The United States is one of few countries in the world that recognizes citizenship for income tax purposes instead of residency. As a result there are many individuals living in foreign countries that may not understand their responsibility for filing income tax returns in the U.S.
The U.S. Government imposes income tax on U.S. persons based on their worldwide income. The following is considered to be a U.S. person for tax purposes:
- A citizen born in the United States or outside with at least one parent who is a U.S. citizen
- A naturalized citizen
- A resident of the United States for tax purposes if they meet either the green card test or the substantial presence test for the calendar year
- Anyone else who is not a foreign person
The rules are complex, and anyone who is born a U.S. citizen or considered to be one under national law is subject to tax unless they renounce their citizenship. This includes those with dual citizenship that have never lived in the country.
Please note that even though filing a tax return may be required the taxpayer may be eligible for certain exclusions and credits on foreign earned income that may reduce or eliminate any U.S. income tax liabilities.
In addition to filing an income tax return the taxpayer may also be required to file a Report of Foreign Bank and Financial Accounts (see my article “What Is the FBAR?” dated March 19, 2019).