The United States is the only country to tax its citizens regardless of where they earn their income. In addition, the U.S. taxes non-citizens' earnings from activities while they live here. Fortunately, many countries have tax treaties with the United States, trading exemptions and lower tax rates for citizens earning income outside of their home country. Claiming tax treaty benefits on your 1040 can save you a significant amount in U.S. taxes.
Two important forms to file if you want to claim tax treaty benefits as a non-citizen filing a U.S. tax return are Form W-8BEN and Form 8833. Provide your employer with Form W-8BEN so it adjusts your payroll withholding to reflect your tax treaty benefits. You file Form 8833 as a supplement to your annual tax return, Form 1040, if the benefits of the tax treaty might reduce the amount of tax you owe on your U.S. income.
Americans Living Abroad
Unless you surrender your U.S. citizenship, even if you work outside of the country you need to file an annual tax return with the IRS. Because the country you work in might also levy taxes on your wages, U.S. tax law provides exemptions and credits to help avoid having citizens paying taxes twice on the same income. You can claim the credit using supplementary Form 1116 or exclude income using Form 2555. Certain restrictions apply to who can claim the benefits on their Form 1040, and up to what amount.
Most tax treaties contain savings clauses that allow countries to tax their own residents as if no treaty existed, saving potential tax revenue losses. For example, U.S. citizens and residents cannot claim tax treaty benefits to reduce their U.S. tax bill because of the terms of the savings clause. They might still be able to benefit from the treaty by reducing their foreign tax bill instead. In such a case, the foreign authority might request confirmation that the taxpayer filed as a U.S. resident. The IRS provides the necessary certification if you file Form 8802.
The nature of international politics makes it nearly certain that the terms, benefits and existence of tax treaties can change from year to year. While treaties with some countries, such as Canada, have remained largely the same since 1980 or earlier, there is no guarantee. The IRS keeps a list of current tax treaties, along with the full text of the treaties, available on its website.
Sean Butner has been writing news articles, blog entries and feature pieces since 2005. His articles have appeared on the cover of "The Richland Sandstorm" and "The Palimpsest Files." He is completing graduate coursework in accounting through Texas A&M University-Commerce. He currently advises families on their insurance and financial planning needs.