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But it is. If I earn $120k in let's say the Netherlands, I pay NL taxes on all of it and US taxes on about $20k of it. I'm getting double-taxed on the amount ov

• kspaans 11y ago
  That's why you claim a foreign tax credit on those income taxes you paid in NL. If NL charges less income tax than you'd be charged in the US, then your tax credits will reduce your taxable income to, say, $20k like you mentioned. But this isn't double taxation because you are only be charged tax to top up the amount of tax you pay to be in line with US income taxes. This is exactly like state income taxes. It's not "double taxation" because you get to deduct your federal taxable income by the amount you pay in state income tax.
  • arjie 11y ago
    Hang on. If it reduces taxable income, that's not the same as topping up. You were right in the first part where you said it's a tax credit. But those subtract from your tax owed, not your taxable income, a difference that's important because it's a pretty large sum in dollars. Here's a simplified model to illustrate: Wlog, suppose the US charges a straight m rate per dollar, country X charges n. Suppose first k dollars of an expat are untaxed by the US. Let's say the expat makes j dollars, an equivalent US citizen in the US makes the same, and so too a citizen of X. The citizen of X is taxed nj by X, the US citizen resident in the US is taxed mj, and the expat would be charged (j-k-nj)×m by the US and nj by X for a total of m(j-k-nj) + nj if it were a deduction to taxable income. Notably if there's no fixed deduction, every tax rate causes you to pay more than otherwise.
• deleted 11y ago
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