You might think international tax issues are only for billionaires with Swiss bank accounts or massive corporations moving money through offshore subsidiaries. Not anymore.
You might have worked overseas for a few years and still have a retirement account there, or inherited property in your parents’ home country. You may have invested in a foreign startup, opened a bank account while living abroad, or started a small business that operates internationally.
“Whatever the situation, if you are a Maryland or Virginia resident with financial ties outside the United States, you have stepped into a world of tax rules that can get complicated fast, and the consequences of getting it wrong can be brutal,” says Maryland and Virginia tax attorney Michael March from Whiteford Tax Defense.
The U.S. Taxes You on Everything, No Matter Where You Earn It
Here is the first thing that catches people off guard: the United States is one of the few countries that taxes its citizens and residents on their worldwide income. It does not matter if you earned that money in Germany, collected rent from a property in India, or made investment gains through a brokerage account in the UK. If you are a U.S. taxpayer living in Maryland or Virginia, the IRS expects you to report it.
The Reporting Requirements Nobody Warned You About
Beyond reporting foreign income on your regular tax return, the U.S. has separate disclosure requirements for individuals with international financial connections. These rules were designed to crack down on offshore tax evasion, but they sweep up many ordinary people with legitimate reasons for holding money abroad.
Do you have a foreign bank account? If the total value of your foreign accounts exceeds certain thresholds during the year, you might need to file something called an FBAR (Report of Foreign Bank and Financial Accounts). This is separate from your tax return and has its own deadline. Do you own foreign financial assets above certain amounts? You might need to file Form 8938 with your tax return.
Tax Treaties: Your Potential Lifeline Against Double Taxation
Okay, so the U.S. taxes worldwide income. And other countries tax income earned within their borders. Does that mean you are just required to pay taxes twice on the same money? Not necessarily. This is where tax treaties come in, and an understanding of these is vital to how you can use them to your advantage.
The United States has tax treaties with dozens of countries. These agreements are designed to prevent double taxation and clarify which country has the right to tax what. Depending on your situation and the country involved, a treaty might reduce or eliminate the taxes you owe to one side or the other.
Treaties can affect all types of income, including wages, pensions, dividends, interest, rental income, business profits, and more. The specifics depend on the particular treaty and the type of income you are dealing with.
Do Not Forget About Maryland and Virginia Taxes
International tax planning is mostly a federal game, but if you live in Maryland or Virginia, your state tax situation adds another layer of complexity. Both states have their own rules about what counts as taxable income, how residency is determined, and whether you get credit for taxes paid elsewhere. Those rules do not always align with federal law.
Coordinating your federal and state strategies is essential to avoid solving half the puzzle and getting blindsided by the other half.
Conclusion
If you are living in Maryland or Virginia with income, assets, or business interests outside the United States, you are navigating a tax landscape that is more complicated than most people realize. The U.S. taxes you on worldwide income. There are disclosure requirements with brutal penalties for noncompliance. Tax treaties and credits can help, but only if used correctly. State taxes add another layer that does not always match federal rules.
Do not hesitate to get help from a professional tax attorney to get legal clarity and guidance where necessary.