Allyson Lindsey, Managing CPA and Partner at Bright!Tax, a leading provider of US expat tax services, tells us about US tax requirements for Americans living in the Netherlands in 2021.
Living in the Netherlands as an American is most often both a charming and invigorating experience, thanks to the local people, customs, and culture. Americans in the Netherlands still have to file US taxes though, often as well as Dutch taxes, on their worldwide income.
This is because US law applies American tax filing requirements to all Americans, worldwide, rather than just US residents, while Dutch tax filing requirements just apply to residents of the Netherlands.
There is a US-Netherlands tax treaty, but it doesn’t prevent Americans living in the Netherlands from having to file either tax return (although it does contain provisions that may benefit some, including teachers, students and retirees).
So, any American who earned over 12,400 USD of any income worldwide in 2020, or just 400 USD of self-employment income, or just 5 USD for Americans married to a foreign spouse filing separately, has to file a US federal tax return.
Some Americans living in the Netherlands may have to file a US state tax return too, depending on the rules in the US state where they last lived.
Avoiding double taxation
To avoid double taxation, Americans living in the Netherlands who pay Dutch income tax often claim the Foreign Tax Credit by filing IRS Form 1116 when they file their US return.
This IRS provision enables them to claim US tax credits for the same value as the Dutch income tax that they’ve paid. Because Dutch income tax rates are higher than US rates, claiming the Foreign Tax Credit normally eradicates the US tax bill, and leaves excess tax credits too, which can be carried forward (or applied to the previous year).
Alternatively, some Americans claim the Foreign Earned Income Exclusion, which simply allows Americans living abroad who meet IRS criteria to exclude up to 107,600 USD (in 2020) of their earned income from US taxation.
Neither of these provisions are applied automatically though: they must both be actively claimed by filing the corresponding IRS form.
Additional US reporting requirements
Americans who have over 10,000 USD in total in non-US registered financial accounts that they have signatory control over, including bank and investment accounts and most individual pension accounts, even if not registered in their name (so, including business accounts), are required to file an FBAR.
An FBAR is a Foreign Bank Account Report. Filing an FBAR involves reporting the details of foreign-registered accounts, including maximum balances, online to FinCEN, the US financial crimes authority. There’s no additional tax implication - FBAR filing is just a reporting requirement – however, there are steep penalties for not filing and the US is receiving the same information directly from foreign financial firms.
Additionally, Americans living in the Netherlands have to report their non-US registered financial assets on IRS Form 8938 if the total value of their assets exceeds 200,000 USD. They must also report any foreign business interests that they have.
What’s new in 2021?
Form 1040 is changing again for tax filing in 2021, with the new layout being slightly bigger compared to last year. Some fields have been moved between the main form and schedules, and there’s a new question about cryptocurrency holdings.
The filing deadline for Americans abroad in 2021 is June 15, although it’s possible that it may be extended due to the pandemic again, as it was last year. Expats who need more time can always request an extension until October 15 anyway, by filing Form 4868, should they need to.
Coronavirus stimulus checks (both the first and second rounds) were technically a credit for 2020, despite being calculated based on prior years’ returns, so expats whose circumstances changed in 2020 may receive an additional refund (along with those who catch up with their filing if they hadn’t filed previously - read about amnesty programmes below.)
The new US administration meanwhile has plans for tax changes that may affect some expats (and especially those with foreign registered businesses), however, any changes made this year will apply to filing next year, rather than filing in 2021.
IRS amnesty programme
Americans in the Netherlands who haven’t been filing their US taxes because they didn’t know that they had to from abroad can catch up without facing penalties (and normally, neither back taxes) under an IRS amnesty programme called the Streamlined Procedure.
Filing from abroad is more complex than filing in the US, and expats always benefit from seeking specialist advice to ensure they file in the most beneficial way possible given their circumstances. Bright!Tax is an award-winning, leading specialist provider of expat tax services for Americans living abroad. If you require any assistance filing your US taxes, please click the button below.