Why Does the U.S. have a Double Taxation Policy?

We get this questions sometimes… why does the U.S. have a double taxation policy?! Double taxation is when you have to pay taxes twice on the same bucket of income. The U.S. 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 U.S. citizens abroad since their host country also taxes them. 

In regards to double taxation for U.S. Expats, citizen-based taxation can certainly be frustrating…

U.S. Expats and Double-Taxation

However, don’t fret just yet, because the U.S. actually has a lot of expat tax benefits and tax treaties in place to prevent double taxation. For example, there are two treaty types you should be aware of: Country Specific Tax Treaties (Concerning Income Tax) and Totalization Agreements (Concerning Social Security Benefits and Tax), where the U.S. 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 U.S. taxes… but the tax preparation fees can be significant (that’s why we’re here!)
How does a treaty provide expat tax benefits?
  • It provides guidance on how certain income types 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 U.S.’ 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!)

What are some 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 U.S. 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 U.S. 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 U.S. taxes. If you’re living in a country where the income tax rate is higher than the U.S. (most European countries), then you will probably always have a more foreign tax credit than you can even use!

If you live in a country with a lower income tax rate, you may still owe some U.S. 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! That’s how we at MyExpatTaxes can help you!

MyExpatTaxes provide the only tax software designed for U.S. expats with a fixed/affordable price.

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