What you need to know about American taxes while living in the Netherlands

Whether it is because of the country's intriguing architecture or must-try cuisine, or for any other reason, living in the Netherlands necessitates knowledge of the Dutch tax system. As a US expat, you must file an expat tax return regardless of where you live. So, if you live in the Netherlands, how are your taxes affected?

Filing US taxes abroad

Regardless of where they live, US citizens and permanent residents are obligated to file expatriate tax returns with the federal government every year. Many people are required to file a return declaring assets kept in overseas bank accounts using FinCEN Form 114, in addition to their regular tax return for income (FBAR).

The United States is one of the few countries that taxes international income received by citizens and permanent residents living abroad. There are, however, some safeguards in place to prevent double taxation. These are some of them:

• The Foreign Earned Income Exclusion is a tax break for people who earn money in another country. This exclusion allows you to deduct USD 108.700 (for 2021 taxes) in earned income from foreign sources.
• A tax credit that allows surplus income to be taxed at a lower rate due to taxes paid to foreign governments.
• An exclusion on overseas housing residents that allows them to deduct additional amounts spent to pay household expenditures as a result of living abroad from their income.

Who can be considered a dutch resident?

The following factors all influence an expat's residency status:

• The location of the expat's family home
• The intention to stay for a longer term at the time of arrival
• The location of the expat's permanent home
• Whether the expat has registered with a Dutch municipality
•  Any economic or social ties the expat has to the Netherlands

What are Netherland’s tax rates?

The Netherlands has a "box" technique, which divides different sorts of income into separate categories, or "boxes," which are taxed at varying rates.

Pension payments, social benefits, earnings, income from other sources, non-cash wages (such as corporate cars), owner-occupied property, bonuses, and other periodic perks are all included in Box 1. Box 1 income is taxed at a progressive rate.

Box 2 comprises income from profit-sharing certificates or shares in which a taxpayer owns more than five percent of the stock (substantial interest). This box's income is taxed at a rate of 25 percent. Investment and savings income, which includes real estate and investment portfolios, is recorded in Box 3. Although there is no tax known as "capital gains," capital gains in the country are taxed in this category. Income earned in Box 3 is taxed at a rate of 30 percent.

Regions and states in the country do not impose any taxes.

What is the 30% ruling?

For workers from other countries who work for a Dutch company for up to ten years, there is a Dutch policy (120 months). Employees in this category are eligible for a tax break of 30 percent on their earnings. The programme is meant to assist immigrants with skills or knowledge that are not readily available in the Netherlands in covering additional living costs.

What is the United States – Netherlands Tax Treaty?

The United States-Netherlands Tax Treaty prevents double taxation on income and capital gains, however as previously stated, the benefits are limited for Americans living in the Netherlands due to a Savings Clause. The treaty does, however, ensure that no one pays more tax than the higher of the two countries' tax rates, and it also specifies where taxes should be paid, which is usually determined by the source of income.

The treaty helps US expats to avoid double taxation on their income in the Netherlands by allowing them to claim US tax credits equal to the amount of Dutch income taxes already paid when they file their US tax returns. Americans in the Netherlands can claim Dutch tax credits against income taxes paid to the IRS on income earned in the United States.

Expats must complete Form 1116 with their federal tax return to claim US tax credits against Dutch taxes paid. The great majority of US expats in the Netherlands will not owe any US income tax as a result of this. The Tax Treaty between the United States and the Netherlands also allows the Dutch government to submit US expats' Dutch tax information, as well as their Dutch bank and investment account details and balances, directly to the IRS.

Some Americans living in the Netherlands, such as students, instructors, and retired expats, may be able to take advantage of a provision in the US-Netherlands Tax Treaty (besides claiming US tax credits). To double-check, expats should contact a tax specialist in the United States. Expats who want to claim a treaty provision can do so by filling out IRS Form 8833.

What is the US-Netherlands Totalisation Agreement?

A separate agreement known as the Totalisation Agreement allows US expats in the Netherlands to avoid paying both US and Dutch social security taxes. Expat donations can be credited to either system while in the Netherlands. The country to which they pay is determined by how long they want to stay in the Netherlands.

When are taxes due in the Netherlands?

The Netherlands has a fiscal year that extends from January 1 to December 31. Tax returns must be filed with the Dutch Finance Ministry by April 1 of the following year. In general, if a taxpayer is due for payment of income taxes in the Netherlands, they must file a tax return. Payment of the taxes is due two months from the assessment's final date. If the taxpayer is registered for tax return preparation with one of the tax agents, an extension of this due date is granted for up to 12 months.