When you’re a U.S. citizen, you normally report on your U.S. individual income tax return the money that you made on U.S. soil as well the money that you made abroad regardless of the country where you live, and you pay U.S. income tax, as appropriate. However, you are allowed to take a credit, on your U.S. individual income tax return, for any income tax that you may have paid to the tax authorities of the foreign country where you made that money.
Let’s take the example of an American who lives and works in France and who earned a salary of $10,000 in France, paid $1,000 of income tax to the French tax authorities. That U.S. taxpayer needs to report the $10,000 on his or her U.S. individual income tax return and determine how much tax he or she owes to the IRS under the U.S. tax law. Let’s also assume that, that American taxpayer owes $1,500 to the IRS on the $10,000 salary. He or she is allowed to deduct the $1,000 paid to the French tax authorities from the $1,500 tax debt that he or she calculated. Consequently, he or she will pay only $500 to the IRS ($1,500 – $1,000 = $500).
You can offset your U.S. tax only with the income tax that you paid to the French government. The thing is that other taxes not specifically called income tax were also taken out from your paycheck in France. These include CSG and CRDS. Until 2019, the IRS denied the ability to offset the CRDS and CSG that a U.S. citizen pays in France because, for the IRS, they are social security tax not income tax. The IRS for instance disallowed the CSG and CRDS that a married couple, dual citizens of the United States and France, offset against their U.S. tax liability. They didn’t appreciate that and filed a complaint with a U.S. tax court.
In 2019, the French government and the U.S. government agreed that the CSG and CRDS are income tax, not social security tax. As a result, Americans who paid these taxes to the French government may offset this payment against the tax they owe to the IRS, or claim a refund. U.S. citizens who paid these taxes may also file a claim for refund of the CSG and CRDS that they paid over the past 10 years.
Compliments of Aimlon CPA PC, a Member of the EACCNY