It is widely understood that the United States Internal Revenue Code requires that “U.S. citizens” are subject to U.S. taxation wherever they may live in the world. Although this is true, the Internal Revenue Code:
- Does NOT explicitly say that U.S. citizens are subject to U.S. taxation on their world income wherever they reside; and
- Does NOT explicitly define the term “citizen” or “U.S. citizen”. (This contrasts with the the terms: “U.S. Person”, “Permanent Resident”, “Substantial presence”, etc. that ARE explicitly defined in the Internal Revenue Code.) This means that the starting point for the definition of “U.S. citizen” is in the 14th Amendment of the Constitution and the United States Immigration and Nationality Act.
Some thoughts on each of these points…
Who (according to the Internal Revenue Code) is subject to U.S. taxation on world income?
Answer: Section 1 of the Internal Revenue Code states that taxation is imposed on: “individuals”, “heads of household”, “estates”, “trusts”, etc. Note that the word “individual” is broad enough enough to include “citizen” but is NOT restricted to “citizen.” Put another way: The Internal Revenue Code of the United States presumes that ALL individuals throughout the world are subject to U.S. taxation. Yes, its’ true…
Note that S. 1 of the Internal Revenue Code also defines which filing status one should use. (“Single”, “Head of Household”, “Married Filing Separately”, etc.) It also prescribes different rates of taxation for different filing statuses. Note that the most punitive status is “married filing separately”—which actually imposes a “hidden tax”—and is commonly used by Americans abroad.
U.S. citizens are subject to taxation on their world income because they are “individuals”.
The Internal Revenue Code does NOT define the meaning of “citizen”!
S. 7701(a)(5) creates the concept of the “tax citizen.” It doesn’t define who is a citizen; it merely states that, citizenship is not lost for tax purposes until the individual meets the requirements of Internal Revenue Code S. 877A(g)(4). Specifically S. 7701(a)(50) reads:
(50) Termination of United States citizenship
(A) In general
An individual shall not cease to be treated as a United States citizen before the date on which the individual’s citizenship is treated as relinquished under section 877A(g)(4).
Whoa! How does any individual in the world escape U.S. taxation?
We look to S. 2 of the Internal Revenue Code which is titled: “Definitions and Special Rules”
S. 2(D) reads:
(d) Nonresident aliens
In the case of a nonresident alien individual, the taxes imposed by sections 1 and 55 shall apply only as provided by section 871 or 877.
In other words, if you are a “non-resident alien” you are taxable only on income connected to the United States. (By the way, S. 55 is the Alternative Minimum Tax.)
So, what’s a “non-resident alien”? The answer is found in S. 7701(b) of the Internal Revenue Code. This section of the Internal Revenue defines the circumstances under which an “alien” has sufficient ties to the United States to move from being a “non-resident alien” to being a “resident alien”. A “Green Card” holder is a resident alien. I wrote an extensive post on this question here.
The bottom line is that …
Every individual in the world is subject to full U.S. taxation on his/her world income unless he/she is a “non-resident alien”.
Contributed By International Tax Lawyer- John Richardson
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