The basics of U.S. tax law on worldwide income of U.S. Citizens
First in a series of short posts to cover international taxation of U.S. Citizens, expatriates, people with dual or more citizenship, and people with alien or green card statuses.
U.S. citizens must pay tax on worldwide income. The only way to change that is to no longer be a U.S. citizen. There are some common sense protections from double taxation. The IRS websites are quite helpful, for example FAQ on international tax matters at https://www.irs.gov/individuals/international-taxpayers/frequently-asked-questions-about-international-individual-tax-matters, and Information for U.S. Citizens or Dual Citizens Residing Outside the U.S. at https://www.irs.gov/uac/newsroom/information-for-u-s-citizens-or-dual-citizens-residing-outside-the-u-s. If you have been filing your 2555 or 2555EZ along with your federal tax forms, then you already know this. If you have not been filing, it is a good idea to get this corrected and file your taxes going back six years.
The first most important basic understanding is where you reside. Whether you are an individual citizen or an employee of your own company, physical residence is what truly controls your taxation. It does not matter if your business is “purely” online, so get past that understanding quickly. The Tax treaties and the Internal Revenue Code both say the same things. For example, Article 4 of the U.S. – Sweden Tax Treaty states, a person “under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management, place of incorporation, or any other criterion of a similar nature.”
The next most important thing to understand is that if you are a U.S. citizen, you have rights and responsibilities regarding tax. You are taxed on “worldwide”
income. U.S. tax law is all about not allowing improper avoidance of taxation, so it is not surprising that you must report worldwide income. If you have not been filing U.S. taxes, and should be, it should also not surprise you that they will want you to report in such a way as to show where you keep your accounts and assets. You may be required to file Foreign Bank and Financial Account Reporting and Foreign Financial Asset Reporting. Reporting just tells the nations involved what is going on, and does not in and of itself figure your tax.
The next point to understand is that the U.S. has treaties with many countries, which protect the taxpayer, and of course protect the foreign nations involved in the treaties. You can find these treaties online at https://www.irs.gov/businesses/international-businesses/united-states-income-tax-treaties-a-to-z. Let’s take Sweden (https://www.irs.gov/businesses/international-businesses/sweden-tax-treaty-documents) and Italy (https://www.irs.gov/businesses/international-businesses/italy-tax-treaty-documents) as examples. Both have a treaty with the U.S. Each treaty protects you from double taxation, stated explicitly. Also, these treaties protect Italy or Sweden by virtue of the rule that which country has the right to collect the single level of taxation depends on where you physically operate. See Article 4 in the U.S. – Sweden tax treaty, for example.
Next up in this series of posts is information on repatriation of funds.
Forms, publications, and links of interest on this subject:
- Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad
- Publication 514, Foreign Tax Credit for Individuals
- Publication 334, Tax Guide for Small Business
- Form 1116, Foreign Tax Credit
- Form 2555, Foreign Earned Income
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