How to Benefit from Tax Treaties

Paying taxes twice on the same income is a concern most U.S. citizens have if they earn income abroad. Luckily, the U.S. has entered into tax treaties with many countries to help alleviate that concern. IRS Form 8833 is how you would claim and report certain U.S. income tax treaty benefits, which can include anything from lower tax rates to full tax exemptions on certain types of income and pensions. Unfortunately, Form 8833 is often misunderstood and filed incorrectly.

How Tax Treaties Work

Tax treaty provisions are generally reciprocal, which means they apply to both countries. A non-resident of the US would be able to apply the same treaty provision to US income that a US resident could apply to income received in the treaty country.

Each country has its own tax system, laws, and income categories. Tax treaties between countries serve to clarify or erase any confusion over benefits. Take the U.K., for example. The U.S./U.K. Tax Treaty has special provisions for U.S. citizens living in the U.K., including double-taxation prevention for capital gains and income taxes, a provision for pensions, and a provision that the two countries can share tax information about their residents. There is a similar treaty in place between the U.S. and Canada, and many other countries.

Form 8833, the Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b) is the form may have to file if you wanted to claim certain tax treaty benefits specific to your country of residence. It provides an explanation to the IRS as to why certain income is receiving beneficial treatment because of the treaty.

There are consequences to not filing this form when you are supposed to: you can be fined up to $1,000 for each year you failed to report your treaty position.

How do I claim tax treaty benefits using IRS Form 8833?

How do you fill out Form 8833? Before you file this form, make sure you need it BECAUSE the majority of treaty benefits in fact do not require the filing of form 8833. For example, you do not have to file if the treaty reduces or modifies the taxation of employment income, pensions, annuities, social security, and other public pensions, as well as income derived by artists, athletes, students, trainees, or teachers. Form 8833 is used in other situations, such as declaring tax treaty-based residency which allows a U.S. tax resident to file a U.S. nonresident tax return.

Exceptions from Form 8833 Reporting

Most filers file Form 8833 unnecessarily.  The Treasury regulations specifically waive the filing of a Form 8833 for certain treaty-based return positions, including:

  • That a treaty reduces or modifies the taxation of income derived by an individual from dependent personal services, pensions, annuities, social security, and other public pensions, as well as income derived by artists, athletes, students, trainees, or teachers;
  • That a Social Security Totalization Agreement or Diplomatic or Consular Agreement reduces or modifies the income of a taxpayer;
  • That a treaty exempts a taxpayer from the excise tax imposed by section 4371, but only if certain conditions are met (for example, the taxpayer has entered into an insurance excise tax closing agreement with the IRS);
  • That a treaty exempts from tax or reduces the rate of tax on FDAP income, if the beneficial owner is an individual or governmental entity;
  • If a partnership, trust, or estate has disclosed a treaty position that the partner or beneficiary would otherwise be required to disclose;
  • Unless modified by the instructions , that a treaty exempts from tax or reduces the rate of tax on FDAP income that is properly reported on Form 1042-S.

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