Expat Tax Advice: Understanding Tax Treaties

Expat Tax Advice on Tax Treaties

As you’re well aware, American expatriate taxes can be confusing. There are many nuances involved, and understanding expat tax advice to be a bit tricky, but we’re here to highlight the many benefits that expats can take advantage of – one of which is the opportunity to reduce or eliminate double taxation.

What Is Double Taxation?

When you move out of the US, you become a non-resident but remain a citizen – unless you renounce your citizenship, that is. A little expat tax advice for you: because you are still a citizen of the US, the IRS requires you to submit a US tax return to report your worldwide income – even if it was not earned in the US. In many countries, you’ll also be required to pay taxes there – hence, double taxation.

Double Taxation Clause

Fortunately, there are multiple ways for you to avoid paying taxes in both the US and the country in which you currently live. One of these is a Double Taxation Clause, which means the US and the country in which you live have agreed to only tax you once for the specified income, rather than being taxed in both. The caveat to this is you must set up a permanent residence in the country where you live in order to take advantage of most of the available tax treaties.

Retirement Benefits

Generally speaking, benefit payments you receive in the US are only taxable in the US and benefit payments you receive in another country are only taxable in that country, if there is a tax treaty in place. Non-government retirement funds are only taxable in the country in which you reside, so if you have a pension earned in the US but you’ve retired to France, you’d only be taxed on the pension in France.

Social Security Totalization

This is a US International Social Security agreement, and it eliminates dual taxation on your Social Security benefits. This is very important to expats, because if you live in a country that doesn’t have this totalization agreement, you may be responsible for Social Security taxes in both countries. If it’s a country with a totalization agreement and a US employer sends you to the country for less than 5 years, you would pay your Social Security taxes to the US. On the contrary, if it’s for more than 5 years or if you were already living in that country when you were hired, you pay your social security tax to that country instead of the US. Here’s a little more expat tax advice for you: the amount you pay toward Social Security counts toward the country you retire in, even if it was earned in another country – as long as there is a totalization agreement in place, of course.

Personal Services Income

Many countries with tax treaties allow for the exemption of personal services income from the host country’s taxation. Independent personal services would be those performed as a self-employed individual or contractor. Dependent personal services are those performed for a foreign employer. You must take time frames into consideration with this type of tax treaty, as most countries allow you to reside in the host country for 183 days or less to qualify.

Check out this list filled with expat tax advice for details on which countries participate and review their various provisions.

Dividends, Interest and Royalties

Since US expats are taxed on their worldwide income, they’d be responsible for taxes on dividends, interest and royalties – which could subject them to double taxation. Luckily, tax treaties usually provide for a lower statutory withholding rate on dividends and interest paid to US citizens from foreign corporations. This also applies to royalty payments, but like all tax treaties, stipulations will vary from country to country.

If There Is Not A Tax Treaty

All of the instances above can apply if there is a tax treaty between the US and the host country, but what if there is no treaty? Be prepared to be taxed at the normal US expat tax rate with no exemptions or reductions once you’ve exceeded the amount excludable under the Foreign Earned Income Exclusion or have a tax liability greater than the Foreign Tax Credit. Getting expat tax advice from an expert prior to moving out of the US can go a long way in helping you adequately prepare for your US expat taxes when the time comes!

Need Expat Tax Advice About Tax Treaties? 

Greenback can help! Get in touch with one of our expat-expert CPAs or IRS Enrolled Agents today.