Can You Reduce Taxes Legally with Dual-Citizenship?

Can You Reduce Taxes Legally with Dual-Citizenship?

Can You Reduce Taxes Legally with Dual-Citizenship?

If most Americans could (legally) reduce their tax liability, they would do so. While there are various international tax planning and avoidance strategies that may help to reduce tax liabilities, some taxpayers would prefer to not pay any taxes at all — and believe just by becoming a dual-citizen with a low-tax jurisdiction, they can avoid US taxes. Therefore, they consider the idea of dual-citizenship in a country that may offer reduced income tax requirements as a viable option. The problem is that unlike most other countries across the globe, the United States follows Citizenship-Based Taxation instead of a Resident-Based Taxation model. At the end of the day, this means that even if the American obtains second citizenship — so that they are considered a dual-citizen — they may now have a tax liability in both jurisdictions, which can actually increase their tax liability. Let’s review some of the pitfalls and landmines in seeking to reduce taxes with your citizenship

Not All Countries Allow Dual-Citizenship

Some countries do not allow a taxpayer to be a dual-citizen/permanent resident.  This may lead to an increase in tax liability in certain situations. For example, a person may be a citizen of the United States and Singapore, but Singapore does not allow dual-citizenship. The Taxpayer is therefore unable to maintain both citizenships. As a result, for example, Singapore may require that the Taxpayer liquidate their CPF – which could result in a significant tax liability. Conversely, if the person decides to expatriate from the United States and is a Covered Expatriate – it may lead to an exit tax implication (ineligible deferred compensation)

Dual-Citizenships May Mean MORE Tax 

In order to establish citizenship abroad – especially by way of a Citizenship-by-Investment Golden Visa, it requires a significant investment in the foreign country. But, since the U.S. taxes individuals on their worldwide income, it may result in a dual-citizen increasing their tax liability and if it turns out they invested in PFICs (such as foreign ETFs or Mutual Funds), the tax implications may be great.

Additional Tax Filing Requirement

When a person is a dual-citizen of the United States and a Foreign Country, they may have one or more international information reporting form requirements as a result of being a dual-citizen. Some of the international reporting forms are very complex and may lead to intensive tax scenarios when FBAR and FATCA are involved. Some of the more common forms include:

      • FBAR (FinCEN Form 114)

      • Form 3520

      • Form 3520-A

      • Form 5471

      • Form 8621

      • Form 8938

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Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure

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