Guide to IRS Form 8833, Tax Treaties and US expat tax return

By ZM Ishmurzina

US taxpayers who live abroad have the valid concern of paying tax twice on their income. In an attempt to avoid this issue, the United States has entered into tax treaties with a number of countries, aimed at avoiding double taxation for US taxpayers abroad and foreign nationals living inside of the US. In order to be able to claim these provisions, a taxpayer will have to file IRS Form 8833 and enclose it to US resident or expatriate tax return. US taxpayers use this form to be compliant with Internal Revenue Code section 6114, while dual-resident taxpayers need it to make the treaty-based return position disclosure required by Regulations section 301.7701(b)-7.

Form 8833, Tax Treaty Provisions and Expat Tax Returns

Tax treaty provisions apply to US non-residents or dual-resident taxpayers who are earning a taxable income. According to these treaty agreements, US taxpayers who are residents of countries outside of the US could be taxed at a reduced rate, or certain types of income could be exempt from US taxation. The majority of tax treaty provisions do not apply to US citizens or green card holders who live abroad, but there are some exceptions. One notable is the US tax treaty with the UK and Canada, both of which include provisions that apply to US citizens living in those countries.

A handful of US states will honor the provisions of US tax treaties, while the rest do not. If you are considering applying a tax treaty to your earned income, it is first necessary to determine whether or not your state of residence recognizes tax treaty provisions.

Tax treaty provisions apply to both countries for which they are written for. This means that a non-resident of the US would be able to apply the same treaty provision to their US income as a US resident would apply to their income earned in the treaty country.

If a tax treaty provision does apply to your US expat tax return it is of upmost important that the provision be applied correctly. You may find that you are obligated to include Form 8833 with your tax return in order to disclose any tax treaty provisions that apply to your income, deductions and credits.

What a Taxpayer Needs to Know about the Form 8833

Anytime that a taxpayer takes a position which overrules or modifies any provisions of the Internal Revenue Code which results in a reduction of US taxes based on the article provisions laid out in in a treaty with another country, that taxpayer will be required to file Form 8833. Form 8833 details the treaty country, the articles of the treaty which are applicable, the sections of the Internal Revenue Code (IRC) which are applicable, and an explanation of the position that was taken.

Form 8833 – Claiming a Treaty Exemption on Your Expat Tax Return

If your circumstance allows you to claim treaty benefits that override or modify any provision laid out in the IRC, you will have to attach a fully completed Form 8833 to your tax return. Titled Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), Form 8833 should be included with your tax return (Form 1040NR, Form 1040NR-EZ or Form 1120-F) if you are able to claim one or more of the following treaty benefits:

  • A reduction or modification in the amount of taxes applied to the gain or loss from the disposition of a US real property interest based on a treaty.
  • Any change in the source of income or a deduction based on the applicable treaty.
  • A credit for a specific foreign tax where a foreign tax credit would not be permissible by the Internal Revenue Code.

Exceptions to Filing Form 8833

You are not required to file Form 8833 under any of the following circumstances:

  • Where you claim a reduced rate of withholding tax under a treaty on interest, dividends, rent, royalties, or any other fixed or determinable annual or periodic income that is typically subject to a rate of 30%.
  • Where you can claim a treaty exemption that results in the reduction or modification of the taxation of income from dependent personal services, pensions, annuities, social security, and any other public pensions or income of artists, athletes, students, trainees, or teachers. This includes taxable scholarship and fellowship grants.
  • Where you are able to claim a reduction or modification of the taxes applied to income under an International Social Security Agreement or a Diplomatic or Consular Agreement.
  • If you are a partner in a partnership or a beneficiary of an estate or trust and that partnership, estate, or trust reports that required information on its return.
  • The payments or items of income that are normally required to be disclosed do not exceed $10,000 in total.

Form 8833 Instructions

Not only does IRS Form 8833 need to be attached to your tax year for every year in which a treaty provision applies to your circumstance, a separate Form 8833 is required for each treaty-based return position you are eligible for. This is the IRS link to this form. Specific details must be disclosed by you on each Form 8833 filed including:

  • The treaty country
  • The specific article or articles in that treaty that apply to the modification or reduction of the tax
  • The Internal Revenue Code provision or provisions which are overruled or modified by the treaty
  • An explanation of the treaty-based return position that you are taking
  • A listing of the nature and estimated amount of gross receipts, each separate gross payment, each separate gross income item, and any other item that is applicable for the treaty benefit that is being claimed.

In most cases a treaty will include an article that limits the treaty benefits to residents of either country. For example, the treaty safe harbor provision prevents US taxpayers from being able to claim a treaty article provision that will reduce or modify a provision in the US tax code in most cases.

For foreign born individuals subject to the mandatory 30% withholding rate on income received from US sources, Form W8BEN should be prepared and provided to the source of your income.

Penalty for Failure to Provide Required Information on Form 8833

If you fail to disclose your treaty-based return position could result in a penalty of $1,000, or $10,000 in the case of a C corporation.

If there is a reasonable explanation you can provide for not filing Form 8833, there is a chance that you can be exempted from paying that fine.

Do you have more questions about Form 8833?

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