What is Citizenship-Based Taxation?

3 min
Published on: 22-01-2024 Last modified on: 10-05-2024

Citizenship-Based Taxation?

Being Americans living abroad ourselves, we learned the hard way about US tax compliance, so we are now here to help you. Citizenship-Based Taxation (CBT) implies that U.S. citizens or permanent residents are taxed on their global income, irrespective of where they live or where their income is generated. This system, primarily used by the U.S., contrasts starkly with residency-based taxation systems.

How does citizenship-based taxation affect Americans living abroad?

CBT can significantly impact US persons living abroad. They face the dual burden of complying with U.S. tax laws while also fulfilling their tax obligations in their country of residence. This often leads to complex financial situations, where understanding and applying tax credits and exclusions becomes crucial.

Comparison of citizenship-based taxation in the U.S. and residence-based taxation in other countries

When comparing CBT with residency-based taxation, such as in Canada, the United Kingdom, and Mexico, the differences become clear. Under residency-based systems, taxpayers are only liable for taxes on income earned within that country, unlike the global income taxation under U.S. CBT.

Tax filing requirements for U.S. citizens living overseas

U.S. citizens abroad must adhere to specific tax filing requirements, declaring their worldwide income. Tools like the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC) are vital in reducing the risk of double taxation.

IRS policies for U.S. Citizens with foreign income under citizenship-based Taxation

The IRS has strict policies for U.S. citizens with foreign income under CBT. Navigating these rules can be challenging, and understanding the nuances of both U.S. and international tax laws becomes imperative.

Legal Challenges Against Citizenship-Based Taxation in International Law

CBT faces various legal challenges in international law, with debates about its fairness and implications for U.S. citizens living abroad.

Financial planning tips for U.S. Citizens subject to citizenship-based taxation while working overseas

Financial planning for U.S. citizens under CBT involves strategic approaches to minimize tax liabilities and ensure compliance, especially important for those working in different countries.

History and rationale behind the U.S. adopting citizenship-based taxation

The U.S. adopted CBT with the rationale that all citizens should contribute to the nation’s finances, regardless of their residence or income source. This policy has deep historical roots and continues to evoke debate.

Comparison of FATCA compliance requirements for U.S. Citizens in different countries

FATCA imposes varied compliance requirements for U.S. citizens based on the country they reside in. Understanding these differences is crucial for ensuring proper compliance and avoiding penalties.

Citizenship-Based foreign asset reporting

Besides income tax, U.S. citizens under CBT are often required to disclose their global assets, including foreign accounts and investments. Various reporting forms, like FBAR and FATCA, are part of this requirement.

What are the steps for renouncing U.S. Citizenship for tax purposes?

Choosing to renounce U.S. citizenship is a major decision, often driven by the desire to avoid the complications of CBT. This process involves legal steps and can also entail exit taxes. It’s a route that requires careful consideration and is often seen as a last resort.

Americans Overseas

We, the founders of Americans Overseas, were born in the Netherlands and obtained our American nationality through our (American) mother.

When we heard about the US tax system for the first time around 2013, we were in total disbelief (it can’t be true!), anger (how can they do this?), fear (am I going to get fined or pick up other problems?), and panic (what should I do?). 

It is (unfortunately) true that there is an additional American tax levy. But there’s no information from the local government, and when approached, the consulate referred us to the IRS, and the IRS was impenetrable.

That’s why we started this initiative to help people from all over the world by providing proper information about the US tax system to avoid unnecessary panic and offering help free of obligation and free of charge. If needed, we have a network of affordable professionals (accountants) who can help you with your Citizenship-Based Taxation obligations.

Contact us for more information