Did you know that expat double taxation for Americans abroad is when you have to pay taxes twice on the same bucket of income? Yup. The US and Eritrea are the only two countries in the world that enforce a citizen-based taxation system. This can result in the double taxation of US citizens abroad since their host (or foreign country) also tax them.
Accidental Americans, this post is also for you. Accidental Americans are people who are born abroad from at least one US parent who can acquire American citizenship at birth. Your US citizenship dictates your tax responsibility, even if you are living outside the states. To avoid double taxation should just be as important for you.
In regards to double taxation for Americans abroad, citizen-based taxation can certainly be frustrating. Today we’ll outline what you can do in your life to prevent double taxation.
What is Double Taxation
To put it simply, double taxation is when your income taxes are paid twice on the same source of income. For example, you could be working as a sales manager in Amsterdam as a US citizen. Then when tax season hits, you not only need to pay Amsterdam taxes but US taxes from the same pot of money as well.
This is double taxation, but not a real-life example because there are treaties that can prevent you from being double-taxed. We share more on this below.
You may ask why is double taxation allowed. It’s simply in creation because of the individuals that the people of the United States elect into their government. And so it’s the people within the government that make double taxation possible.
How to Prevent Double-Taxation
As you can see, the US actually has expat tax benefits and tax treaties in place to prevent double taxation for Americans abroad.
For example, there are two treaty types you should be aware of:
- Country-Specific Tax Treaties (Concerning Income Tax)
- Totalization Agreements (Concerning Social Security Benefits and Tax)
Treaties as US Expat Tax Benefits
Treaties provide guidance on how certain types of income are sourced and which country has primary taxing rights. More importantly, it can also define which income types can be completely excluded from either the US or your host country’s taxation system.
This is especially important for tricker income sources such as social security benefits, pension, unemployment, paternity pay… you name it!
To claim a treaty tax benefit, you would have to normally file Form 8833: Treaty-Based Return Position Disclosure (hint: we include some common treaty benefit claims in MyExpatTaxes’ tax software so you don’t have to read through the treaties yourself!). This form requires you to inform the IRS of what treaty article you are intending to use your position on the claim.
United States Income Tax Treaties from A to Z
The United States has tax treaties with a number of foreign countries. Under these treaties, residents (not necessarily citizens) of foreign countries are taxed at a reduced rate, or are exempt from U.S. taxes on certain items of income they receive from sources within the United States. These reduced rates and exemptions vary among countries and specific items of income.
Click here to see if your country made the list. The US has made agreements with certain countries around the world to prevent double-taxation. So moneywise, you’re probably not going to end up paying additional US taxes… but the tax preparation fees can be significant.
Here at MyExpatTaxes, we can help you, an American abroad, reduce your taxes and income taxes through our expat tax software.
Non-Country Specific Expat Tax Benefits
For non-tricky income types such as salary/wages, you don’t need to spend your precious time scanning these treaties. The IRS has some standard benefits that you can as a US Expat in general, regardless of the country (as always some exceptions do apply…)
- Foreign Earned Income Exclusion: You can exclude up to approximately $100K USD of foreign earned income per year if you are a bona fide resident abroad or have been physically out of the US for 330 full days.
- Foreign Tax Credit: Do you pay income taxes in your host country? Then most likely you can take a $ for $ credit for your owed US taxes. If you’re living in a country where the income tax rate is higher than the US (most European countries), then you will probably always have a more foreign tax credit than you can even use!
Claim Benefits with MyExpatTaxes
If you live in a country with a lower income tax rate, you may still owe some US taxes but only as much as you would have paid making that same salary in the states. The trick is knowing how to claim those benefits!
We at MyExpatTaxes help thousands of Americans abroad every week fulfill their tax obligation, become tax compliant, and avoid double taxation. Our company provides the only tax software designed for US expats with a fixed affordable price.
This post was updated on May 15, 2020.