Dreaming of replacing the American dream with Dutch windmills, art museums and cycling along the canals? You're not alone - the Netherlands really does offer a picturesque life.
However, as a US expat, you might face a complex tax situation. Your home country still wants their cut, potentially leading to double taxation and a filing mess. Moreover, the Dutch have pretty strict laws around dual citizenship.
So, how do you navigate your citizenship and tax situation while in the Netherlands? This article explores the answers to these questions: get ready to untangle the FEIE, FTC and expatriation tax to find the path to tax efficiency (and maybe some stroopwafels).
The Netherlands is among the strictest countries when it comes to dual citizenship. Yes, you can have it - but only in very specific situations. Thus, if you want to become a Dutch citizen, you most likely have to give up your other passport(s).
However, more relaxed laws were set to be debated by the Dutch parliament late in 2023, so we might expect to see some changes soon.
For now, the general rule is that you need to renounce your other citizenship to obtain the Dutch one. This is especially true if you do it through naturalisation, the most common process for getting citizenship in the Netherlands.
Some exceptions include:
Note: The US allows dual citizenship, so there are no specific restrictions for US citizens seeking Dutch citizenship on the US side. However, you'll still need to meet the Netherlands' requirements and potentially renounce your US citizenship (with exceptions mentioned above).
Being a US citizen with Dutch residency creates a unique tax situation. The US operates under a citizenship-based taxation system, so US citizens, regardless of where they live or work, are required to file US tax returns annually.
This also applies to US expats living in the Netherlands, so in some cases, you'll need to file tax returns with both countries.
Fortunately, the US and the Netherlands have a tax treaty to prevent double taxation. This treaty helps to ensure you're not taxed on the same income by both countries. However, due to the Saving Clause included in the treaty, you may be better off claiming tax credits:
The FEIE allows qualified US expats to exclude a portion of their foreign earned income from US taxes, which may significantly reduce your US tax liability. To qualify, you must meet the physical presence test or the bona fide residence test.
Even if your income falls outside the FEIE limits, you might still be able to reduce your US tax burden with the Foreign Tax Credit (FTC). The FTC allows you to claim a credit on your US tax return for income taxes you've already paid to the Netherlands, helping to prevent paying taxes twice on the same income.
US expats living in the Netherlands with qualifying children or dependents living with them can claim the Child Tax Credit (CTC) just like in the US. The credit usually gives you up to $1.600 in partially-refundable credits per qualifying child / dependent.
Decided to renounce your US citizenship? This is a formal and irreversible process, involving appearing in person at a US consulate or embassy abroad to complete an oath of renunciation.
There are also fees associated with the process, such as:
A significant tax consequence of renouncing US citizenship for certain individuals is the potential for an expatriation tax, also known as the exit tax.
The exit tax applies to US citizens meeting one or more of the following criteria at the time of renunciation:
If you fall under one of these categories, the IRS may tax you as if you sold all your worldwide assets the day before expatriation. This could result in a significant tax bill, especially for high net-worth individuals.
Even after renouncing your US citizenship, you might still have some tax filing obligations:
After filing these forms, the process of renouncing your US citizenship is officially complete and you have fulfilled the last obligation to the IRS as a US taxpayer.
Consulting with a qualified tax professional specialising in US expatriation taxes is crucial before making any decisions regarding renouncing your US citizenship or even filing your first tax return from abroad. These experts can guide you through the intricacies of the US - Netherlands tax treaty, the FEIE and FTC, as well as other relevant tax provisions.