U.S. Taxes for Americans Living in the Netherlands
As an American, no matter whether you live in the United States or abroad, the rules for filing an income tax return are generally the same. Your worldwide income is subject to U.S. income taxation, regardless of where you reside. When moving to the Netherlands, you should be aware of the tax rules that may apply to you, as well as the additional filing requirements you may have when residing abroad. Also, Americans living in the Netherlands will be subject to Dutch tax rules that specifically apply to expats.
Sanders US Tax Services is located in Rotterdam. We speak English and Dutch. We prepare U.S. tax returns as well as Dutch tax returns. Contact us to schedule an online meeting or an in person meeting at our office in Rotterdam.
Do I need to file a U.S. tax return?
After you move to the Netherlands, you must continue to file a U.S. tax return each year. You may be required to file certain additional forms as part of your tax return. For example, you may be required to file Form 5471 if you own shares in a Dutch limited liability company (BV). Americans living abroad are generally allowed the same deductions as citizens living in the United States.
The Foreign Earned Income Exclusion allows you to exclude up to $112,000 of your foreign earned income. The exclusion amount is adjusted annually for inflation. In addition, you may also exclude employer-provided housing or deduct housing costs up to a certain limit.
You can claim a foreign tax credit for income taxes paid to the Netherlands on income that is also subject to tax on your U.S. tax return.
These provisions often reduce your U.S. tax liability significantly, or might even completely eliminate it. However, please note that the Foreign Earned Income Exclusion only excludes earned income (i.e. employment income), which does not include unemployment benefits and pensions. Also, you are not allowed a foreign tax credit on the taxes on the income excluded under the Foreign Earned Income Exclusion. When preparing your tax return, we will make sure these provisions are used the best way possible.
How does the Dutch tax system work?
When living and working in the Netherlands, you will generally be subject to Dutch income taxation. This means that you will be subject to tax in the Netherlands on your worldwide income. You will also be liable for social security contributions and healthcare insurance contributions. A taxpayer identification number will be assigned to you by the tax authorities once you have registered as a resident. Depending on your level of income, you may be entitled to childcare, healthcare, and housing benefits.
For tax purposes, your income is divided into three categories. The first category includes all employment and self-employment income, unemployment benefits, and pension and annuity income. This income is taxed at progressive rates. The second category includes investment income from companies in which you have a ‘substantial interest’. This generally means an interest of 5% or more. All other investment income is included in category 3: interest, dividends, capital gains, rental income, etc. The income from assets in category 3 is not taxed as such. However, based on your net wealth on the first day of the year, an amount of imputed income is taxed at progressive rates. Even though this is very much like a wealth tax, the IRS generally allows a U.S. taxpayer to claim a credit for the tax on his U.S. tax return.
Dutch income tax rates on employment income and other income that is taxed as ‘category 1’ income are usually higher than U.S. tax rates. Therefore, when claiming the Foreign Earned Income Exclusion or the foreign tax credit, U.S. income tax on Dutch income is often fully offset. However, this entirely depends on your specific facts and circumstances. For example, capital gains are usually taxed at a far lower rate, which means that you may owe U.S. income tax on capital gains.
What is the 30%-ruling?
If you were recruited outside the Netherlands or sent to the Netherlands on an assignment by your employer in the United States, you may be eligible for an exclusion of 30% of your gross employment income. You are required to apply for this exclusion in advance with the Dutch tax authorities to be able to claim it on your tax return.
Do I need to file a Dutch tax return?
Your employer is required to withhold income tax on your wages. Usually, the tax that was withheld is sufficient to cover your tax liability. However, you must file a tax return to claim certain deductions and exclusions or if the amounts withheld on your wages do not fully cover your tax liability (this may be the case if your personal situation changes during the year or if you move to or from the Netherlands during the year). The due date of your Dutch tax return is 1 May, but can be extended until 1 September if you timely file a written request with the authorities.
Is there a tax treaty between the United States and the Netherlands?
The tax treaty between the United States and the Netherlands mostly follows the OECD Model Tax Treaty and is therefore fairly straightforward for individual taxpayers. The treaty may help to determine whether certain income is taxable in the Netherlands or not. Generally, tax treaty provisions do not reduce the U.S. taxes of Americans living abroad, as they are subject to U.S. income taxation on their worldwide income based on the U.S. tax code.
We specialize in the preparation of U.S. tax returns for Americans living in the Netherlands. We’re located in Rotterdam and speak English and Dutch. Contact us to schedule an online meeting or an in person meeting in Rotterdam. We also have offices in Denver CO, Germany, Switzerland and the United Kingdom.