March 13, 2023
The United States has many income tax treaties with foreign countries, offering reduced rates or exemptions for certain income. International Income Tax Treaties provide benefits and reciprocity. USiBTS assists in understanding and navigating these treaty provisions. State tax implications vary.
If the treaty does not cover a particular kind of income, or if there is no treaty between your country and the United States, you must pay tax on the income in the same way and at the same rates shown in the instructions for Form 1040NR, U.S. Nonresident Alien Income Tax Return.
International Income Tax Treaties generally reduce the U.S. taxes of residents of foreign countries as determined under the applicable treaties. With certain exceptions, they do not reduce the U.S. taxes of U.S. citizens or U.S. treaty residents. U.S. citizens and U.S. treaty residents are subject to U.S. income tax on their worldwide income.
Treaty provisions generally are reciprocal (apply to both treaty countries). Therefore, a U.S. citizen or U.S. treaty resident who receives income from a treaty country and is subject to taxes imposed by foreign countries may be entitled to certain credits, deductions, exemptions, and reductions in the rate of taxes of those foreign countries. U.S. citizens residing in a foreign country may also be entitled to benefits under that country’s tax treaties with third countries.
Foreign taxing authorities sometimes require certification from the U.S. Government that an applicant filed an income tax return as a U.S. citizen or resident as part of the proof of entitlement to the treaty benefits.
Many of the individual states of the United States tax the income of their residents and/or the income from sources inside this state. Some states honor the provisions of U.S. tax treaties and some states do not. Therefore, you should consult the tax authorities of the state in which you live to find out if that state taxes the income and, if so, whether the tax applies to any of your income or whether your income tax treaty applies in the state in which you live, or your income is from.