Understanding Tax Treaties: Form 8833 and Your Expatriate Tax Return

To prevent the perils of double taxation that often arises with US taxpayers living abroad, the US has entered into tax treaties with many countries.  If you reside in a foreign country that has entered into such a treaty with the US, Form 8833 must be attached to your US expatriate tax return each year.

Tax Treaties Explained

Generally, tax treaty provisions apply to US non-residents or dual-resident taxpayers. Under these treaty agreements, residents of countries outside the US may be taxed at a reduced rate, or certain income items received by these residents could be exempt from US taxes.

Tax treaty provisions only apply to US citizens or green card holders living in particular countries. For instance, the US tax treaty with the UK includes provisions that apply only to US citizens living in the UK. Likewise, the US-Canada Tax Treaty applies only to expats in Canada.

How Tax Treaties Work

Tax treaty provisions are generally reciprocal, which means they apply to both countries. A non-resident of the US would be able to apply the same treaty provision to US income that a US resident could apply to income received in the treaty country.

Do States Recognize Tax Treaties?

Some US states honor the provisions of US tax treaties, and some do not. If you are applying a tax treaty to any of your income, it may be important to determine whether your state of residence or the state that is the source of your income recognizes the tax treaty provisions.

File Form 8833 to Use a Tax Treaty

If a tax treaty provision applies to your US tax return, it is important that the provision is applied properly. You could be required to include Form 8833 to your tax return to disclose the tax treaty provisions that apply to any of your income, deductions or credits.

What You Need to Know About Form 8833

The IRS uses Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), to make sure treaty provisions are applied properly. Failure to include Form 8833 can result in a $1,000 penalty for each year you fail to disclose your treaty position.

However, if you can offer reasonable cause for failing to file Form 8833, the IRS may abate the penalty.

How to File Form 8833

Form 8833 should be attached to your tax return every year that the treaty provision applies to you. Specific Information has to be given about the tax treaty, including:

  • The exact tax treaty article that applies to your tax return
  • The Internal Revenue Code section that is being changed by the treaty provision

Form 8833 must also include a general description of the treaty-based position that is being applied to your expatriate tax return. The nature and amount of exempt income, deduction, or credit must be included with the description, as well as a brief summary of the facts upon which the treaty position is based.

Once completed, attach Form 8833 to your US tax return to show the IRS that you are properly complying with the treaty provisions that apply to you.

Is Applying a Tax Treaty Provision Right for You?

You’ll need to determine if applying a tax treaty provision to your expatriate tax return is the best option for your situation. Because there are many ways to reduce expat taxes, it can be difficult to tell which route is best without reviewing all the options. If you’re unsure if you should use Form 8833 on your US tax return, consult an accountant for advice.

Keep in mind, if you do elect to use a tax treaty provision, you’ll need to make sure this is properly disclosed on Form 8833. Tax professionals can make sure this is done accurately to ensure there will be no issues with your return.

How to Eliminate Withholding for Tax-Exempt Income

In some cases, foreign income may be exempt from US taxes according to a tax treaty. However, US companies often withhold US taxes automatically. If your income is exempt from US taxes according to a tax treaty but tax is still being withheld, fill out Form W-8BEN and give it to your employer (or their withholding agent, such as a payroll company). This form will explain your exemption from withholding so they can eliminate the withholding from future income.

Form 8833 Example

To learn even more, or for a Form 8833 example or instructions, visit the IRS website or reach out to a seasoned tax professional.

Questions About Your US Expatriate Tax Return or the 8833 Form?

Want more information about Form 8833 and the tax treaty provisions that apply to you? Greenback takes the guesswork out of expat tax prep! Our specialized team of accountants can help you apply all the best tax-saving deductions and credits to your return. Get started today to have an expert in expat taxes prepare your return.