Tax treaties: why they rarely stop U.S. tax for Americans

1What the saving clause does

A tax treaty divides taxing rights between two countries. But U.S. treaties include a saving clause, which lets the U.S. tax its citizens, and generally its residents, as if the treaty had never come into effect.

So the parts of a treaty saying only your new country can tax something usually don't stop the U.S. from taxing it too. Double tax is still avoided, mainly through the foreign tax credit, which the treaty also protects.

For Americans, a treaty is mostly about its exceptions.

2The exceptions that help

Each treaty lists the articles that still apply to citizens despite the saving clause. The ones that matter most:

• Relief from double taxation: how the foreign tax credit works between the two countries, including rules that let more of your foreign tax count.
• Social security: in many treaties, only the country that pays a social security benefit can tax it. U.S. Social Security paid to residents of Canada, Egypt, Germany, Ireland, Israel, Italy, Romania and the UK is exempt from U.S. tax. See U.S. Social Security abroad.
• Some pension rules: for example, the U.S.-UK treaty generally lets growth in a UK pension stay untaxed by the U.S. until you draw it, and the U.S.-Canada treaty does the same for RRSPs.

Our country guides say what each treaty means in practice.

3Countries without a treaty

The U.S. has income tax treaties with more than 60 countries. There's none with Singapore, Hong Kong, the UAE, Saudi Arabia, Brazil, Argentina, Colombia, Malaysia or Taiwan, among others. Treaties with Croatia and Vietnam have been signed but aren't in force.

Without a treaty, the foreign tax credit still reduces your U.S. tax by the income tax you pay locally, so double tax is usually avoided anyway.

4Claiming a treaty position

When you use a treaty to reduce U.S. tax, you usually disclose it on Form 8833 with your return. The penalty for leaving out a required disclosure is $1,000. Some treaty benefits don't need the form, in cases the IRS lists.

Green card holders can sometimes use a treaty to be taxed as a resident of the other country, with serious side effects. See green card holders abroad.

Behind on U.S. returns? The Streamlined Foreign Offshore Procedures let Americans abroad catch up with no penalty, if they qualify. See every IRS catch-up option for expats.

Common questions

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