The United States has tax treaties with 69 other countries. Thanks to these tax treaties, you can often reduce your income tax liability and avoid double taxation while living overseas. To claim your tax treaty benefits, you must file the IRS Form 8833 (also called the Treaty-Based Return Position Disclosure Under Section 6114 or 7701). 

In this article you’ll learn:

• – How tax treaties work
• – How to file Form 8833
• – The penalties involved if you don’t file Form 8833
• – Who is exempt from filing Form 8833

How do tax treaties work? 

Tax treaties between the United States and a foreign country outline the mutual agreement and understanding of how both countries define residency and how they will tax residents and nonresidents of each country. While they apply to individual taxpayers and companies, we’ll just focus on individual taxpayers in today’s article.

Under many of these treaty provisions, expats and foreigners living in the US (such as nonresident aliens or green card holders) may benefit from reduced tax liability and exemptions on various types of income. To view what the rules are in the tax treaty between the US and your country of residence or citizenship, check out the official IRS list of all US tax treaties from A to Z. 

It’s also important to note that not all US states recognize international tax treaties… meaning income the IRS excludes on your federal tax return may not be excluded on your state tax return. Alabama and Connecticut are just two examples of states where international tax treaties do not apply!

How do I file Form 8833? 

To claim treaty benefits on your tax return, you must file Form 8833 to the IRS each tax year with your annual filing. Here’s a quick look at the information you’ll need to include in Form 8833:

• – Reference ID number
• – Your country of tax residency
• – Address in the country of residence
• – The article of the treaty that you want to use
• – Which income qualifies for exemption, according to the tax treaty
• – An explanation of the treaty-based position that you are taking

(Here’s a link to download Form 8833 in PDF form for your convenience!). 

Are there penalties if I don’t file Form 8833? 

The short answer is yes (no surprise!). 

The penalty for not filing Form 8833 when taking a treaty-based position on your tax return is $1,000 for individual taxpayers. If you exclude income from your return because of something you’ve relied on within a tax treaty, it is essential to state that to the IRS on Form 8833 to avoid penalties. 

Just learning about this filing requirement? No worries – if you can provide a reasonable explanation why you didn’t file Form 8833, there’s a chance that you can qualify for an exemption from these fines.

Who is exempt from filing Form 8333? 

According to the IRS, US taxpayers that fall under the following circumstances don’t have to file Form 8333:

• – You claim a reduced withholding tax under a treaty on interest, dividends, rent, royalties, or any other fixed or determinable annual or periodic income typically subject to a rate of 30%
• – You claim a treaty exemption that results in reduction or modification of taxable income from:
  • – Dependent personal services
  • – Pensions
  • – Annuities
  • – Social security
• – You are a partner in a partnership or a beneficiary of an estate or trust, and that partnership, estate, or trust reports that required information on its return
• – You qualify to claim a reduction or modification of the taxes applied to income under an International Social Security Agreement or a Diplomatic or Consular Agreement
• – The payments or items of income you usually must declare don’t surpass $10,000

The Catch for US Citizens…

Now that you know the benefits that Form 8833 can bring to your tax return, there is some bad news to break for US citizens. 

Most tax treaties include a Savings Clause provision that states that the US can tax its citizens as if the treaty did not exist in the first place. The clause generally prevents the US citizen taxpayer living abroad from taking advantage of the treaty’s contents. 

That being said, some exceptions to this saving clause exist, providing a narrow but existent window of application of the tax treaty for US taxpayers living abroad. 

Don’t Get Double Taxed Overseas

No one wants to pay taxes twice on the same income. While Form 8833 allows you to claim tax treaty provisions and reduce what you owe to the IRS, it’s just one option. Other ‘tools’ to reduce US tax liability exist, such as the Foreign Earned Income Exclusion (FEIE) or the Foreign Tax Credit (FTC). 

If you have any questions about which tax treaty provision or relief program best benefits you, we can help. Not every US expat is the same, which is why our team of CPAs will assess your specific situation to find the best solution for you. 

The post Tax Treaty Benefits & Form 8833: What You Need to Know (From a CPA!)  appeared first on Bright!Tax Expat Tax Services.

In this article, we will dive into what Totalization Agreements are, some general rules on how they are applied, and how they impact US expats living abroad. 

What is a Totalization Agreement? 

US expats must report their worldwide income to the IRS each year regardless of where they live. As a result, some end up in the dilemma of having to pay both US Social Security and the insurance system of their new home country. 

While expats employed by companies registered overseas (read: foreign employers) are generally not impacted by double taxation, self-employed taxpayers run the risk. That’s when Totalization Agreements come into play. 

A Totalization Agreement is a tax convention between the US and another country to determine how taxpayers should pay into & receive benefits from their respective social security systems when they have connections to both countries. 

The typical outcome: taxpayers avoid paying into both social security systems simultaneously, thereby avoiding double taxation on their Social Security contributions.

What makes a Totalization Agreement different from a traditional tax treaty? A treaty doesn’t include provisions related to social taxes. Totalization Agreements, however, directly handle Social Security taxes as an agreement independent from the tax treaty itself. For example, there are some countries such as Chile and Brazil that have a Totalization agreement in place with the US, but a general tax treaty otherwise does not exist.

Another goal of Totalization Agreements is to dictate benefit allocation and protection for American expats who have split careers across different countries. 

Here’s a complete list of the countries that have a Totalization Agreement with the US in 2022:

• – Australia
• – Austria
• – Belgium
• – Brazil
• – Canada
• – Chile
• – Czech Republic
• – Denmark
• – Finland
• – France
• – Germany
• – Greece
• – Hungary
• – Iceland
• – Ireland
• – Italy
• – Japan
• – Luxembourg
• – Netherlands
• – Norway
• – Poland
• – Portugal
• – Slovak Republic
• – Slovenia
• – South Korea
• – Spain
• – Sweden
• – Switzerland
• – United Kingdom
• – Uruguay

If a country doesn’t have a Totalization Agreement with the US, you must pay US self-employment tax as a self-employed US taxpayer. And if you reside in a foreign country where you are also subject to taxation, you’ll likely pay social security taxes to both countries. 

How is a Totalization Agreement applied?

Not all totalization agreements are the same, and they vary from country to country. The factors that influence the rules of the totalization agreement include:

• – Whether you’re employed or self-employed 
• – How long you plan to stay in the new country 
• – Whether you are covered under the social security system (and therefore able to obtain a certificate of coverage) 

A coverage certificate proves that the employee and employer are exempt from having to pay taxes to the foreign country. To get a certificate of coverage, you must submit a request to the Social Security Administration. 

Can self-employed US expats benefit from Totalization Agreements? 

Typically, self-employed US citizens must pay the following taxes, which the IRS refers to as self-employment tax (for the self-employed) or payroll tax (for those who are employed):

• – 12.4% Social Security tax
• – 2.9% Medicare tax

The rules for Totalization Agreements are a bit more complicated. While self-employed expats can also avoid double taxation, every Totalization Agreement has its own rules, generally based on these factors:

• – The source of their self-employed income
• – Their tax residency status
• – Their nationality 
• – How long they’ve been self-employed

The best advice for self-employed US expats is to consider whether the US has a Totalization Agreement with their new home country. That way, they can plan their time abroad and budget for taxes accordingly.

You Don’t Have to Figure Out Your Social Security Taxes on Your Own

Totalization Agreements aren’t easy to navigate, especially if you don’t have a tax background. That’s why it’s best to consult with an advisor to help figure out the best solution and to avoid paying Social Security taxes twice on the same income.

At Bright!Tax, we help our expat clients solve US tax challenges in various ways, whether it’s minimizing their Social Security taxes or filing their Report of Foreign Bank and Financial Accounts (FBAR) to the IRS. You can contact one of our CPAs to assess your tax situation and learn more about our services. 

The post How Totalization Agreements Affect US Expat Taxes appeared first on Bright!Tax Expat Tax Services.

While the tax treaties that the US has with around 100 other countries generally don’t prevent US expats from having to file US taxes, there are several IRS exemptions that expats can claim when they file their federal US tax return that allow them to avoid paying taxes on the same income twice.

The main exemptions are the Foreign Tax Credit, and the Foreign Earned Income Exclusion. Which is most beneficial to claim depends on several factors, such as where the expat lives, the tax rate in that country, their income levels, and the circumstances of their spouse for example, but in all cases expats have to file a federal return to claim them.

Furthermore, while these measure reduce US income tax liability, they don’t reduce social security taxes.

So what about social security contributions?

US social security for expats

To claim social security benefits in retirement, all Americans, including those who live or who have lived abroad, must pay at least 40 quarters’ of social security contributions.

Totalization Agreements for US expats

Totalization Agreements are tax treaties that are specifically designed to prevent the possibility of paying social security contributions to two countries at the same time.

Most Totalization Agreements stipulate that if a person is going to live in a foreign country for up to five years, they will continue paying social security contributions in their home country. If on the other hand they intend to live abroad for longer, or if they don’t know how long they are going to live abroad for, they will instead pay social security contributions in their host country.

The great thing about Totalization Agreements is that they allow for contributions made in either country to be applied to either system. So for example if an American lived in the UK for 7 years and so paid UK social security contributions during this time, those contributions would count towards their ability to receive US social security benefits when they retired.

Expats who live in other countries on the other hand should also consult an expat tax specialist to see what their best options are.

Catching up

Expats who are behind with their US tax filing could face significant hassle and penalties if the IRS contacts them before they become compliant.

As such, we recommend that expats who are one or two years behind with their US tax filing back file their missing returns at their earliest convenience. Expats who are three or more years behind on the other hand can catch up without facing penalties by using the IRS Streamlined Procedure amnesty program, as long as the IRS hasn’t contacted them yet.

The post What American Expats Need to Know About Totalization Agreements appeared first on Bright!Tax Expat Tax Services.

These updates, or protocols, were agreed with the respective countries nearly a decade ago, with the delay in their ratification largely due to the efforts of a single senator, Paul Rand, who has concerns that the information exchange elements of the new protocols breach Americans’ privacy rights.

Further ratification of updates to treaties with Poland, Hungary and Chile are still pending.

How do US international tax treaties benefit US expats?

All Americans are required to file US taxes on their global income. This rule leaves many expats at risk of double taxation, as they may also have to file foreign taxes in the country where they live. Unfortunately, the international tax treaties that the US has signed with around 70 other countries don’t mitigate this risk for most expats.

Some expats may need to claim both, depending on the tax rules in the country where they live, as well as their income types and levels and where their income is sourced. Expats should always seek advice from a US expat tax specialist to ensure that they file in the most beneficial manner.

Some expats may benefit from a tax treaty provision however, in particular researchers, developers, teachers, athletes, artists, students, some retirees, and some Americans with foreign registered businesses that also trade in the US. These expats can claim any relevant treaty provision when they file their US federal tax return by attaching IRS Form 8833.

How will the newly ratified protocols affect expats?

The new protocols that have been ratified are updates to existing treaties. The new Switzerland, Spain and Japan protocols introduce exemptions to certain withholding taxes on interest and cross border dividends. The latter is intended to allow companies to invest and expand rather than keep their money tied up in refundable taxes for long spells of time. Paragraph

Americans who live abroad but haven’t been filing US taxes reporting their global income because they weren’t aware that they had to can catch up without facing penalties under an IRS amnesty program called the Streamlined Procedure.

Americans who are just one or two years behind can simply back file.

The post Senate Ratifies Updates To Tax Treaties appeared first on Bright!Tax Expat Tax Services.

The purpose of the treaty is to prevent double taxation for Americans living in China and Chinese citizens living in the US. The principle way it achieves this is by allowing expats to claim Chinese tax credits against US taxes paid on US sourced income, and US tax credits against Chinese source income. So US expats living in China must file both Chinese and US taxes.

US taxes for expats in China

The US taxes based on Citizenship, meaning that all US citizens and green card holders, including US expats living in China, with worldwide income of over $12,000 a year, or just $400 of self-employment income, are required to file a US tax return each year.

China on the other hand only requires Chinese residents to file Chinese taxes. An American typically qualifies as a Chinese tax resident if they have a residence in China, or if they’ve maintained a temporary residence in China for a year, or if they’ve been in China for 60 months in the last 120 months.

This leaves many US expats living in China having to file two tax returns, and also puts them at risk of double taxation.

The United States – China Tax Treaty covers double taxation with regards to income tax and capital gains tax, however, as already mentioned, due to a Savings Clause, the benefits are limited for Americans expats living in China. The treaty does ensure though that no one will pay more tax than the higher of the two countries’ tax rates, and it also defines where taxes should be paid , which normally depends on where the income arises.

The only exceptions to the Savings Clause in the US-China Tax Treaty are for American researchers, teachers, students, diplomats, professional athletes competing, and for pension income.

The way for US expats to avoid double taxation on their income arising in China is to claim US tax credits to the same value as Chinese income taxes that they’ve already paid.

For income arising in the US, Americans in China can claim Chinese tax credits against income US taxes paid to the IRS.

It is possible in some circumstances to claim both the Foreign Earned Income Exclusion and the Foreign Tax Credit, although they can’t both be applied to the same income.

Article 25 of the US-China Tax Treaty also contains a clause that allows the Chinese government to send US expats’ Chinese tax information directly to the IRS, as well as their Chinese bank and investment account balances.

To claim a provision in the United States – China Tax Treaty (besides claiming US tax credits), expats should use IRS form 8833. For example, article 20 of the treaty exempts American students in China from paying Chinese taxes on their student income.

Catching up

Expats in China who are behind with their US tax filing because they were unaware of the requirement to file from abroad can catch up without facing penalties under an IRS amnesty program called the Streamlined Procedure, so long as they do so before the IRS contacts them about it.

The post Taxes for Expats – The US – China Tax Treaty appeared first on Bright!Tax Expat Tax Services.

In principle, tax treaties are intended to prevent double taxation on the same income by two different countries.

The US has signed tax treaties with around 70 other countries (with more in the pipeline), however in general these treaties protect foreign nationals living in the US from double taxation much more than US citizens living abroad.

This is because most US tax treaties contain a ‘Saving Clause’, which essentially guarantees the US the right to tax its citizens regardless of the other provisions of the treaty.

When exactly are tax treaties beneficial to US expats?

Another example of when a tax treaty can benefit US citizens is if they are living abroad as a researcher, student, teacher or trainee. Most US tax treaties contain provisions to exempt these groups from having to pay taxes in their host country, providing their residence abroad is temporary, typically no longer than 2-5 years, as defined in each tax treaty.

Two important points to make though are that all tax treaties are different, so if you think you might benefit from a tax treaty provision, you still have to check the particular treaty, and secondly, that the benefits of a tax treaty aren’t applied automatically, but instead have to be claimed by filing form 8833 when you file your federal income tax return.

So how can expats avoid double taxation?

So in general, the usefulness of tax treaties to protect most US expats from double taxation is limited. The good news however is that there are a number of other ways to do this.

For expats who earn up to around $100,000, the Foreign Earned Income Exclusion lets them exclude their income from US taxation.

This is often a good strategy for expats who have paid more tax abroad than they would owe to the US, as they can claim more US tax credits than they need and carry their excess credits forward for future use.

It’s probably clear by now that expats always have to file to claim the exemptions that let them avoid double taxation, and also that expats should strategize which exemptions they claim depending on their circumstances (to file most beneficially in terms of tax efficiency). It may or may not be beneficial to take advantage of the provisions of a tax treaty a part of this strategy, again depending on their circumstances.

Catching up

Expats who weren’t aware that they have to file a US tax return while living abroad, perhaps because they thought they were protected by a tax treaty, should consider catching up with their US tax filing using the Streamlined Procedure. The Streamlined Procedure is an IRS amnesty program that lets expats catch up without facing any penalties, while also letting them backdate the exemptions (and tax treaty provisions, if applicable) that allow them to avoid double taxation.

The post Do Tax Treaties Protect US Expats from Double Taxation? appeared first on Bright!Tax Expat Tax Services.

Of the estimated nine million Americans living abroad (this number includes diplomatic and military personnel), only a small proportion are currently filing a federal US tax return however.

Many of those who don’t aren’t aware of their obligation to file a US return, believing that because they pay tax in another country, they don’t have to. This assumption is mistaken.

Another mistaken assumption is that because a tax treaty exists between the US and their country of residence, where they may already pay taxes, again they don’t have to file a US return and pay US taxes. Unfortunately this isn’t the case either.

While the US has signed tax treaties with around 70 countries, US taxpayers who wish to claim any of the provisions contained in one of these treaties still have to file a return to claim the provision, and they may also still be liable for US taxes. Furthermore, almost all the treaties contain a “saving clause” which prevents US citizens from using a tax treaty to avoid taxation of U.S. source income.

There are other mechanisms that prevent or reduce US income tax liability for Americans living abroad, such as the Foreign Earned Income Exclusion, and the Foreign Tax Credit, however again these need to be actively claimed by attaching extra forms to a federal income tax return. Which of them it is most beneficial to claim depends on each taxpayers’ individual circumstances, however the salient point is that a return must be filed in all cases where a US citizen or greencard holder earns over $10,000 a year, or just $400 a year of self-employment income.

US expats have additional filing obligations too, such as reporting foreign assets worth over $200,000 per person (excluding a home owned in their own name), and reporting foreign financial accounts if they contain an aggregate total of over $10,000 at any time during the tax year.

Penalties for failing to file can be steep, and the IRS is increasingly capable of knowing who isn’t filing from information provided by foreign tax authorities as well as foreign financial institutions (including banks). However, if you weren’t previously aware of your obligation to file, perhaps because you thought you were protected by a tax treaty, there is an amnesty program called the Streamlined Procedure that allows you to catch up without facing any fines.

The post The US Has A Tax Treaty With My Country Of Residence – Do I Still Have To File A US Federal Return appeared first on Bright!Tax Expat Tax Services.