Friday, April 19, is Dutch-American Friendship Day, the day on which the Netherlands and the US celebrate 227 years of diplomatic relations. But not all is easy for the US nationals who have made their home in the Low Countries – especially when it comes to taxes and a mysterious thing called FATCA.
As friendly as relations are between the two countries, American citizens living in the Netherlands still have the unfriendly obligation of paying US taxes – which they should have done by last Monday.
It’s a requirement that many are unaware of, or have conveniently forgotten, and it applies equally to US citizens to have never lived in the country as to those who are living away for a few years.
It all stems back to 1902, when an American named George Cook moved to Mexico. He set up a business. He married a Mexican woman. And 22 years later, the Internal Revenue Service of the United States demanded $1,193.38 for unpaid tax. Cook claimed that the US had no right to tax income he earned in another country.
The Supreme Court disagreed. In 1924, the court ruled, in Cook v. Tait, that ‘…government by its very nature benefits the citizen and his property wherever found…’ and ordered Cook to pay.
‘I had no idea I still needed to pay my taxes when I moved here,’ said Michelle Rounds. (Rounds did not want us to use her real name for this story, due to her ongoing issues with the IRS.) Rounds hadn’t filed a US return for seven years while she was living in the Netherlands. She’s currently trying to get herself back in compliance.
She isn’t the only one, according to Charles Rubenacker. He’s the founder of Rubenacker and Company, a consulting company that helps internationals settle in the Netherlands, including helping Americans with their taxes.
The United States is one of only two countries in the world that imposes citizenship-based taxation. The other is Eritrea.
Fortunately, most US citizens working in the Netherlands qualify for the foreign earned income exclusion, which reduces their taxable income. ‘For many citizens, this brings their tax liability to zero,’ says Rubenacker.
The maximum exclusion in 2019 is $105,900 (which doesn’t include some extras, like a house allowance) or around €93,000. However, citizens must demonstrate that they were a resident of another country or that they were not physically in the US for 330 days per year.
For Americans who earn more than this amount, there is a tax treaty between the two countries which can allow US citizens to avoid paying tax in the US if their tax liability in the Netherlands exceeds that in the US. ‘Considering the top rate in the Netherlands is 52%, while in the US it is 37%, Americans generally meet this requirement,’ says Rubenacker.
The foreign earned income exclusion and the taxation treaty generally only apply to wages, so income from investments, rental property or inheritance may be taxed differently.
Regardless, Americans must file a tax return every year, even if they are under the foreign earned income exclusion. ‘Ignorance is not an excuse,’ says Rubenacker.
Last month the US ambassador to the Netherlands, Peter Hoekstra, took questions during a meeting for US citizens. During the forty-five-minute question session, most of the questions were related to tax issues.
Others, however, related to FATCA – Foreign Account Tax Compliance Act – a piece of US legislation, which ostensibly aimed to track the assets of non-citizens living in the US, applies to US citizens living abroad as well.
FACTA requires all US citizens to supply the government with information about any assets they hold abroad. This includes bank accounts, houses and more. Further, it requires non-US financial institutions with American clients to furnish the IRS with information about those holdings.
‘Honestly, I’m considering giving up my citizenship,’ said Tim Jenkins, who also did not want to use his real name. Time Magazine found US citizens giving up their citizenship increased sevenfold after the legislation was passed. Some Dutch banks will not open accounts or give mortgages to US citizens as a result of the onerous of reporting requirements and high penalties that FATCA brings.
Jenkins says that FATCA has made it more difficult or even impossible for him to open a bank account in the EU. ‘I couldn’t find a bank that would do it when we were living in Switzerland,’ he said. He and his Austrian wife moved to the Netherlands two years ago from Geneva.
Since FATCA applies to all US citizens, that includes anyone who was born in the US, even to foreign parents, even if they have never returned to the country since birth.
‘Many people are confused by it,’ admits Heather Van de Velde, the IRS attache at the US consulate.
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