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Tax Treaties for Americans Abroad

Expat Tax Blog | Tax Tips for US Americans Abroad

tax treaties for Americans abroad

What’s the point of having tax treaties for Americans abroad? Basically, it’s to prevent double taxation and other tax penalties for living overseas. Tax treaties are specific agreements the United States made with foreign countries, and most likely the country you’re living in has a tax treaty with the US.

Tax treaties for Americans abroad are very useful when it comes to saving time and money with US taxes. In this blog, we’ll expand more on tax treaties and Form 8833. We’ll also ensure you understand why you may need to use a tax treaty provision for filing taxes as an American abroad.

Tax Treaties 101

Tax treaties allow US residents of foreign countries eligible to be:

  • Exempt from US income taxes on certain items of income from sources in the US
  • Taxed at a reduced rate from certain items of income from US sources

Each exemption and reduced rate differ from country to country, and on specific items on income. This is why it’s important you become aware of what tax treaty is in your foreign country. Here is a list of each country that has a tax treaty with the US.

If your country does not have a tax treaty with the US, or cover a particular type of income, you’ll need to pay taxes just like your fellow Americans back in the US. Meaning, you’ll need to pay US tax on income at the same rate and same way as a US Resident.

Each foreign country has their own provisions for Americans living there. For example, Americans living in Canada have different tax treaty provisions than Americans living in Australia.

Keep in mind that if you owe taxes to the US, you’ll need to pay by April 15 as an overseas American.

What Tax Treaties for Americans Abroad Mean to You

Treaty provisions, or laws, are usually reciprocal. Tax treaty provisions apply to both countries. A US resident could apply the same tax treaty provision to income received in the treaty/foreign country, as a US non-resident would be able to apply to US income.

Additionally, as a US citizen living abroad:

  • who receives income from their foreign country,
  • and is subject to taxes from that foreign country,

…may be entitled to receive reductions, exemptions, deductions and tax credits in the rate of taxes of those foreign countries.

For example:

Charlie, an American abroad in Italy, works at a marketing agency in Milan. His only income comes from Italy. Due to the tax treaty between the US and Italy, he is not double taxed. He only has to pay income taxes on what he is earning in Italy because he can use those income taxes as a credit on his US taxes.

A Note on US State Taxes and Tax Treaties

Each individual state in the United States has its own set of laws and rules regarding state taxes. Plus, some states also comply with provisions of US tax treaties. A tax treaty could apply to the state you last lived in.

Therefore if you want to apply a tax treaty to your income, you’ll need to check whether the state you last lived in – or are a resident of – recognizes tax treaty provisions. You should consult one of our tax professionals and let us know which state you last lived in or a resident of. Then we can determine if you need to pay state taxes as an American abroad.

Form 8833 for Americans Abroad

Form 8833 is the Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b). It is only necessary to use this form if you want to apply tax treaty provisions on your US tax return. 

So if you’re living in a foreign country that has a tax treaty agreement with the US, you’ll want to attach Form 8833 with your tax return every year. 

Or better yet, easily fill it out through our e-filing software! 

How to File Form 8833

Form 8833 allows you to disclose provisions to any of your income, credits or deductions. On this form, you’ll need to add information about the specific tax treaty article for your tax return and the IRS code that is changed by the treaty provision.

Furthermore, as an American living abroad, you’ll need to write a general description of the treaty that is being applied to your tax return. This includes income, deductions, or credits that must be exempt. Plus, you’ll need to add facts from which the tax treaty position is based.

Sounds complicated? It is. However, if you use the MyExpatTaxes software, tax treaties and Form 8833 will be a piece of cake. Our software and professional tax team make it simple for you to understand and walk through.

Failing to File Form 8833

If you fail to attach this form or disclose your treaty position for one or many years, you could be fined $1,000 for each year you failed to disclose the information. Yet if you have a valid reason as a US citizen abroad for failing this disclosure, the IRS could remove the penalty.

Do I Really Need to Apply a Tax Treaty Provision?

There are so many expat tax benefits like the Foreign Earned Income Exclusion, Foreign Tax Credit, Foreign Housing Exclusion. These benefits help reduce expat taxes, saving you money, and preventing unnecessary penalties and fees. Because of these benefits, you may not actually need to apply for a tax treaty provision on your tax return.

Got Questions?

Do you have more questions about tax treaties for Americans abroad? Or maybe you want to learn more about using Form 8833 on your tax return? Our support team is here to help. There are a lot of expat tax benefits out there for Americans abroad, and we’ll make sure you get the right ones.

In general, we recommend you file your tax return through our tax software and pay only when satisfied. We offer a flat fee rate of 149 Euro per year of filing, and our Streamlined Procedure is one the most affordable packages in the American expat tax industry.

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