With a relevant tax treaty in place, someone who is a resident of a country other than the United States may be able to reduce or exempt some of their income earned in the U.S. from U.S. income taxes, but they would still pay taxes to their home country. Conversely, a U.S. resident who earns income in another country may be eligible to avoid paying some taxes to that country if it has a tax treaty with the U.S. Tax treaties can also involve information sharing between two countries to help tax authorities in those nations carry out tax compliance. However, the specifics of the tax treaties can vary significantly depending on which countries are involved. Some treaties might exempt capital gains income from sales of real property from double taxation, whereas other treaties might exempt international students from paying U.S. income tax on the value of a scholarship. Tax treaties can also differ in terms of how they provide benefits, which may include:
Tax creditsTax exemptionsReduced tax ratesOther types of benefits
Example of a Tax Treaty
Say a college professor is a resident of another country and temporarily comes to the U.S. to teach at a university. Many tax treaties include provisions that would exempt this professor from having to pay U.S. income tax on their teaching income. That way, they won’t be double taxed on that income by the U.S. and their home country.
What Tax Treaties Mean for Individuals
Given that many different treaties exist and the rules can vary significantly, it’s important to look at the specific agreements in place between the relevant countries that apply to your situation. Also keep in mind that the definition of a “resident” may depend on the specific tax treaty, rather than applying across the board. In some cases, you might be a dual resident of two countries but still be able to claim some tax treaty benefits—so it’s important to check the rules of any tax treaties between countries where you live or earn income. Claiming tax treaty benefits can also involve filling out additional tax forms. For example, a non-resident of the U.S. may have to fill out Form 8233 to claim an exemption for certain types of compensation. Again, the exact forms required depend on your situation, so you may want to consult with a relevant professional to guide you through how tax treaties affect your tax filings and overall tax management. Another option is to use tax software designed for expatriates, which is more specialized than typical tax tools.
