CASE 1:

U.S. citizen comes to live and work in the Netherlands

Case description

The client is a United States citizen who is living and working in the Netherlands. Besides the relevant sections of the Internal Revenue Code, client's tax status is subject to the relevant provisions of the Income Tax Treaty entered into between the U.S. and the Netherlands. Moreover, the client had a financial interest in foreign financial accounts.

Advice to client

The client, as a U.S. citizen living and working outside the U.S., is required to report his worldwide income which includes his salary, interest and/or dividends and all other income acquired in the Netherlands. In addition to Form 1040 and all subsequent forms, the client will also need to file specific forms, namely the forms 2555 and 1116. As an owner of a Dutch bank account, the client must file an FBAR form with the U.S. Department of the Treasury if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year.

Services to client

Gathering the information

The first step is always to gather all the relevant information from the client. Information required can usually be found in the following documentation: year-end salary statement from all the employers (Dutch and U.S., if applicable); year-end financial statements (U.S., Dutch and other bank statements); 401(K) plan form; copy of the previous year U.S. tax return, copy of the Dutch tax return for the reporting year (provided that it is not prepared by onestopTaxPrep). In addition, the following information is required for proper assessment and preparation of tax returns: the exact date of arrival to the Netherlands; summary of travel to the U.S.; information on housing expenses, such as rent paid, utilities paid, repairs, residential parking fees, etc.; statement on IRA contributions; whether the client is renting out the property in the U.S.

For the FBAR forms, we need to know the highest account value of each non-U.S. (bank) account for each year.

Once the information is gathered (timeliness depends on the client) we can start preparing the U.S. tax return. At this step, we ask additional questions that may arise while examining the documentation and information received.

Assessing the information and preparing the tax return

If from the information received it can be concluded that the client’s tax home is in the Netherlands, then he/she meets the bona fide residence test for his/her period of stay abroad. In that case, the client is entitled to exclude from his gross income the amount of his/her foreign earned income (and the housing costs if any) up to the prescribed amount (for 2012 this amount was $95,100). The form 2555 is used to figure the foreign earned income (and housing cost) exclusion.

In addition, under the Income Tax Treaty and the U.S. Internal Revenue Code the client can take a credit up to the amount prescribed by the US.. law for the Dutch taxes paid or accrued on income acquired in the Netherlands. Such income includes: a) Dutch earned income above the prescribed amount (note that the amount of the foreign earned income up to that prescribed amount, i.e., $95,100 for 2012, can be excluded by filing the Form 2555; the credit cannot be used for the amount which was excluded); b) interest and/or dividends acquired in the Netherlands; and c) other income acquired in the Netherlands (e.g., rent income).

The client may also be allowed a deduction for Dutch real estate tax paid as well as a deduction for Dutch and U.S. tax preparation fees.