US Tax Treaties Help Prevent Double Taxation – A Guide for US Expats

Americans abroad face some unique tax challenges. They must still file US taxes no matter where they live, which can lead to the risk of double taxation (being taxed both by the US and the host country). Tax treaties can help prevent double taxation but are often overlooked. And they don’t apply automatically – tax treaty benefits must be claimed. 

Treaties often contain helpful measures to reduce taxes, but they don’t prevent expats from having to file. This is when the help of a US expat tax advisor is important to minimize liability and take the most beneficial treatment for each specific case.

In this article, we explore how tax treaties work, and when and how expats can benefit from them.

Table of Contents

• What is the purpose of US tax treaties?
• Tax treaty benefits explained
• Tax treaty saving clause
• Re-sourcing clause: Taxing income as if it was earned in another country
• Residency and tie-breaker rules
• Which countries have an income tax treaty with the US?
• Filing Form 8833 to claim treaty benefits
• Do double tax treaties help with state taxes?
• What if there’s no tax treaty?
• Totalization Agreements
• Case study: How one family saved millions with a tax treaty
• How to find out if you can benefit from a US tax treaty

What is the purpose of US tax treaties?

A US tax treaty is a bilateral agreement between the United States and another country. These treaties address tax issues related to cross-border income. They define how certain types of income—such as wages, business profits, dividends, interest, and royalties—should be taxed. The treaties also determine which country has the primary right to tax these income streams or assets.

Income tax treaties address specific types of income, such as:

• Passive Income: Tax treaties often reduce withholding rates on dividends, interest, and royalties. This helps reduce the tax burden on expats with investment income.
• Retirement Accounts: Some treaties explain how US retirement accounts (like 401(k)s or IRAs) are treated. They specify whether distributions are taxable in the US, the host country, or both. Some treaties also address how foreign retirement accounts are treated in the US.

These provisions vary depending on the country. It’s important to understand the tax treaty for your country of residence and analyze each case individually.

Income tax treaties are typically the most useful for expats. However, other types of tax treaties exist. For example, some tax treaties only address inheritance and estate issues. 

Tax treaty benefits explained

Each US income tax treaty is different, but it will usually provide these key benefits:

• Exemptions or reduced tax rates on retirement or pension plans.
• Exemptions or reduced tax rates on business income.
• Reduced withholding rates on passive income (such as dividends and interest).

Income tax treaties can also determine which country can tax your social security income or distributions. For example, the US-Canada Tax Treaty will determine whether a US expat living in Canada will pay taxes on social security payments in the United States or in Canada.

(However, where you will make contributions to the social security system is determined by a Totalization Agreement – more about this later). 

However, tax treaties are not always as advantageous for US expats as they often assume, due to a provision in all US tax treaties known as the “saving clause.” 

Tax treaty saving clause

The “saving clause” in US tax treaties is important for US expats to understand. It allows the US to retain the right to tax its citizens on their worldwide income, even if they live in a country with a tax treaty. 

Essentially, the saving clause means that the US can tax expats as if the treaty did not exist.

In other words, in the eyes of the US government, nothing in the treaty matters for US citizens unless an exception is mentioned in the text. Usually, certain sections of the tax treaty will be exempt from the saving clause. 

As you can see, clauses like this are why it’s so important to not just cherry-pick information in a US tax treaty. Instead, you (or your tax advisor) should have a clear understanding of the entire treaty. You must also pay attention to technical explanations and protocols that may be issued after the original tax treaty was put in place. 

Re-sourcing clause: Taxing income as if it was earned in another country

A re-sourcing clause is another type of clause that is found in some treaties. It allows certain types of income that are sourced in one country to be taxed as if they were sourced in another country.

The most common example of this is when someone is working abroad for a foreign company and is sent on a work trip to the US.

Example: Jennifer in Australia

Jennifer is a US citizen and a resident of Australia for all of 2019. She pays Australian income taxes on her employment income and spends 10 days in the US for a business trip in February. The income earned while in the United States is considered US-sourced and taxed by the IRS.

This income is not eligible for the Foreign Earned Income Exclusion or the general Foreign Tax Credit because it was earned in the United States. Because the employer is Australian, the Australian government will also tax it as Australian earned income. Moreover, the Australian government does not provide any relief for the income earned abroad. In short, Jennifer could potentially be taxed twice on this income.

Fortunately, by claiming the US-Australia Tax Treaty, income earned in the US during the 10-day work trip can be re-sourced as foreign-earned. With that, it would be considered Australian sourced, not US sourced, and qualify for the Foreign Tax Credit. 

Using the US Australia tax treaty, Jennifer can avoid double taxation on the income earned during her US travel. 

Residency and tie-breaker rules

Tax treaties define residency and offer tie-breaker rules to help solve conflicts when someone is a tax resident in both the US and another country. This applies mostly to foreign nationals moving to the United States.

For example, if you own homes in both countries, the tie-breaker rules will consider factors such as where your permanent home is, where your vital interests are (like family and business), and where you spend most of your time. These rules help determine which country has the primary right to tax.

Which countries have an income tax treaty with the US?

The United States has income tax treaties with over 60 countries, including most (but not all) popular expat destinations. In fact, the US even has tax treaties with exotic places like Kyrgyzstan.

Here are a few of the top US tax treaty countries:

• Australia
• Canada
• Mexico
• China
• Japan
• Denmark
• Germany
• Italy
• Luxembourg
• Spain
• Switzerland
• United Kingdom
• And more.

Some other popular destinations (such as Singapore, Hong Kong, Panama, UAE, Brazil, and Colombia) do not currently have income tax treaties with the US.

Filing Form 8833 to claim treaty benefits

To claim tax treaty benefits, expats must file Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b). You file it together with the tax return for every year that you claim treaty benefits.

The form requires specific Information about the tax treaty, including: 

• Treaty country from which you are claiming benefits
• The article of the treaty that applies to your tax return 
• The amount and type of income that’s exempt from taxation, based on the treaty 
• Internal Revenue Code (IRC) section that is being overruled or modified
• Limitations of benefits provision (if applicable)

As you can see, this gets very technical. An expat tax accountant can help you navigate this and file correctly. If you don’t file Form 8833 correctly, you could face a penalty of $1,000 per year. 

Fortunately, the IRS may waive this penalty if there’s a valid reason for the omission. (Our team has experience with penalty abatements in this situation.)

Do double tax treaties help with state taxes?

US tax treaties apply to federal tax. Except in special circumstances (such as student income), tax treaties do not apply on the state level and states do not allow treaty benefits.

Make sure you understand your state filing requirements. Some states, like California, continue to consider you a tax resident, even when you live abroad. 

What if there’s no tax treaty?

If the US has no tax treaty with a country, it doesn’t automatically mean double taxation will occur. The US tax code offers several ways to help expats in this situation:

• Foreign Earned Income Exclusion (FEIE): This allows qualifying individuals to exclude up to a certain amount of foreign-earned income from US taxes ($126,500 for 2024, $130,000 for 2025). Expats can claim the FEIE by filing Form 2555.
• Foreign Housing Exclusion: Expats eligible for the FEIE can also exclude certain housing costs while living abroad.
• Foreign Tax Credit: This credit allows expats to offset foreign taxes paid against their US tax liability. Expats can claim the Foreign Tax Credit by filing Form 1116.

By utilizing these exclusions and credits, most expats can significantly reduce, or even eliminate, their US tax liability on foreign-sourced income.

Totalization Agreements

The US has signed Totalization Agreements with several countries to avoid double social security taxation. These allow expats who are self-employed or work for a US-based company in these countries to just pay social security taxes in one country, depending on the terms of the Totalization Agreement. These contributions count toward social security benefits in either country

Case study: How one family saved millions with a tax treaty

In one case, our team was able to save a client millions of dollars by applying a tax treaty.

A few years ago, an Argentine family approached us for tax assistance after their father passed away. During his lifetime, the father had built a multi-million-dollar stock portfolio at a US brokerage firm.

When he passed away, the brokerage firm froze his account and argued that as a non-US person who owned stock, the man’s family owed the IRS a 40% estate tax.

During our consultation with the family, we discovered that the father had immigrated from Italy to Argentina as a young man and that he was still an Italian citizen at the time of his passing.

Working directly with the IRS, we were able to establish that the family patriarch was still an Italian citizen and was eligible for an exception under a US-Italy Estate Tax Treaty from the 1940s. By applying for this exemption, the Argentine family protected millions of dollars from estate taxes and preserved their father’s assets.

As you can see, tax treaties can have a huge impact on your tax liability. An experienced expat tax advisor can help you leverage them

How to find out if you can benefit from a US tax treaty

Understanding US tax treaties and whether they apply to you usually isn’t straightforward. Nonetheless, tax treaty benefits can be an important part of your tax savings strategy as an American abroad. And, as we’ve seen in the examples above, in some cases they can help US taxpayers overseas save significant money.

Forgetting to check for a tax treaty can result in missed tax savings. In addition, you could end up owing penalties to the IRS if you incorrectly claim a tax treaty.

Before proceeding with a tax treaty, it´s worth consulting an expert who fully understands the nuances of expat tax, tax treaties, and Form 8833. If you miss an important clause, your tax return could be filed incorrectly, and you could be penalized.

Our team has broad experience utilizing income tax treaties to help Americans abroad optimize their taxes.