For Americans living in the Netherlands, a new year means a new tax season. In 2022, this involves filing both Dutch and US taxes. While this might sound like an arduous task, Brittany Lally, CPA at Bright!Tax, has put together a handy guide to filing US taxes for American expats living in the Netherlands to help make things easier.
In the Netherlands, tax is based on residence, while US taxes are based on citizenship. There is a US-Netherlands international tax treaty, however, it unfortunately doesn’t prevent Americans living in the Netherlands from having to file both countries’ tax returns.
The good news is that while Americans in the Netherlands have to file their US taxes, the vast majority won’t end up having to pay any US tax.
Filing strategyAll American citizens (or Green Card Holders) whose total, global income was over 12.550 USD in 2021, or just 5 USD if they’re married but file separately, or 400 dollars of self-employment income, have to report their worldwide income in US dollars on Form 1040.
Americans living in the Netherlands employed by a Dutch firm have their Dutch income tax deducted at the source, and they don’t have to file a Dutch tax return. It can be beneficial to file though, to claim credits for example, and you have to file Dutch taxes anyway if you have other income sources. The Dutch tax day is May 1.
As Americans living abroad receive an automatic filing extension until June 15, most Americans in the Netherlands normally file their Dutch taxes first (if they need to), and then file their US return.
The best way forwardAs Dutch income tax rates are generally higher than US rates, the best strategy for most Americans in the Netherlands who pay Dutch income tax is to claim the US Foreign Tax Credit by filing IRS Form 1116 when they file their US taxes. This provides them with US tax credits to the value of the dollar equivalent of the Dutch taxes they’ve paid, which will often not only wipe out their US tax liability but also leave them with excess US tax credits that they can carry forward.
An alternative for some American expats is to claim the Foreign Earned Income Exclusion on IRS Form 2555, which lets you exclude up to 108.700 USD of earned income (in the 2021 tax year) from US tax if you can meet one of two IRS tests to prove that you live abroad.
That said, the Foreign Tax Credit is often more beneficial for Americans living in the Netherlands. As an example, expat parents with dependent children (who have US social security numbers) that claim the Foreign Tax Credit can also claim the US Child Tax Credit. This often results in no US tax bill, plus an IRS tax refund of 1.400 USD per child when you file in 2022.
Note that if you need extra time to file beyond June 15, you can request an extension until October 15 using IRS Form 4868.
Self-employment taxesAmericans who have self-employment income, or who work for an American company, have to pay US social security and Medicare taxes. These can’t be mitigated by claiming either the Foreign Tax Credit or the Foreign Earned Income Exclusion.
However, there’s a treaty called the Totalization Agreement that prevents Americans living in the Netherlands from paying both US and Dutch social security taxes. Which country you pay depends on how long you expect to be living in the Netherlands.
Account, business, and asset reportingAmericans who have financial accounts in the Netherlands such as Dutch bank, investment or pension accounts may have to report them in the US.
There’s no tax implication of reporting, but if you had over 10.000 USD in total in accounts outside the US in 2021, you have to report all your foreign-registered accounts by filing an FBAR (Foreign Bank Account Report) with the US Treasury. The US receives your account information directly from the bank too, so it’s an important requirement.
If you had over 300.000 USD in total at any time in non-US bank and investment accounts, or over 200.000 USD at the end of 2021, you also have to report them on IRS Form 8938.
If you have a business registered in the Netherlands, you have to report it to the IRS, and there may be a US tax implication
Seek adviceEveryone’s situation is slightly different, and seeking advice from an expat tax specialist normally means keeping more of your money in your pocket thanks to their knowledge of which credits and exclusions you can claim when you file.
If you’ve missed one or more years of filing US taxes from the Netherlands, then definitely seek advice and get caught up, as you may well qualify for an IRS amnesty programme such as the Streamlined Procedure, as long as you take steps to catch up before the IRS writes to you about it.
Brittany Lally is a Managing CPA at Bright!Tax, and an expert in US taxes for Americans living abroad. Bright!Tax is an award-winning US tax services provider for Americans overseas.