The United Arab Emirates (UAE) doesn’t tax its citizens or residents on income, but if you’re on of the 50,000+ United States (US) citizens living in the Emirates (or overseas in general) you must file an income tax return to the Internal Revenue Service (IRS) nonetheless. The only concession for US citizens living and working abroad is that they are automatically entitled to a two-month extension to file their return. This means that US citizens living in the UAE have until 15 June each year to complete an income tax filing with the IRS. 

This blog post will explain why American citizens are required to report income tax in the US even if they live overseas, and how they can fulfil all their tax obligations. However, whenever assessing the tax implications of living and working abroad, you should seek the advice of a professional tax adviser before making any tax-related decisions as circumstances may vary depending on your individual situation..

Paying taxes overseas

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Income tax in the UAE

Although the UAE introduced a 9% tax on business profits (over AED 375,000) in 2023, it remains one of a small number of countries that don’t levy income taxes on individuals, earning its tax revenue instead from excise taxes, Value Added Tax (VAT) and corporate taxes on energy companies and foreign banks. As well as Emiratis, this exemption from income tax applies to the majority of foreigners who have become resident in the UAE, adding yet another compelling reason for living and working in the Emirates. However, the global reach of the IRS still applies and (in its words) American citizens are “subject to tax on worldwide income from all sources and must report all taxable income and pay taxes.”

Citizenship-Based Taxation

The US employs a system of Citizenship-Based Taxation, meaning individuals are taxed according to citizenship rather than residence. Under this arrangement, US citizens are required to pay tax to the US government on their gross worldwide income each year, no matter where they currently live or work. If they earn a worldwide income that is equal to or greater than the standard deduction amount for a given year, they must complete an income tax filing in the US. As of 2023, the standard deduction amounts are as follows: 

• Filing as single: $13,850.
• Filing as married (joint filing): $27,700.
• Filing as head of household: $20,800.

First introduced in the US in 1861, citizenship-based taxation is an extremely rare system. Eritrea is the only other country in the world to use it, taxing overseas citizens at a flat rate of 2%. US citizens living abroad are taxed at the same rates as US residents. For 2023, those brackets vary from 10% to 37%. Those who are retired and living overseas also have the same income tax obligations as a retired person living in the United States. 

Tax credits and exclusions for US citizens living in the UAE

Americans living abroad cannot avoid tax reporting at home (without renouncing US citizenship) but they can significantly reduce (or eliminate) their tax liability. One method is via the US Foreign Tax Credit, which allows anyone who has paid tax abroad to take a credit or itemized deduction for those taxes when filing their US return. However, since the UAE doesn’t tax individual income, US citizens who live there can’t avail of this credit. This specific distinction is one of the reasons why you should avail of the services of a tax professional before transferring money or making any financial decisions. 

US citizens can take advantage of other credits and deductions such as the Foreign Earned Income Exclusion (FEIE), which allows US citizens living outside America to exclude a certain amount of their foreign earnings from their income. According to IRS rules, to qualify for the FEIE an individual must:

• Have their tax home in a foreign country. 
• Have foreign earned income.
• Be either a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year, or have been physically present in a foreign country for at least 330 full days during 12 consecutive months.

The FEIE is adjusted annually for inflation, and stands at US$120,000 per person for the tax year 2023. American individuals residing in the UAE may also be eligible to deduct a limited amount of their housing expenses from their US income tax liability, through the Foreign Housing Exclusion and Deduction.   

Paying US taxes from overseas: rules and regulations

When completing their income tax filing, US citizens living outside America are required to express the reported amounts in USD, even if they receive all or part of their income in foreign currency. Payment of income tax must also be made in USD. Returns can be completed electronically or by mail. When using mail, they should not file their return in their home state, but rather send it to a specified address listed in the IRS Tax Guide for U.S. Citizens and Resident Aliens Abroad. 

As well as declaring their annual income, US citizens living in the UAE who hold significant assets may also be expected to complete the following filings:

• A Foreign Bank and Financial Accounts Report (FBAR) – also known as a FinCEN Form 114 – is required by anyone with financial accounts overseas whose total value exceeds US$10,000 at any time during the calendar year.
• A Statement of Specified Foreign Financial Assets – or Form 8938 – is required by anyone who owns foreign financial assets whose total value exceeds a given threshold amount. These include financial accounts with foreign financial institutions as well as stocks and securities. 

While most residents of the UAE enjoy an exemption from income tax, US citizens must declare earnings and assets above specified thresholds to the American government, no matter where those earnings are generated, or risk penalties. Although overseas residents are granted an automatic two-month extension to file, interest on income tax owed will begin to accrue from the usual annual filing date of 15 April , therefore prompt payment is recommended.   

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This information is correct as of June 2023. This information is not to be relied on in making a decision with regard to an investment. We strongly recommend that you obtain independent financial advice before making any form of investment or significant financial transaction. This article is purely for general information purposes.