Do Tax Treaties Protect Expats from Double Taxation?

Double taxation is often one of US expats’ chief concerns before moving abroad.

While living in a foreign country may mean paying taxes in two countries, there are ways to avoid this. US tax treaties are often one of the first methods expats think of, but unfortunately, Americans abroad typically don’t benefit from most of the provisions.

If this all sounds confusing, don’t worry — we’ll break down everything you need to know about US tax treaties below. Read on to learn how tax treaties work, who can actually benefit from them, and which alternatives you can capitalize on to reduce your US tax burden.

How the United States taxes expats

Before discussing income tax treaties in detail, let’s examine how US expat taxes work high level. 

The US’s citizenship-based taxation system means that all Americans — citizens and permanent residents alike — are subject to US taxation, even if they live abroad. Any American who meets the minimum threshold must file a federal tax return each year and potentially pay taxes. In addition to a federal return, in some cases, you may also be subject to state income taxes.

If you also qualify as a tax resident in the country you live in, you may be subject to income taxes both there and in the US (at least in principle). To avoid paying income taxes to both countries, the US federal government offers several forms of relief, including tax treaties.

What are US tax treaties, & how do they work?

A tax treaty is an agreement between two countries generally designed to prevent double taxation, which can apply to both individual taxpayers and taxable entities, such as businesses. The US has signed tax treaties with a number of foreign countries, including Canada, Mexico, the UK, Australia, China, and most EU countries. In total, the US has tax treaties with nearly 70 countries (and more in the works).

These treaties serve several important functions:

• Defining tax residence: Tax treaties often present the criteria a taxpayer (individual or business) must meet in each country to be a tax resident  
• Establishing tie-breaker rules: In an event where somebody is a tax resident in both countries, tax treaties clarify which country has the primary taxation rights
• Detailing tax breaks: Each tax treaty offers different tax benefits, like reduced rates and exemptions for certain types of income

The big catch: the Saving Clause

Despite its name, the Saving Clause won’t help you save money — quite the opposite, in fact. 

The Saving Cause reserves (or “saves”) the US government’s right to tax you on your worldwide income as if the treaty didn’t exist. This makes the vast majority of the benefits the treaty offers inaccessible to most US citizens.

When is it worth claiming tax treaty benefits?

In general, there are three main situations in which it’s beneficial for US expats to claim a tax treaty:

You can claim an exception to the Saving Clause

Many treaties outline exceptions to the Saving Clause that allow certain provisions to prevail. One notable example is in the US-UK tax treaty, which spares Article 17(1)(b) — allowing Americans living in the UK to make a tax-free, lump-sum pension withdrawal.

You study or work in education

Most US tax treaties contain provisions that make the income of American researchers, students, teachers, and trainees tax-exempt in their country of residence. To qualify, they must prove that their residence abroad is temporary — typically, there’s a limit between two to five years.

You earn foreign-sourced passive income

Some tax treaties offer tax breaks on certain types of passive income — like dividends, interest, and royalties — that you receive from sources outside the US. If your income qualifies, you may be eligible to pay taxes at a reduced rate.

Refer to the IRS’ tax treaty tables for specific rates.

Claiming US tax treaty (& other) benefits

All tax treaties are slightly different, and individual treaties themselves sometimes change due to updates in tax law. As such, it’s important to review the one relevant to your country of residence closely — or preferably, have a professional do it for you.

Most of the time, the benefits will not automatically apply to you. Instead, you’ll have to file Form 8833 to claim your position and the benefits along with your federal income tax return.

Alternatives to US tax treaties

Don’t qualify for any tax treaty benefits? No problem. As an expat, you can claim most of the same itemized deductions and credits that you would if you lived in the US, such as the Child Tax Credit (CTC).

On top of that, you may be eligible for a few expat-specific tax breaks that the US offers:

The Foreign Tax Credit 

The Foreign Tax Credit (FTC) gives Americans who pay taxes on foreign income dollar-for-dollar credits they can apply toward their US tax bill.

This way, they can essentially subtract what they’ve paid in foreign income taxes from what they owe in US income taxes. In most countries, this will greatly reduce (if not eliminate) your US tax bill.

The FTC may be a good fit if you live in a high-tax country, or bring in significant passive income. To qualify for the FTC, taxes must be legal, based on income, due by you specifically, and paid. You can claim the FTC by filing Form 1116.

The Foreign Earned Income Exclusion  

The Foreign Earned Income Exclusion (FEIE) lets Americans exclude a certain portion of their foreign earned income (not passive income) from US income taxes. For the 2023 tax year — aka the taxes you file during the 2024 calendar year — you can exclude up to $120,000. To account for inflation, this figure will increase to $126,500 for tax year 2024.

The FEIE may be a good fit for you if your income is all or mostly earned, under the FEIE limit, and/or if you live in a low-tax country. To qualify for the FEIE, you must pass one of two tests:

• Physical Presence Test: To meet the Physical Presence Test, you must spend at least 330 days in any 365-day period outside of the US
• Bona Fide Residence Test: To meet the Bona Fide Residence Test, you must prove that you’ve lived abroad for at least a calendar year through official documentation (e.g. a residence permit, passport, etc.)

You can claim the FEIE by completing Form 2555.

The Foreign Housing Exclusion/Deduction

Meeting either the Physical Presence Test or Bona Fide Residence Test also makes you eligible for the Foreign Housing Exclusion (or Deduction, if you’re self-employed). The FHE helps Americans abroad offset certain foreign housing costs, like rent, utilities, parking, and more.

To claim the FHE, you’ll use the same form as you do to claim the FEIE: Form 1116.

Totalization agreements

While tax treaties aim to prevent double-income taxation, totalization agreements aim to prevent double social security taxation. If you live in one of the 30 countries that have a totalization agreement with the US, you will only have to pay social security taxes in one country.

The country you pay social security taxes to generally depends on how long you intend to live there:

• Less than 5 years: Social security taxes due to the US
• 5 years or more: Social security taxes due to your country of residence

Optimize your taxes with treaties (and tax credits)

As you can tell by now, US tax treaties aren’t particularly straightforward. While the Saving Clause nullifies most of their benefits, there are certain exceptions depending on your circumstances and the treaty rules.

And beyond US tax treaties, you may also be able to claim tax breaks like the CTC, FTC, FEIE, FHD, and totalization agreements.