Navigating US Taxation with a Global Perspective

The US tax system: A brief overview

The US operates on a worldwide taxation system for its citizens and residents. This means that no matter where you earn your income, if you're a US citizen or a Green Card holder, you're likely subject to US taxation. However, this doesn't always mean double taxation.

Foreign Tax Credit (FTC)

If you paid or accrued foreign taxes to a foreign country or US possession (Guam, Northern Mariana Islands, American Samoa, US Virgin Islands, or Puerto Rico) and are subject to US tax on the same income, you may be able to reduce the US tax by claiming either an FTC or an itemized deduction for those foreign taxes. Generally, the FTC only applies to income, war profits, and excess profits taxes.

A tax credit directly reduces US income tax on a dollar-for-dollar basis, whereas a deduction reduces the amount of income subject to tax. In most cases, it is more beneficial to take foreign income taxes as a tax credit.

The foreign tax eligible for the FTC may differ from the tax withheld by the foreign country. If a tax treaty between the US and a foreign country allows for a reduced tax rate, only the reduced amount qualifies for the FTC. You can choose to file for a refund from the foreign government for any excess tax paid beyond this amount.

Foreign Earned Income Exclusion (FEIE)

An additional primary tool the US offers to mitigate the double taxation issue is the Foreign Earned Income Exclusion (FEIE). If you qualify, the FEIE allows you to exclude a certain amount of your foreign-earned income from US taxation.

For tax year 2024, the FEIE is USD 126,500, increased from USD 120,000 for tax year 2023. The FEIE amount is adjusted for inflation each year.

If you choose to claim the FEIE, you cannot take an FTC or deduction for taxes on income that you choose to exclude. If you do take a credit or deduction for any of those taxes, your election to claim the FEIE will be revoked.

In addition, if you claim the FEIE, you cannot take the additional child tax credit or the earned income credit for the year.

Tax treaties: Avoiding double jeopardy

The US has tax treaties with numerous countries. Currently, the US income tax treaty network covers approximately 65 countries worldwide.

The primary aim of an income tax treaty is to facilitate cross-border trade and investment eliminating double taxation and combating tax evasion, avoidance, or instances of double non-taxation.

These treaties help determine which country gets the primary right to tax specific types of income. Knowing these treaties is essential for anyone earning income in multiple countries.

A US citizen or US treaty resident earning income from a foreign country with a US has a tax treaty and who is subject to taxes imposed by foreign countries may qualify for credits, deductions, exemptions, and a reduced tax rate on foreign taxes. Additionally, US living aboard might also receive benefits under that foreign country's tax treaties with other nations.

With certain exceptions, tax treaties do not reduce the US taxes of US citizens or US treaty residents.

Global taxation trends and the US

As the world leans towards a more harmonized taxation approach, especially for corporations, the US often finds itself adjusting its tax policies to be competitive globally. Recent changes in corporate tax rates and discussions about digital taxation are examples.

Off-shore financial reporting

FBAR reporting

US persons (including US citizens and residents, and US domestic entities) with financial interests or signatory authority over foreign financial accounts may need to file a Foreign Bank Account Report (FBAR). This move, aimed at curbing tax evasion, has global implications for US taxpayers.

Taxpayers must file an FBAR if the aggregate value of their financial accounts exceeds USD 10,000 at any time during the calendar year. This is a cumulative balance of multiple accounts (meaning that if a taxpayer has two or more accounts with a combined account balance greater than USD 10,000 at any time, both or all accounts would have to be reported).

FATCA reporting

US persons (including US citizens and residents, and US domestic entities) with an interest in foreign financial assets may need to file IRS Form 8938 (Statement of Specified Foreign Financial Assets) under the Foreign Account Tax Compliance Act (FATCA) to report information about their foreign financial assets and accounts.

Various reporting thresholds apply based on whether the taxpayer is an individual or entity, whether the individual lives in the US or abroad, and based on the individual’s filing status. For example, the FATCA reporting requirement applies to married individuals filing jointly and living in the US if the total value of their foreign financial assets exceeds USD 100,000 on the last day of the tax year, or USD 150,000 at any time during the year.

Head of household status for international couples

To qualify for head of household status, you must be unmarried or considered unmarried at year's-end,  along with meeting other requirements. If married to a non-resident alien, you may qualify if you don't elect to treat your spouse as a U.S. resident.

You can qualify for the head of household filing status, if:

1. You paid over half the cost of maintaining a home that was your parent’s main residence for the year (even if they didn’t live with you), and you can claim them as a dependent; or
2. You paid over half the cost of keeping up a home where you and a qualifying family member (other than a non-resident spouse) lived for more than half the year.

You can benefit by filing a joint tax return with your non-resident spouse as a US resident, but you must then report both your and your spouse's worldwide income.

Denial of US passport in cases of unpaid taxes

The Internal Revenue Service (IRS) is required to notify the State Department of taxpayers certified as owing a seriously delinquent tax debt. The State Department is generally prohibited from issuing or renewing a passport to a taxpayer with seriously delinquent tax debt. If you currently have a valid passport, the State Department may revoke your passport or limit your ability to travel.

Seriously delinquent tax debts do not include, for example, the penalties for violating the FBAR reporting requirement, child support, debts being timely paid through IRS-approved installment agreements, debts being timely paid with an offer in compromise accepted by the IRS, and tax debts suspended because of a request for innocent spouse relief. 

US estate tax liability for global citizens

For those with assets in the US, or US citizens and US domiciles (i.e. foreign nationals domiciled in the US) with assets abroad, understanding the US estate tax's global implications is crucial. The US imposes an estate tax on worldwide assets for its citizens, with certain exemptions and credits available.

VAT, GST, and US sales tax: A comparison

Unlike many countries that have a Value Added Tax (VAT) or Goods and Services Tax (GST), the US operates with a sales tax system. Understanding the differences can help businesses set competitive prices and individuals anticipate costs.

The challenges of digital taxation

With the rise of e-commerce and digital businesses, countries worldwide, including the US, are grappling with how to tax digital entities fairly. Understanding the global conversations around this can guide US-based digital businesses in their operations.

Incorporating a business: US vs. global perspectives

For entrepreneurs considering where to incorporate, understanding the tax benefits and implications in the US compared to other countries is essential. The choice can have significant impacts on global operations and profitability.

Final notes on navigating the global tax maze

Taxation, when viewed with a global lens, can seem daunting. However, with an understanding of the US's place in the global tax landscape and the tools available, individuals and businesses can make informed decisions that optimize their tax positions.

This post outlines US taxation with an eye on the broader global landscape, highlighting the complexities and tools available for those operating across borders.

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