Tax 101: U.S. Tax Compliance for Young Adults with Dual Citizenship – Tax authorities

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INTRODUCTION

It is not uncommon for a young adult born in the United States to non-citizen parents temporarily living in the United States to live abroad. Although they may never have returned to the United States, the young person is a US citizen and this status carries US tax obligations. In many cases, young adults may not have had personal income or assets, and therefore may not have had reason to file a US tax return. As these young adults graduate from college and enter the workforce, or become the recipients of gifts and bequests, the issue of U.S. tax filing obligations becomes more important.

Consider Mrs. A, a typical young adult, born in the United States but living abroad. She may have a bank account in a foreign country, but usually will not have her own source of income. At some point, Mrs. A may receive gifts and bequests from her foreign parents or grandparents. At this point in her life, Mrs. A’s tax compliance obligations in the United States become complex. Due to her fact pattern, she faces many complex reporting obligations simply because she resides abroad and nearly all of her employment income, investment earnings and family gifts may need to be reported to the IRS. Additionally, breaches of compliance can result in severe penalties. Mrs. A’s family may wonder if she should give up her US citizenship. Taking this action triggers other tax liabilities and is not a simple solution in many cases.

This article discusses Ms. A’s US tax obligations and suggests two routes out of the US tax system, depending on her age.

US INCOME TAX

The most important filing will be Form 1040 (U.S. personal income tax filing). All US citizens are required to report their worldwide income and pay income tax to the IRS, regardless of their place of residence. Although the due date for this statement is usually April 15 of the following year, if Ms. A resides outside the United States and works or attends college full-time outside the United States, she may qualify for an automatic two-month extension. to file a tax return. This automatic extension of the filing date does not extend the deadline for payment of the fee. Interest will be due for amounts not paid by April 15.

If someone who lives outside the United States is unable to file a return at the end of the two-month extended period, they can request an automatic four-month extension by filing Form 4868 (Application for Automatic Extension of the Filing Deadline for U.S. Personal Income Tax Returns) no later than June 15 following the close of the tax year. If filed on time, the tax return is due no later than October 15. In addition to the extension until October 15, taxpayers based outside of the United States can request an additional two-month discretionary extension to file tax returns until December 15. It is customary for the IRS to grant the extension. If for some reason the IRS denies the request, it nevertheless extends the due date for the return up to 10 days from the date of denial.

The young adult may be required to make estimated tax payments during the year on Form 1040-ES. Estimated tax rules apply a pay-as-you-go tax system and are the method used to pay income tax that is not subject to withholding in the United States, i.e. income other than wages. This includes self-employment income, interest, dividends, rent, gains from the sale of assets, prizes and awards. If the taxpayer does not pay enough estimated tax throughout the year, the IRS will impose a penalty based on the interest rates set by the IRS for the late payment.

FOREIGN INCOME AND TAXES

If another country imposes tax on Mrs. A’s income, the United States will allow her to claim a foreign tax credit for taxes paid to that other country. Foreign tax credit calculations are made on Form 1116 (Foreign tax credit (individual, estate or trust)). Note that income taxed by the foreign country must be considered foreign source income under US tax concepts for the credit to provide a benefit. Changes to IRS regulations applicable to foreign tax credits require a jurisdictional nexus between income and foreign tax. Even if the connection exists, US law generally does not allow the foreign tax credit to offset US tax on US source income.

If Ms. A resides and works abroad, a foreign earned income exclusion and a deduction or exemption for foreign accommodation amounts may be available to her when calculating her taxable income. Form 2555 (Income earned abroad) is used for this purpose. If certain conditions are met, an individual can exclude up to $112,000 of income earned abroad in 2022. In addition, up to $15,680 can be excluded or deducted in 2022 for the overseas accommodation amount. foreign. The maximum amount of these foreign benefits is adjusted each year to take inflation into account.

To claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, Ms. A must meet the following three conditions:

  • Its tax domicile must be located in a foreign country. A tax household is the general area of ​​a person’s principal establishment, employment, or workplace, regardless of where they maintain a family home. If a person does not have a regular or main establishment due to the nature of their work, their tax domicile may be the place where they regularly live. If she has neither a regular or principal place of business nor a place where she regularly lives, she is considered to be itinerant and her tax domicile is where she works at a given time.

  • She must have income earned abroad.

  • She must be either (i) a US citizen who is authentic resident of one or more foreign countries for an uninterrupted period comprising an entire taxable year, generally January 1 through December 31, or (ii) a U.S. citizen who is physically present in a foreign country for at least 330 full days as of during any period of 12 consecutive months.

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The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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