which begins as an investment visa — and can culminate into a green card and then US citizenship. While having multiple citizenships may provide some peace of mind for the ‘what if’s’ of life, there are tax complications to be aware of. Here are five important tax implications of becoming a global citizen.
Worldwide Income/Citizenship-Based Taxation
The United States is one of the only countries across the globe the taxes US persons on the worldwide income. In addition, and especially if the US person is obtaining foreign citizenship by way of investment, they may be required to invest in various income generating assets in the foreign country. The United States were still tax income even if it is sourced overseas and never brought back to the United States.
Low-Taxed Country, Insufficient Tax Credits
Expanding upon the paragraph above, in many countries that offer citizenship-by-investment visas they have a low or nonexistent tax rate on personal income. Therefore, while the income generated in the golden visa country may not generate any taxable income in the foreign country, the United States will still tax income and the taxpayer will not have any foreign tax credits to apply to offset their US tax.
FEIE is only for Earned Income & Housing
Oftentimes, when taxpayers realize that they are going to be earning income overseas, they learn about the term Foreign Earned Income Exclusion and assume that they can exclude a portion of their foreign income. It is important to note, that the foreign earn income exclusion only applies to earned income and does not include items such as dividends, interest, or capital gains.
As a US person, if you have foreign bank and financial accounts overseas you are required to report this information to the US government on the annual FBAR. The form is required by US persons whether or not they are required to file a tax return (for example, because their income is below the threshold). Depending on how many types of accounts the person has and whether the accounts are single or joint – with a US person or foreign person — can make the reporting both intrusive and time-intensive. Moreover, the failure to file this one time we may result in significant fines and penalties.
FATCA refers to the Foreign Accountant Tax Compliance Act. When it comes to taxpayers with foreign assets, there are two main headaches involving this reporting requirement. The first issue is that similar to the FBAR, US persons you have ownership of foreign accounts and/or assets may be required to file the Form 8938 (FATCA) annual to disclose this information to the IRS. In addition, US citizens may find it very difficult to open accounts overseas if they are considered a US citizen — even if they are considered a dual citizen. This may lead some taxpayers to consider formally expatriating from the United States but this is another headache in another itself that may result in exit tax and ongoing taxes if the person is considered a covered expatriate and plans on giving gifts or bequests to US persons.
Current Year vs Prior Year Non-Compliance
Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.
Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to streamlined procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead of the Streamlined Procedures. But, if a willful Taxpayer submits an intentionally false narrative under the streamlined procedures (and gets caught), they may become subject to significant fines and penalties.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.
Contact our firm today for assistance.