Tax Treaty Benefits - When you're in another country

There may be instances in which you must be in a foreign country and you earn an income in that country. If you are in a country, such as Canada, that the United States has a tax treaty with, you will find that there are certain benefits that are available to you. The countries that the United States has tax treaties with a number of countries and the IRS has a list of these countries. If you are in any of these areas, you get benefits that you would not get if you were in other countries around the world that do not have a tax treaty with the U.S.

The benefits

It is important that you are aware of the tax treaty benefits available to you if you are in a tax treaty country at any point during the tax year and gain an income. Here are the benefits that you can expect to receive:

• If you provide personal service - If you are a resident of the United States who is in a treaty country for any period of time and you meet certain requirements set forth by the IRS, the pay that you earn in that country may be exempt from the income taxes of that country.
• If you are a professor or teacher - Professors and teachers the first 2 to 3 years that you gain an income from the treaty country is exempt from that country's income tax.
• Apprentices, students, and trainees - When you are a student, an apprentice, or a trainee, any income the United States sends you for your training is exempt from that country's income tax.
• Pensions and annuities - If in a treaty country, any pensions and annuities that you receive from the United States may be exempt from the treaty country's income tax.
• Investment income - Your investment income, which includes interest and dividends, may be excluded from the treaty country's income tax. However, you may also be taxed at a reduced rate. If you meet certain qualifications, you may be exempt from capital gains tax within that country.
• Tax credit provisions - If you own capital in a foreign country or you receive income from a foreign country, you may be taxed by both that country and the U.S. However, there are treaty countries that allow you to claim a credit or deduction in their country based on what you paid out on your U.S. income tax return. This allows you to claim back some of your money.

So there are quite a few benefits available to U.S. citizens who are abroad. The purpose behind the treaties is to keep U.S. residents from having further tax burdens placed upon them. In other words, the U.S. resident does not have to pay taxes on the same income twice and cause an undue hardship. In these treaties, the United States agrees to do the same for residents of those countries who are legally staying within the United States and earning an income.