Tax treaties on your US tax return: when you need Form 8833

The US has tax treaties with most European countries. Many people take that to mean they don't need to do anything on their US tax return. Not so: the treaty only works on your US return if you claim it, often on a separate form, and for US residents it applies only in part. This page shows how a treaty gets onto Form 1040 and Form 1040-NR, when Form 8833 is mandatory, what the dual residence rule triggers and how treaties allocate pensions, Social Security, dividends and capital gains.

A tax treaty is not an umbrella that opens by itself. It divides the right to tax a given income between two countries and limits the tax at source. On your US tax return it works when you apply it, and sometimes only when you disclose it to the IRS on a separate form. For the big picture, see our guide US tax return for Europeans; the rules for wages on a secondment, including the 183-day rule, are covered in Secondment to the USA: taxes and salary, and withholding tax and the W-8 forms in IRS W-8 forms. This page is about how the treaty gets onto your Form 1040 or Form 1040-NR.

1Two ways the treaty works

The treaty reaches your US tax in two ways.

At source. On many types of US-source income paid to foreigners, the payer withholds 30%. The treaty lowers that rate: to no more than 15% on dividends paid to individuals, and usually to zero on interest. To get it, you give the payer, such as your broker or the US company, a W-8BEN before the payment. If the payer withheld correctly and you have no other US income, you often don't need to file a return at all.

On the return. Where a return is required, you apply the treaty on it: you exclude an item of income, use a lower rate, or rely on the dual residence rule to be treated as a nonresident. The law calls this a treaty-based return position. Under § 6114 you must disclose every position in which you claim that a treaty overrides or modifies a provision of the US tax code. The form for this is Form 8833.

Because the disclosure is tied to the tax return, it can force you to file one: if you have to disclose a position and would otherwise have nothing to file, you still file a return, with your name, address, taxpayer ID, signature and Form 8833. For that you need a US taxpayer ID; more on the page Applying for an ITIN.

2The saving clause: why residents get little from the treaty

3Form 8833: when it's required and when you're exempt

The regulations under § 6114 list positions that must always be disclosed and exempt others. For individuals from Europe, the list of exemptions is pleasantly long. Under § 301.6114-1(c), exempt positions include:

• a reduced withholding rate on dividends, interest, rents or royalties owned by an individual,
• positions on wages, pensions, annuities, Social Security and other public pensions, and on income of artists, athletes, students, trainees and teachers,
• re-sourcing an item of income for the foreign tax credit limitation,
• positions under a social security agreement,
• all items of an individual that together do not exceed $10,000 in a year.

Disclosure remains mandatory mainly in these cases:

• You are a dual resident and use the dual residence rule to be treated as a nonresident (see the next section).
• The treaty reduces or modifies the tax on the gain from selling US real estate.
• You don't pay tax on profits from a US business because, under the treaty, there is no permanent establishment.
• The treaty changes the source of an item of income or grants a credit the law doesn't provide.

If you fail to make a required disclosure, § 6712 imposes a penalty of $1,000 per failure ($10,000 for a corporation), on top of other penalties. The IRS can waive it for reasonable cause and good faith. You file Form 8833 separately for each position and each year, though you may combine items of the same type from the same payer. It states the country, the article, the provision of the US tax code the treaty modifies, and the facts with the amounts.

4Dual residence: the tie-breaker and its consequences

If the test shows you are a resident of your home country, you can be treated as a nonresident in the US. Under regulation § 301.7701(b)-7 you then calculate your US tax as a nonresident, file Form 1040-NR and attach Form 8833. This has consequences you should know about:

• Only for computing your tax. For other purposes of the tax code you remain a resident, for example when determining whether a foreign company you hold shares in counts as a controlled foreign corporation.
• All or nothing. If you claim nonresident treatment under the treaty for part of your income, all of your income is taxed as a nonresident, including income where residence would be more favorable. The regulations even work through an example of this.
• Green card. The regulations point out that filing Form 1040-NR can affect the immigration authorities' decision on your permanent residence. And if you held a green card in at least eight of the last 15 years, the instructions to Form 8833 say that making this choice gives up your US residence for tax purposes. The expatriation tax rules under § 877A can then apply, and you file Form 8854. More on the page Exit Tax.

In the year you move, the tie-breaker can also bring forward the end of your US residence. How the move year works overall is explained on the page Arrival year and departure year.

5Types of income at a glance

The table shows which country the treaties give the right to tax the income individuals most commonly have. "Residence country only" means the other country may not tax it. "Also" means both may, and the residence country avoids double taxation under the treaty's article on eliminating double tax.

For a nonresident's US return, this means: rent from US property and gains from selling it are taxed in the US, and you report them on Form 1040-NR. Under the treaty, gains on shares held in a US brokerage account are taxed only by your home country. The US may tax dividends from a US company at no more than 15 %, and the rest belongs on your return at home. If you want to be taxed on net rental income, filing on time also matters; the late US tax return page explains the 16-month limit.

6Pensions and Social Security across the border

Pensions are where tax treaties differ the most, and it is where many of our readers have questions.

Switzerland and the USA. Under Article 19(4), the country of residence may tax, but the paying country may tax no more than 15 %. Under Article 23(1)(d), Switzerland grants relief for the US tax on a US pension, by deducting the US tax and exempting one third of the net amount.

Without a treaty, the US withholds 30 % tax on 85 % of a nonresident's Social Security benefits, according to Publication 519. You do not need Form 8833 for pension and Social Security positions.

7What happens to your US income at home

A treaty has two sides, and the second one plays out in your tax return at home.

For the order of things, that means the US figures come first. Without them, your tax office at home is missing the amount it needs for the tax rate or the credit.

8Your checklist for the treaty on your US return

1. Clarify your status. Resident, nonresident or dual resident? This decides whether the treaty applies at all and which form you file.
2. Assign your income. Identify the treaty article for each type of income.
3. At source or on the return? Where the payer withholds correctly based on a W-8BEN, everything is often already taken care of. Where not, you apply the treaty on your return.
4. Check Form 8833. Is the position exempt or does it have to be disclosed? If in doubt, disclose; the penalty for failing to do so costs more than the effort.
5. Think about home. Send the US figures for exemption, tax rate or credit to your accountant at home.

In short

• The treaty only works on your US return if you claim it: at source with the W-8BEN, or on the return, often with Form 8833. If you fail to make a required disclosure, you pay $1,000 per case.
• For individuals, the most common positions are exempt: reduced withholding on dividends and interest, wages, pensions, retirement income and Social Security.
• Form 8833 remains mandatory above all for dual residents who use the tie-breaker to be treated as nonresidents; they file Form 1040-NR. For long-term green card holders, this counts as giving up residency.
• If you are a US resident, the saving clause lets you rely only on certain articles; double taxation is then avoided mainly through the foreign tax credit.

How we help you

• Your US Tax ReturnForm 1040 or 1040-NR, handled in English.
• Withholding taxW-8 forms, withholding and treaty benefits, done right.
• US Tax ConsultationYour US tax question, answered by people who know both sides.
• US taxes for US citizens abroadForm 1040, FBAR and Streamlined for US citizens living in Europe.