Reporting Dutch Income and Assets on Your U.S. Tax Return
As a resident of the United States, you are generally subject to U.S. federal income taxation on your worldwide income, including Dutch income. In addition, you may be required to report foreign assets, such as a Dutch bank account or an investment in a Dutch company, to the IRS.
We specialize in the preparation of U.S. tax returns with foreign income and assets. This article summarizes some of the most common topics and questions from our clients with Dutch income and assets.
U.S.-Netherlands Tax Treaty and the Foreign Tax Credit
The tax treaty between the Netherlands and the United States will provide some relief for double taxation. For example, based on the provisions of Article 16 of the tax treaty, wages from employment in the Netherlands are taxable in the United States only, if the Dutch employment period did not exceed 183 days, and certain other conditions are met.
Pensions usually are taxable only in the country of residence. In other words, if you worked in the Netherlands, now live in the United States and receive a Dutch pension, you should not be subject to Dutch income taxation. However, there are some exceptions. For example, if you receive your pension in a lump-sum, if you start receiving payments before you reach a certain age or within a certain time period after your move from the Netherlands to the United States, your pension may also be subject to Dutch income taxation. You may not be subject to taxation at all if a payment from a Netherlands pension plan is invested in a U.S. Individual Retirement Account (“IRA”).
If your Dutch income is subject to Dutch income taxation, on your U.S. tax return, you can claim a credit for the income tax paid to the Netherlands, if certain conditions are met. Please note, you can claim a credit for income taxes only; you cannot claim a credit on your U.S. tax return for Dutch social insurance premiums. Considering the relatively high Dutch income tax rates, with the income tax paid to the Netherlands, you may be able to fully offset the U.S. federal income tax on your Dutch income.
Claiming a Credit for Dutch Box-3 Income Tax
You are also required to report Dutch passive income (interest, dividends, capital gains, etc.) on your U.S. tax return.
On a Dutch individual income tax return, the Dutch tax code divides income into 3 categories (“Box 1”, “Box 2”, and “Box 3”). Box 3 includes income from savings and investments. Box 3-tax is based on a deemed (imputed) income from the taxpayer’s savings and investments. Essentially, Dutch Box 3-tax is a tax on wealth, rather than an income tax. However, the IRS has confirmed that the Dutch Box 3-tax is ‘substantially similar’ to an income tax. Therefore, with reference to Article 25(4) and Article 2(2) of the tax treaty between the United States and the Netherlands, it can be claimed as a foreign tax credit on Form 1116.
Dutch Social Security Benefits (“AOW”)
Dutch social security benefits (“AOW”) are taxable in the Netherlands only. If you are a resident of the United States, whether you are a U.S. citizen or not, and you receive Dutch social security benefits, you do not report them on your U.S. tax return. Article 24, Paragraph 2(a) of the tax treaty between the United States and the Netherlands lists social security benefits as one of the exceptions to the saving clause of Article 24, Paragraph 1.
Foreign Bank Account Report (FinCEN Form 114) and Form 8938
If the aggregate value of your Dutch or other foreign financial accounts exceeded $10,000 at any moment during the year, you are required to file FinCEN Form 114, also known as “Foreign Bank Account Report” or “FBAR”. You are required to report all foreign (i.e. non-U.S.) financial accounts: bank accounts such as savings accounts, checking accounts, and time deposits, securities and brokerage accounts, mutual funds, insurance policies with a cash value (such as life insurance policies), as well as certain pension accounts.
In addition to FinCEN Form 114, you may be required to file Form 8938. Form 8938 is filed as part of your U.S. tax return. You are required to file Form 8938 if the total value of your Dutch financial assets is more than $50,000 or $75,000, depending on your filing status.
Moving to or from the Netherlands: filing a ‘dual-status’ tax return
You are a dual-status taxpayer when you have been both a resident of the Netherlands and a non-resident of the Netherlands in the same tax year. Dual-status does not refer to your citizenship, only to your resident status for tax purposes in the Netherlands. In determining your Dutch income tax liability for a dual-status tax year, different rules apply for the part of the year you are a resident of the Netherlands and the part of the year you are a non-resident. The years of arrival in the Netherlands and departure from the Netherlands are dual-status tax years. For these year, you are required to file a dual-status tax return: the M-Form.
Similarly, if you are not a U.S. citizen, for the year in which you move from the Netherlands to the United States, you are generally required to file a so-called ‘dual-status’ tax return: the American equivalent of the Dutch M-Form.
Sanders US Tax Services specializes in the preparation of U.S. and Dutch tax returns. We have offices in Rotterdam and Denver. Contact our Denver office in English with any questions you may have about filing a U.S. tax return with Dutch income or assets, or if you’re planning to move to the Netherlands.