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Tax Tips for U.S. Americans Abroad

Why Does the US Have a Double Taxation Policy?

What Forms Does an Expat Really Need?

Did you know that 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. 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.

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 USA 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.

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.

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

The US actually has a lot of 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:

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 (that’s why we’re here!).

How Treaties Provide 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.

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 Your Benefits

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! That’s how we at MyExpatTaxes can help you! We provide the only tax software designed for US expats with a fixed/affordable price.

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2 Comments

  1. Avatar Daniel M. on October 9, 2019 at 8:29 am

    Hi Michelle,

    Thanks. I have referred to the US-Canada tax treaty and unclear on how the resourcing rules work and what impact being a US citizen has. I am a US citizen residing in Canada. I have received conflicting responses from the IRS/CRA and cross border tax advisors as to where to pay the tax, what reduced rate and where to claim the FTC for US sourced interest income and dividends. The CRA refers to article XI of the tax treaty claiming that US interest arising in the US is exempt from US taxes and therefore there is no FTC. For Dividends, the CRA state it is limited to 15% tax rate as per the treaty. I am trying to confirm if this is fact correct and if they are overlooking the fact I am a US citizen. I understand the total taxes I pay will probably be the same the only difference being to which country I pay it to. I have reread several times article XXIV clause 4 which seems to imply that as a US Citizen resident in Canada the interest income sourcing remains in the US. This is contrary to a non-US Citizen Canadian resident receiving US income who would source the income to Canada. I am trying to find a laymen terms explanations of how this works. Please let me know if you know of any resource, tutorial, book that explains it. Thanks.

    • Markus Markus on October 9, 2019 at 2:36 pm

      Hi Daniel,

      I’ll follow up with you through email, if that’s alright with you!

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