Second Passport vs Expatriation
Second Passport vs Expatriation and US Tax Implications: When a US Citizen (and some US Persons) obtains a second passport but has not formally expatriated, then they are still subject to US tax on their worldwide income. While the second passport may assist the taxpayer with traveling to different foreign country locations more easily than it would be with a US passport, it does nothing to eliminate US tax consequences. In other words, while obtaining a second passport may be beneficial for US persons in order to travel to different locations without necessarily having to obtain a visa, it does nothing to avoid the IRS. In fact, depending on the particular tax laws of that second-passport country, they may have actually set themselves up for even more tax liability (such as a Wealth Tax).
Second Passport for Travel
For some US Citizens, they prefer to travel outside of the US with a non-US passport. To do so, they obtain a second passport. Depending on which country the US Citizen wants to travel to, sometimes having a different passport can help avoid certain visa issues and restrictions.
The two most common ways to obtain a second passport is when a person is a dual-national at birth or when a person applies for certain Golden Visas. It is important to note that not all Golden Visas Programs are the same. Some Golden Visa programs begin as RBI or Residence-by-Investment, which may later be transitioned into Citizenship when certain requirements are met. Other Golden Visa Programs are CBI (Citizenship-by-Investment) which provides for fast-track citizenship and passport.
US Tax After Obtaining a Second Passport
This is where much of the confusion lies.
The United States is one of the only countries in the world that requires US Citizens and other US Persons to pay US tax on their worldwide income.
It doesn’t matter if the US person resides in the United States or outside of United States, and it doesn’t matter if the US person earns all of their income in a foreign country.
Rather, as long as the person is a “US Person,” they are required to report and pay tax on the worldwide income.
When a US citizen obtains a second passport, it does not eliminate the requirement that the US person file and pay tax on the worldwide income. In fact, depending on which country the US citizen obtains the second passport, then they have an additional tax liability depending on how the tax rules play out for the foreign country. *Even though the baseline requirement is that US persons pay tax on their worldwide income, there are tools available (such as Foreign Earned Income Exclusion, Foreign Tax Credit, Treaty Benefits, and the Closer Connection Exception), which may reduce and/or eliminate US tax liability. Still, despite these tax reduction strategies, it is beneficial for very high income earners to consider various tax strategies.
Expatriation to Avoid US Tax Consequences
In order to avoid the tax implications of being a US person, a person must formally expatriate.
In order to expatriate, a person has to formally give up or renounce their US citizenship. The process of renouncing US citizenship can be complicated, and it is very important that the person carefully assesses all of the facts and circumstances surrounding their income, assets, and prior year tax compliance before the expatriation has occurred.
Once the expatriation act has been performed, a person cannot just go back and unwind that act.
Second Passport – Tax or Travel?
When a US citizen receives a second passport, that does not automatically allow them to avoid the tax implications of being a US person. Obtaining a second passport for travel may be a good idea, but obtaining a second passport for tax purposes is only the first step — expatriation (or other tax strategies) will still need occur in order to avoid the ongoing tax consequences of being a US person.
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