What Is a U.S. Citizen?
A U.S. citizen is an individual who holds full legal membership in the United States, typically acquired through birth within U.S. territory, birth abroad to U.S. citizen parents, or naturalization. This status confers certain rights, protections, and obligations, significantly impacting an individual's financial life, particularly concerning Taxation and Financial Planning. From the perspective of Financial Regulation, being a U.S. citizen means being subject to unique reporting requirements and tax laws, regardless of one's physical residence.
History and Origin
The concept of U.S. citizenship has evolved since the nation's founding. Initially, citizenship was largely determined by common law, but the Fourteenth Amendment to the U.S. Constitution, ratified in 1868, formally established birthright citizenship. Its Citizenship Clause states: "All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they reside." This constitutional amendment solidified two primary pathways to becoming a U.S. citizen: birth within U.S. territory and naturalization. Naturalization, the process by which a foreign national voluntarily becomes a U.S. citizen, is governed by laws passed by Congress, with specific requirements and procedures handled by U.S. Citizenship and Immigration Services (USCIS).5
Key Takeaways
- A U.S. citizen is an individual with full legal membership in the United States, usually by birth or naturalization.
- U.S. citizens are subject to worldwide income taxation, meaning they must report and pay taxes on income earned anywhere in the world, regardless of their country of residence.
- This status carries specific obligations, including tax Filing Status requirements and reporting of foreign financial accounts under laws like FATCA.
- Citizenship provides access to federal benefits, such as Social Security and Medicare, and certain protections abroad.
- Renouncing U.S. citizenship can trigger an Expatriation tax, which may involve a deemed sale of assets.
Interpreting the U.S. Citizen
For financial purposes, the primary interpretation of being a U.S. citizen revolves around tax obligations. Unlike most countries that tax based on residency, the U.S. employs a citizenship-based taxation system. This means a U.S. citizen must report all global Income to the Internal Revenue Service (IRS), regardless of where that income is earned or where the citizen resides. This obligation extends to disclosing foreign financial Assets through various forms, ensuring transparency and Tax Compliance.
Hypothetical Example
Consider Maria, a U.S. citizen who lives and works in London, England. She earns income from her job in London and also has investments in a British mutual fund. Despite living outside the United States and paying taxes in the UK, Maria, as a U.S. citizen, is still required to file a U.S. tax return annually. She must report her worldwide income, including her London salary and any gains from her British mutual fund, to the IRS. While mechanisms like the Foreign Income Exclusion or foreign tax credits may reduce or eliminate her U.S. tax liability, the fundamental obligation to report her global income and potentially her foreign accounts, such as those that might trigger a Foreign Bank Account Report (FBAR), remains.
Practical Applications
The status of U.S. citizen has significant practical applications across various financial and regulatory domains:
- Taxation: U.S. citizens are subject to worldwide taxation, meaning they must report income from all sources, domestic and foreign, to the IRS. This includes wages, investment gains, and business profits earned anywhere in the world.3, 4
- Financial Reporting: The Foreign Account Tax Compliance Act (FATCA) requires foreign financial institutions to report information about accounts held by U.S. taxpayers to the IRS. This law, enacted to combat offshore tax evasion, also obligates U.S. citizens to disclose their foreign financial accounts and Liabilities annually.2
- Estate Planning: For U.S. citizens, estate and gift tax rules apply to their worldwide assets, impacting international Estate Planning strategies, regardless of where the assets are located or where the citizen resides.
- Investment Access: In some cases, foreign financial institutions or investment products may be hesitant to offer services to U.S. citizens due to the extensive FATCA reporting requirements and other U.S. regulations.
Limitations and Criticisms
While U.S. citizenship offers many benefits, the unique citizenship-based taxation system presents notable limitations and criticisms, particularly for citizens residing abroad. The primary critique is the administrative and financial burden of complying with dual tax regimes—those of their country of residence and the U.S. This can involve complex calculations, significant record-keeping, and professional fees for tax advice.
Furthermore, renouncing U.S. citizenship, a process known as Expatriation, can trigger a substantial "exit tax." The expatriation tax provisions under Internal Revenue Code sections 877 and 877A apply to certain U.S. citizens who renounce their citizenship, potentially treating their worldwide property as if it were sold at fair market value on the day before expatriation, with any resulting gain subject to tax. T1his "mark-to-market" tax can be a significant deterrent for individuals considering giving up their U.S. citizenship, especially those with substantial assets.
U.S. Citizen vs. Resident Alien
The distinction between a U.S. citizen and a Resident Alien is crucial for U.S. tax purposes, although both generally share the obligation to pay U.S. taxes on worldwide income. A U.S. citizen's tax obligations stem from their citizenship status, which persists regardless of where they live.
A resident alien, on the other hand, is not a U.S. citizen but is treated as a U.S. resident for tax purposes. This status is typically determined by holding a Green Card or meeting the "Substantial Presence Test," which considers the number of days an individual is physically present in the U.S. over a three-year period. If a resident alien gives up their green card or no longer meets the substantial presence test, their U.S. tax residency typically ends, and their U.S. tax obligations shift to those of a non-resident alien, who is generally only taxed on U.S.-sourced income. A U.S. citizen, however, retains worldwide tax obligations until their citizenship is formally renounced.
FAQs
How does being a U.S. citizen affect my taxes if I live abroad?
If you are a U.S. citizen living abroad, you are still required to file U.S. tax returns and report your worldwide income to the IRS. While you may qualify for exclusions (like the Foreign Income Exclusion) or credits for foreign taxes paid to reduce or eliminate your U.S. tax liability, the filing requirement remains. You may also need to report foreign financial accounts.
Can a U.S. citizen hold dual citizenship?
Yes, the U.S. generally permits dual citizenship, meaning a U.S. citizen can also be a citizen of another country. This status does not alter their U.S. tax obligations, which continue to apply to their worldwide Income and assets.
What is the Foreign Account Tax Compliance Act (FATCA) and how does it affect U.S. citizens?
The Foreign Account Tax Compliance Act (FATCA) is a U.S. law requiring foreign financial institutions to report information about financial accounts held by U.S. citizens to the IRS. It also requires U.S. citizens to report their foreign financial accounts and certain foreign assets to the IRS, typically using Form 8938, as part of their annual Tax Compliance.
What happens if a U.S. citizen decides to renounce their citizenship?
Renouncing U.S. citizenship is a formal process that can lead to significant tax implications, including a potential "expatriation tax." This tax, which applies to certain high-net-worth individuals, may treat their worldwide Assets as sold on the day before expatriation, with any deemed gains subject to tax. It also requires certification of prior U.S. tax compliance.
Are U.S. citizens eligible for Social Security and Medicare benefits regardless of where they live?
Eligibility for Social Security and Medicare benefits primarily depends on having accumulated sufficient work credits under the U.S. system, regardless of a U.S. citizen's current country of residence. However, receiving these benefits while living abroad can involve specific rules regarding payment methods and potential taxation in the country of residence.