Tax Treaty Benefits To Help Offset US Expat Tax Return Liability

Tax treaty benefits for US expat tax return

Tax treaties apply to US non-residents or dual-resident taxpayers to prevent double taxation that often arises with US expat tax returns. Fortunately, the US has entered into tax treaties with many countries to help offset these double costs. If you are living in a country that has a tax treaty in place, then you are able to receive the benefits even while maintaining your US Citizenship.

Biggest Benefits

The biggest benefit of tax treaties is the double taxation clause, but please note that you have to set up a permanent residence in the foreign country for many tax treaty benefits to apply.  All of the US tax treaties can be found here.

Let us walk you through an example:

You live in Germany and work for a company that has a US affiliate. Your employer sends you to the US to work for 3 weeks and you are paid $3,000 for that time. You do not receive a W-2 nor are any US taxes withheld on that income. At the end of the year that $3,000 is included on your German wage statement and is taxable in Germany. Normally that $3,000 would be fully taxable in the US, with no credits available, but the US and Germany have a tax treaty and Article 23 gives you Relief From Double Taxation, and you will be able to use the taxes paid to Germany against the taxes due in the US.

Tax Treaties and Retirement Funds

Let us walk you through another example using Germany again:

If you are a “permanent” resident of Germany and are receiving US Social Security payments, those payments will only be taxable in the United States and accordingly German Social Security payments will only be taxable in Germany. Government pensions are also treated the same way, i.e. if you are employed by the German Government as a teacher and receive retirement benefits from that position (those benefits must be paid by the government entity) those benefits are only taxable in Germany. The same is true if while you are working for the government in Germany, if you have established permanent residency in Germany.

Non-government retirement funds are taxable only in the country of residence, so if you have a pension from your German employer and you have moved back to the US, that pension would be taxable only in the US, vice versa also applies, if you have a pension from your US Employer and you have retired to Germany, the pension is only taxable in Germany.

Social Security Totalization Agreements

Another type of tax treaty is the Social Security Totalization Agreement. A totalization agreement is a US International Social Security agreement and it’s very important as a US expat to understand what these agreements are and how they may impact your US expat tax return. Without such an agreement you may be forced to pay into both systems.

Currently, there are only 25 Social Security Totalization Agreements in effect as of May 1, 2014. You can find the list here.

These agreements eliminate dual Social Security taxation. If you live and work in a foreign country (we will use Germany as an example again) you will only pay social security tax to one country. If a US Employer sends you to Germany for less than 5 years, you will pay social security to the US, if you are sent for more than 5 years or were already living in Germany when you were hired you pay social security tax to Germany. The amounts you pay to Germany do count towards your US Social Security should you return to the and retire while in the US, if you retire in Germany your previous US Social Security credits can be applied to your German Social Security.

These agreements also eliminate the self-employment tax for those people who are in business for themselves in a foreign country. If you are self-employed and living in Australia, you would only pay self-employment taxes to Australia. If you decide to move your business to New Zealand you would be liable for US self-employment taxes as there is not Totalization Agreement between the US and New Zealand. This is very important to note as self-employment taxes can amount to a great deal of tax.

Remember if you still have a permanent home in the US and plan to return to it in the future, then the only treaty benefits available to you are in the double taxation clause. There are many other treaty articles that may apply in certain situations, it is best to consult a tax professional when dealing with tax treaties.

Need More Information About How Tax Treaties Affect You?

If you would like to discuss your tax situation with one of our expert CPAs, please contact us!

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