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Do Tax Treaties Prevent American Citizens Abroad From Filing U.S. Taxes?

There’s an old saying that the only two certainties in life are death and taxes. That is true whether you’re an American citizen living in the United States or abroad.

But, wait! You say the country you currently reside in has a tax treaty with Uncle Sam? You may think that’s good news, but read the fine print: Except in rare cases, a “saving clause” in the treaty often excludes American citizens from using the provisions outlined in the treaty to avoid paying personal taxes.

Indeed, there is a lot of information to unpack in the tax code when you’re an expat. Let’s get started:

What is a tax treaty?

A tax treaty is an agreement between the United States and another country that is designed to mitigate tax liabilities for U.S. citizens who choose to live abroad. Since U.S. citizens are expected to file American taxes whether they live stateside or not, tax treaties typically include a definition of residency, outline available tax benefits and state what taxes need to be paid to each country. The goal is to avoid potential conflicts with double taxation and make it easier to spot possible tax evasion.

How does a tax treaty work?

Basically, a tax treaty allows for the exchange of information between two countries. This way, the Internal Revenue Service (IRS) has access to the resources it needs if it suspects offshore tax evasion or needs to enforce the U.S. tax code. Shared information usually includes items related to bank accounts, taxes and other financial matters, allowing American officials to reduce the number of accounts opened by often wealthy individuals seeking to avoid paying U.S. taxes.

What do tax treaties mean to expats?

For one thing, it means that no matter which country you find yourself in, taxes need to be filed to the IRS as required by law. If you file taxes in your new home country, but fail to do so with the U.S. government, the IRS will find out – and possibly impose strict penalties.

Remember, ignorance is no excuse. If you’re an expat who is unsure about how to file your taxes with two different countries, consult with a tax professional who specializes in services for expats.

Do tax treaties help expats avoid double taxation?

Yes, they can. Often these treaties spell out which taxes each country is entitled to and provides for tax benefits like the Foreign Earned Income Exclusion, Foreign Housing Exclusion and Foreign Tax Credit, all of which help American citizens abroad avoid double taxation and lower their tax liabilities to the U.S.

Does a tax treaty mean that expats don’t have to pay U.S. taxes?

No. It actually outlines the taxes that expats do have to pay. The common addition of savings clauses in tax treaties generally preserves the right of each government to levy taxes on its own citizens as if no tax treaty existed in the first place.


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