Living in the Netherlands is a wonderful experience, thanks to the positive and forward-looking mentality of the country, a proud history blended with a first-world infrastructure, excellent public services, and great access to the rest of Europe.
One disadvantage that US expats living in the Netherlands experience though is that US law requires them to file US taxes, reporting their worldwide income, even if they file Dutch taxes as well.
There are mechanisms in place to help American expats avoid double taxation, however, they have to be claimed when expats file their US federal return, meaning that US expats always have to file their US taxes.
The tax treaty in place between the two countries doesn’t prevent Americans in the Netherlands from filing US taxes. Very few Americans benefit from the treaty, and those that do (for example, American students, teachers, and retirees) still have to file to claim the relevant tax treaty provisions anyway.
The most common way Americans in the Netherlands can avoid paying US taxes is by claiming the IRS Foreign Tax Credit when they file. This lets them claim US tax credits up to the same value of the Dutch income taxes that they’ve paid.
As Dutch tax rates are higher than US rates, this normally eliminates the US tax liability completely, as well as giving expats some additional, leftover US tax credits that they can carry forward for up to 10 years (or back for one year).
To claim the Foreign Tax Credit, Americans in the Netherlands have to file their Dutch taxes first. As Dutch Tax Day is April 1, expats receive an automatic two-month US filing extension until June 15.
Alternatively, expats can claim the Foreign Earned Income Exclusion when they file their federal return on Form 2555, which simply lets them exclude the first 105,900 USD (for 2019) of their earned income from US tax.
Another important US filing requirement that affects many American expats living in the Netherlands is having to file a Foreign Bank Account Report, often referred to as an FBAR.
FBAR reporting is for Americans who have over 10,000 USD in foreign-based financial accounts at any time during the year. Qualifying foreign accounts include bank and investment accounts, and also business or other accounts that expats control or have signatory authority over, but not mortgage accounts.
Expats also have to report any foreign registered businesses that they own (or co-own), whatever the business structure.
Finally, expats may still have to file US State taxes, depending on the rules of the state where they last lived and what ties they maintain there.
So, while US expats in the Netherlands always have to file, they rarely end up paying any US tax once they do so. In fact, some, such as many US expat parents who claim the refundable Child Tax Credit, find that the IRS owes them money when they file.
Expats in the Netherlands who are behind with their US tax filing because they weren’t aware that they have to file from abroad can catch up without facing penalties under an IRS program called the Streamlined Procedure.
Most importantly though, all US expats should seek advice from a US expat tax expert who will have the experience and knowledge to ensure that each expat not only stays compliant but files taxes in their optimum short, medium- and long-term best interests.