The Tax Treaty Savings Clause: What US Expats Should Know

When Americans move abroad, one of the first things they often hear about is a tax treaty. But what is a tax treaty? Simply put, it’s an agreement between the US and another country that decides which one has the right to tax certain types of income, helping to minimize double taxation.

At first glance, a treaty may look like a golden ticket, ensuring you won’t get taxed twice on the same paycheck. But buried in nearly every US tax treaty is a small but powerful provision called the savings clause, and for American expats, it changes almost everything.

What Is The Savings Clause?

A savings clause is a standard provision in US tax treaties that essentially “saves” the US government’s right to tax its citizens and residents as if the treaty didn’t exist.

That doesn’t mean the savings clause wipes out the entire treaty. It mainly limits treaty benefits for US citizens and Green Card holders regarding certain types of income. In other words, Americans abroad often can’t rely on treaty provisions alone to reduce or eliminate double taxation unless the treaty carves out a specific exception.

How the Savings Clause Works

In principle, the savings clause says the US can tax its citizens and residents as if the treaty didn’t exist. This applies to all income categories.

In practice, each treaty then lists exceptions where the savings clause does not apply. These carve-outs usually only cover Social Security payments, Alimony, childcare payments, and the double taxation relief provision.

Why It Matters More for Americans

Technically, the savings clause applies to both treaty partners. In reality, though, only the United States enforces it against its non-resident citizens, since most countries tax based on residency rather than citizenship.

Avoiding Double Taxation Under a Tax Treaty

Even when the savings clause applies, treaties still play an important role by assigning primary taxing rights to one country. That assignment matters because it allows you to use IRS expat tools like the Foreign Tax Credit (FTC), which gives you a dollar-for-dollar credit for income taxes you’ve already paid abroad. You can generally offset the same amount of US tax on the same foreign income.

In some cases, you may also qualify for the Foreign Earned Income Exclusion (FEIE), which lets you exclude a portion of your foreign salary from US taxation altogether.

Bottom line: Treaties don’t create your eligibility for the Foreign Tax Credit (FTC), but they make sure you can actually use it. By clarifying which country taxes first, treaties prevent overlaps (both countries taxing the same income) and gaps (no creditable foreign tax). Without that, you could end up paying more to the IRS.

Conclusion

Even though most Americans abroad never end up paying much, or sometimes any, US tax thanks to tools like the FTC and the FEIE, the savings clause still matters. It’s what allows the US to keep taxing its citizens and Green Card holders, no matter where they live. That means filing a US return every year isn’t optional, even if foreign tax credits wipe out your US liability.

For expats, the real impact of the savings clause isn’t always higher taxes; it’s the ongoing obligation to report your income to the IRS and make sure you’re claiming the credits or exclusions that prevent double taxation.

Let MyExpatTaxes Help!

MyExpatTaxes makes expat taxes easy. Our software is simple to use and designed specifically for Americans abroad, while our trusted team of Tax Professionals is here to back you up. We ensure you stay compliant while helping you claim every expat tax benefit available, so you never pay more than you owe. And if you’re behind on filing, we can guide you through the Streamlined Filing Procedures to catch up without unnecessary penalties.

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