Unlock US Tax Treaty Benefits: How Foreign Earners Can Slash Withholding and Claim Refunds

US Tax Treaty Benefits: Foreign nationals earning income from US sources may be sitting on valuable tax treaty benefits but only if they claim them correctly. These bilateral agreements between the Internal Revenue Service (IRS) and other countries can reduce or eliminate US taxes on certain types of income like dividends, interest, royalties or compensation for services.

What are Tax Treaty Benefits?

A US tax treaty is a formal agreement between the United States and another country designed to prevent double taxation and encourage cross-border trade and investment. Under these treaties, a resident (not necessarily a citizen) of the treaty country may be taxed at a reduced rate or entirely exempt from U.S. income tax on specified U.S.-source income.

For example-

• Dividends paid to a nonresident from a U.S. company may face only 15% withholding (instead of the default 30 %).

• A teacher or researcher temporarily in the U.S. under a treaty might receive compensation exempt from U.S. tax under specific treaty articles.

These benefits differ by country and income type, so you must check the treaty article that applies to your situation.

Step-by-Step: Before Income is Paid

To avoid excess U.S. tax withholding, you should act before the income is paid:

• Form W-8BEN / W-8BEN-E: For non-service income (such as dividends, royalties or interest).

• Form 8233: For income from personal services (e.g., consulting or teaching) where a treaty exemption may apply.

Your withholding agent (the payor) must receive a valid form certifying your treaty eligibility and foreign residence. Without it, the default 30% withholding rate may apply.

Step-by-Step: Claiming on Your Tax Return

Even if you already submitted the withholding form, you must still report the income and claim the benefit on your annual U.S. tax return. Procedure depends on your residency status.

• If you are treated as a nonresident alien, you typically file Form 1040-NR (U.S. Nonresident Alien Income Tax Return).

• If you are treated as a U.S. resident for tax purposes, you use Form 1040 (U.S. Individual Income Tax Return).

When claiming treaty benefits that override or modify U.S. tax law, you must attach Form 8833 (Treaty-Based Return Position Disclosure) explaining the treaty article you rely on.

Special Cases: Students, Teachers, Dual Residents

• Students, teachers and researchers from treaty countries often qualify for specific exemptions under treaty provisions. They file Form 8233 and attach a statement describing the relevant treaty article.

• If you are a dual resident (i.e., treated as a resident of both the U.S. and a treaty country), you may still claim benefits — but only if the treaty contains a “tie-breaker” rule. In such a case you might file as a nonresident (Form 1040-NR) and attach Form 8833.

Why Accuracy Is Critical

Claiming treaty benefits can significantly reduce your U.S. tax bill, but errors or missing documentation can lead to denied exemptions or penalties. The IRS may impose a penalty of $1,000 for failure to file Form 8833 if required.

Furthermore, state taxes may not honour federal treaty provisions, so you should check your state’s rules as well.

Real-Life Example: What You Could Save

Imagine you are a resident of Canada working remotely for a U.S. company and earning $50,000 in consulting fees (U.S. source). Under default rules you’d face 30% withholding (≈ $15,000). But if the U.S.–Canada treaty allows a lower rate (say zero or 15%) for such services, and you file Form 8233 correctly, you might reduce withholding to only $7,500 or even nothing, and later claim excess withholding back when you file your tax return.

If you are a foreign national earning U.S.-source income and your home country has a tax treaty with the U.S., you should not leave money on the table. Use the correct forms before income is paid, and file the proper return after the year ends. Consult a tax professional specialising in international tax law if you’re unsure about residency status, treaty articles or filing procedures.

ALSO READ – Bitcoin Crash Sparks Tech Market Panic as $1.8 Trillion Crypto Drags Nasdaq Down