Form 8833: Tax Treaty

As a US expat, filing taxes while living abroad can often be stressful. This is especially true when it comes to knowing which additional forms to fill out and what implications they may have on one’s tax burden. One of the most important forms is IRS Form 8833, the Treaty-Based Return Position Disclosure. In this guide, we’ll define US tax treaties, discuss benefits and claims, and show you how to lessen or even eliminate your US tax burden by filing Form 8833.

What are US Tax Treaties?

A US tax treaty is a bilateral agreement between the United States and another country. These treaties are designed to avoid double taxation of its citizens’ and residents’ passive and active income. They cap each country’s tax on income, such as wages, business profits, dividends, interest, and royalties.

The United States has tax treaties with over 60 countries, the provisions of which differ from country to country.

To give you an idea, here are just a few countries with US tax treaties:

• Australia
• Belgium
• Canada
• China
• France
• Germany
• India
• Ireland
• Italy
• Japan

For a complete list of included countries, consult the IRS’s A to Z tax treaty list.

Tax Treaty Benefits and Claims

Tax treaties may benefit US expats by preventing them from being double taxed on their worldwide income. This applies in both the United States and the foreign country in which they reside. Many tax treaties also provide reduced withholding tax rates on US-source income. They may also exempt foreign pension income from US taxation. However, due to the Savings Clause described below, US citizens and green card holders may not be eligible to claim these benefits.

One common benefit that is normally exempt from the Savings Clause is that US expats generally pay income taxes on Social Security Benefits to either the paying country or their resident country. This prevents double taxation.

When claiming a tax treaty benefit, US taxpayers must file a federal tax return and report worldwide income. To eliminate any income tax obligations under the tax treaty of the foreign country where you reside, you must file Form 8833 along with your federal return. Different countries have different treaties with the United States. It’s best to consult the IRS’s list of countries where tax treaties exist, if any.

Tax Treaty Savings Clauses

All US tax treaties include a Savings Clause. A Savings Clause preserves each country’s right to tax its own citizens and treaty residents on certain types of income. It is as though there were no tax treaty in place, allowing them to retain some of their own taxing rights.

These Savings Clauses may limit the benefits you would otherwise receive from a tax treaty, for example, income from salaries, dividends, and pensions. Certain types of income are generally exempt from Savings Clauses, such as Social Security benefits as mentioned above.

Do Tax Treaties Prevent Double Taxation on State Taxes?

Tax treaties generally apply to double taxation concerning US federal income taxes, e.g., wages, interest, and pensions. State taxes are treated differently, so these tax treaties typically do not cover state income taxes. Based on your state of residency, you may still owe state taxes at the end of the year.

States that do not impose income taxes on individuals are:

• Alaska
• Florida
• New Hampshire
• Nevada
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming

The IRS does not provide an exhaustive list of states included and their tax treaty laws. So be sure to research your state’s taxation and revenue website to stay compliant.

How to File Form 8833

Claiming tax treaty benefits is not automatic. You must fill out and manually attach IRS Form 8833 along with your income tax return by the April 15th deadline. This ensures your tax treaty benefits override your income’s regular US tax treatment. These benefits may reduce or eliminate your tax burden. If you file your return with MyExpatTaxes, our tax software determines whether a tax treaty applies to your return and files it for you.

Be careful: If you are required to file Form 8833 and fail to fill it out correctly or don’t file at all, the IRS could impose a $1,000 penalty for each year you did not correctly disclose pertinent information. Just to be safe, it’s always a good idea for expats to file Form 8833.

Exceptions to Filing Form 8833

There are, of course, exceptions when filing Form 8833. For instance, if you claim the Foreign Tax Credit (Form 1116) or Foreign Earned Income Exclusion (Form 2555) and do not utilize any tax treaty benefits, you may not need to file Form 8833.

Penalties for Failing to File IRS Form 8833

There are pros and cons to claiming these tax treaties. As outlined above, tax treaties are generally beneficial for expats. They include provisions for avoiding tax penalties and double taxation, as well as being transparent and compliant with the IRS.

Should you include tax treaty benefits in your return but fail to file IRS Form 8833, there are some potential penalties. These include failure-to-pay penalties, accruing interest on unpaid taxes, and leaving yourself vulnerable to tax audits, among other things.

Is Claiming a Tax Treaty Provision the Best Strategy for US Expats?

In most cases, claiming a US tax treaty provision will benefit expats on their tax returns. By filing Form 8833, you’ll avoid paying income taxes in both the United States and the country in which you reside. You may qualify for the Foreign Tax Credit (FTC), as it can help offset any income that is not covered by the tax treaty.

Get Help with Form 8833 and US Expat Taxes

When filing with MyExpatTaxes, our user-friendly tax software helps guide you through the e-filing process. This process automatically includes Form 8833 when applicable. For more complex returns, our Reviewed and Premium plans include comprehensive professional support and guidance, free current-year tax amendments, and year-round coverage.

Conclusion

At first glance, understanding the ins and outs of US tax treaties and which ones apply to you can seem like a lot. However, with proper research and a certified Tax Professional to help guide you, filling out and filing Form 8833 doesn’t have to be as intimidating as it seems.

Let us help! MyExpatTaxes makes the process quick and easy. Our easy-to-use software ensures you’ll receive the full benefits of any applicable tax treaties between the US and the country in which you reside. Sign up for our Base Plan and start for free — and pay only when you’re satisfied and ready to file.