Difference Between Residency-Based Taxation and Citizen-Based Taxation
American expatriates may be responsible for two sets of taxes. Countries have different tax codes and rules. Some may require you to pay taxes because you’re a citizen, others because you’re a resident. As a U.S. expatriate, it’s important to understand the taxes for which you’re liable.
There are two systems of taxation: residency-based and citizen-based. The former determines whether or not to tax a person based on where they live in the world. The latter helps a government determine taxation based on where a person has citizenship. The United States has citizen-based taxation laws. So, even if you no longer live in America but you retain citizenship, you will still have to pay U.S. taxes under the citizen-based taxation system. Depending on the system of your country of residence, you may have to pay dual taxes. Especially for U.S. expatriates, it’s important to know what taxes you’re liable for.
US Tax Help focuses on aiding expatriates in filing their American taxes. We know that filing taxes can be confusing, especially for expats who must file in two countries. Our experienced CPAs can help you navigate the filing process and inform you about certain benefits you might be eligible for as an expat. Call US Tax Help today to make tax season stress-free at (541) 362-9127.
Does the United States Use Residency-Based Taxation or Citizen-Based Taxation?
Every country has different tax codes to determine whom to tax and how much. However, most countries are guided by residency-based taxation. Still, some, like the United States, abide by citizen-based taxation. Understanding the difference between the two taxation systems can be helpful for expatriates living in another country.
Residency-based taxation is perhaps the most ideal for expatriates. This system takes into account where you live, not where you hold citizenship. For example, say you were born in Australia. You still hold citizenship there, but now you live in America. If your country of origin follows residency-based taxation, you would no longer have to pay taxes there while you reside in another country.
Residency-based taxation is appealing to expatriates because when you reside in another country, you will likely have to pay taxes there, too. In this system, you’d only have to pay taxes to your country of origin on any income earned there. By adopting residency-based taxation, countries receive taxes only from residents, not citizens living and working elsewhere. However, the United States doesn’t follow residency-based taxation.
Expatriates who live outside of the United States still have to pay taxes in America. A country with citizen-based taxation requires all citizens to pay taxes on their worldwide income, regardless of residence. That can be particularly frustrating for U.S. expatriates who may be required to pay dual taxes. Because the United States follows citizen-based taxation, American citizens who live overseas still need to pay taxes in the United States. So, if you’re a U.S. expatriate who has retained your citizenship, you will still be taxed on your worldwide income, not just income earned in America. When you decide to move out of your country of origin, check its taxation system to prepare accordingly.
The difference between citizen-based taxation and residency-based taxation is significant. It could mean paying income tax twice or once, depending on your country of origin and where you currently live. That’s why it’s important to work with a trusted certified public accountant. The CPAs at US Tax Help can aid you in filing American taxes while overseas. You may be eligible for additional benefits and credits to lower your tax return or increase your tax refund.
How Does Citizen-Based Taxation Affect U.S. Expatriates?
Expatriates living overseas should know that citizen-based taxation is employed in the United States. That means that regardless of where you live, you’ll have to pay federal income tax if you’re an American citizen. That may cause you to pay taxes twice. Once in the United States, and again in your country of residence. If that’s the case, it’s important to know what benefits or credits you may be eligible for as an expatriate.
Foreign Earned Income Exclusion
Though the United States subscribes to citizen-based taxation, it has some mechanisms in place to minimize taxes for expatriates. The Foreign Earned Income Exclusion benefit allows for a certain amount of your income earned outside of the United States to be deducted from your taxable income. For example, in 2021, the cap for this benefit is $108,700 per person. Say you earned $200,000 a year from your foreign job. From that $200,000, $108,700 would be deducted, meaning you would only be taxed on $91,300 in the United States. Any income earned in America is taxable. For example, say you work for an American company remotely while overseas. In that case, your entire income would be taxable. If you qualify, the Foreign Earned Income Exclusion benefit can greatly reduce your taxable income for your American taxes.
Foreign Tax Credit
As an expatriate, you’ll likely have to pay taxes in your country of residence. The Foreign Tax Credit allows for the equivalent of every American dollar paid in taxes to your country of residence to act as a credit for your American taxes. Say you paid the equivalent of $100 in taxes to your country of residence. That amount would act as a credit to your required American taxes for the same tax year. The qualifying taxes for the Foreign Tax Credit are income, war profits, and excess profits taxes, among others. So, not every tax paid in your country of residence would qualify for the Foreign Tax Credit. A CPA can help you navigate these confusing benefits, like the Foreign Tax Credit, and help you to pay the appropriate amount of taxes as an expatriate.
Call US Tax Help for CPA Service Today
If you’re an expatriate who needs help filing your American taxes overseas, our CPAs can help. Call US Tax Help today to navigate tax season as an American expat at (541) 362-9127.