If you’re an American living in France, you may have wondered whether your child has any tax obligations in the US, despite not living there. The Local spoke with tax specialist Jonathan Hadida to find out what parents need to know.
If you are American and have moved to France you will have to continue filing your US tax declaration (in addition to your French one) – but what about your US-citizen children?
Even if they live their whole life in France, they may still have obligations to the US tax authorities.
The United States is one of the few countries that taxes based on citizenship rather than residence, so a child who acquires US citizenship through an American parent may still fall under certain US reporting rules even while living in France.
Jonathan Hadida of Hadida Tax Advisors, who advises Americans in France on staying compliant with both French and US tax systems, explained how the rules generally work for children.
Does a young child have to file a US tax return?
Short answer: it depends.
A child who has no income and no significant financial assets usually has no US filing requirement of their own.
Generally, their only connection to the US tax system is being claimed as a dependent on a parent’s US tax return.
However, Hadida pointed out different situations where reporting obligations can arise. One common example is if you open a bank account in France in your child’s name.
If the total value of foreign financial accounts exceeds $10,000 at any point during the year, a Foreign Bank Account Report (FBAR) may be required. The threshold applies to the combined balance of all foreign accounts.
For instance, if a child has two French accounts containing $5,000 each and the combined balance goes above $10,000, the reporting requirement can be triggered.
Additional reporting requirements, such as Form 8938 for specified foreign financial assets, may apply at higher asset levels. Hadida warned that penalties for failing to file these information reports “can be significant”.
They may also have to file if they receive an inheritance (more on that below).
What changes when your child becomes an adult?
This is where things change a little, however the important thing is not the age of the child, but how much they are earning.
Once your child starts to work and earns enough income to exceed the annual filing threshold (currently $15,750), or receives sufficient investment income, they generally must file a US tax return.
The key point: if they earn enough money, they need to file.
Even if all the work is performed in France and French taxes are paid, US citizens generally remain subject to US filing rules.
Those who earn under that $15,750 threshold per year – for example, students – remain listed as dependants on their parents’ tax return, but they don’t have to complete their own.
If a parent dies, a child who was previously a dependent does not automatically need to start filing taxes. They only need to file if their income exceeds IRS filing thresholds. They become an independent taxpayer when no one can claim them as a dependent anymore, which depends on support and living situation – not just age.
One crucial thing to remember is that just because a person has to file in the US, that does not necessarily mean they will owe US tax.
Tax treaties and foreign tax credits often reduce or eliminate double taxation. The obligation is typically about filing the return rather than paying additional tax.
READ ALSO: 9 tax traps for Americans in France to avoid
What are the rules on gifts and inheritance?
US citizens may face reporting requirements when receiving large gifts or inheritances from non-US persons.
If a US citizen receives more than $100,000 from a foreign individual through a gift or inheritance, they may need to file Form 3520.
This is generally an information return, not a tax payment, but the penalties for failing to file can be substantial.
Hadida noted that these reporting requirements are among the most heavily penalised areas of US international tax compliance.
This does not apply to an inheritance from a US citizen – for example an American grandparent.
What if you were unaware of these obligations?
Hadida said that many ‘accidental’ Americans discover these obligations years later.
So don’t panic. The IRS offers procedures designed for taxpayers who failed to file because they were unaware of the rules rather than intentionally avoiding them.
This procedure is called the Streamlined Filing Compliance Procedures. You can thus correct your mistake by filing the previous three years of tax returns and six years of foreign account reports, while explaining why you failed to file previously.
“It’s a bit like going to church and confessing,” Hadida joked, before adding more seriously that the process allows people to regularise their situation without facing the full range of penalties that might otherwise apply.
What are the filing deadlines for Americans living abroad?
US citizens living outside the United States receive an automatic two-month extension beyond the standard April 15th deadline, giving most overseas taxpayers until June 15th to file.
However, taxes owed are generally still due from the original deadline, and interest may accrue on unpaid amounts. Additional extensions are available if needed.
Failing to file on time can lead to penalties of up to five percent of unpaid tax per month, capped at 25 percent.
READ MORE: Everything that Americans in France need to know about tax
One final point Hadida stresses is the importance of the France-US tax treaty. Anyone with financial interests in more than one country is governed by the tax treaty between those two countries.
“It’s important to use that to your advantage and structure your investments and income in a way that benefits from the treaty.”
In other words, France and the US are operating under two different tax systems. What makes sense from a French tax perspective may not be optimal from an American one, so understanding both sets of rules is essential.
There are multiple examples of this, including French savings vehicles like the Assurance Vie creating problems with the IRS, or American trusts creating extra requirements with the French tax office.
READ ALSO: Reader question: How can I find English-speaking lawyers and accountants in France?✎
