Understanding Double Taxation: A Guide for American Expats

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Written by: Josh Katz, CPA

American expats living and working abroad undoubtedly encountered the complex double taxation issue. Double taxation occurs when an individual is taxed on their income by their home country (in this case, the United States) and country of residence. This article aims to shed light on double taxation, explain its implications for American expats, and provide a guide in understanding this challenging tax landscape.

Do American expats have to pay double taxes?

The US employs a citizenship-based taxation system, meaning its citizens are taxed on their worldwide income, regardless of where they reside. Meanwhile, most countries use a residence-based taxation system, taxing individuals based on residency status and income earned within their borders.

Therefore, American expats may be required to file tax returns in the US and their country of residence. In some cases, this can result in paying double taxes on the same income, significantly reducing the expat’s overall income.

How to Prevent Double Taxation?

To mitigate the effects of double taxation, the US has entered tax treaties with many countries worldwide. These treaties aim to eliminate or reduce double taxation and provide relief for American expats. Tax treaties often include the elimination of double taxation on specific types of income, provisions for determining residency, and mechanisms for resolving conflicts between the two tax systems.

Here are some countries that have entered a tax treaty with the US.
For the complete list, please refer to this link: Tax Treaties A-Z

  • Australia
  • Belgium
  • Canada
  • China
  • Denmark
  • Finland
  • France
  • Germany
  • Ireland
  • Italy
  • Israel
  • Japan
  • Mexico
  • Netherlands
  • New Zealand
  • Norway
  • Poland
  • Portugal
  • South Korea
  • Spain
  • Sweden
  • Switzerland
  • Thailand
  • United Kingdom

One crucial tool that American expats can use is the foreign tax credit (FTC). The FTC allows expats to offset the US tax liability on the income their country of residence already taxed. By claiming this credit, you can avoid being taxed twice on the same income. It’s important to note that you must meet specific criteria and follow proper procedures to claim the FTC effectively.

Another provision that can relieve American expats is the foreign earned income exclusion (FEIE). The FEIE allows eligible expats to exclude a portion of their foreign-earned income from US taxation. However, it is essential to understand the limitations and requirements of the FEIE, as there may be better options for some.

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Totalization Agreement

Totalization agreements, also known as Social Security agreements, are bilateral agreements between countries that aim to coordinate the social security systems of both countries and eliminate dual social security taxation for individuals working internationally.

Totalization agreements benefit self-employed American expats by addressing their social security obligations. These agreements clarify which country’s social security system applies to self-employed individuals, helping them determine where to make their social security contributions. By following the rules outlined in the totalization agreement, self-employed American expats can ensure they fulfill their social security obligations systematically and avoid double taxation of social security contributions.

Additionally, it can help self-employed expats maintain continuity in their social security benefits, allowing them to accumulate credits towards benefits in both their home country and the country where they work.

Suppose your country of residence has no totalization agreement with the United States; specific provisions may not be in place to coordinate social security systems and avoid double social security taxation. In such cases, you may be subject to social security contributions in your country of residence and the US. As a self-employed individual, you would typically be responsible for paying self-employment taxes, including social security contributions, in the country where you are conducting your self-employment activities.

In the United States, self-employed individuals are subject to self-employment tax, including Social Security and Medicare taxes. This tax is generally paid to the Internal Revenue Service (IRS).

In your country of residence, you must comply with its tax laws and regulations regarding self-employment taxes and social security contributions, which vary depending on the specific rules and requirements of the country.

Since there is no totalization agreement in place, you may be unable to offset or avoid double social security taxation directly. However, you can claim a foreign tax credit or other similar provisions to alleviate potential double taxation of your self-employment income at the income tax level.

Navigating the complexities of double taxation can be challenging. It is highly recommended that American expats seek the assistance of a qualified tax professional experienced in international tax matters. A tax professional can provide personalized advice based on your unique circumstances, ensuring compliance with US and foreign tax obligations while maximizing available tax benefits.

If you need help understanding your tax situation and potentially eliminating your US tax liability, feel free to contact us at info@universaltaxprofessionals.com