If U.S. tax laws were not complicated enough to begin with, imagine what happens when you throw the laws of other countries into the mix. For taxpayers earning income across borders, the risk of being taxed twice by different governments is a pressing concern—one that can quickly erode both earnings and savings. These challenges have only grown more relevant in today’s economy, where remote work and the rise of digital nomads mean more individuals are contending with multiple tax jurisdictions than ever before. Failing to meet international tax obligations can result in steep penalties, interest charges, or worse. In this guide, we will explore some essential elements of international taxation, including how to determine tax residency, source income appropriately, and adopt strategies to mitigate double taxation effectively.

Residency and Taxation

A fundamental question for tax purposes is: What determines whether the U.S. taxes you on all your worldwide income or just on the income you earn within the U.S.? The answer depends on your residency status—a concept that can be deceptively simple on the surface but becomes more complicated upon closer examination. Are you a resident? A non-resident? Or potentially a bit of both? Essentially, under U.S. law, an individual is considered a U.S. tax resident if they meet either the Substantial Presence Test or the Green Card Test.

The Substantial Presence Test

This test focuses on your physical presence in the U.S. over the past three years, using a weighted formula:

• 100% of the days you were present this year.
• 1/3 of the days you were present last year.
• 1/6 of the days you were present two years ago.

If the total equals 183 days or more, and you were present in the U.S. for at least 31 days during the current year, you are generally considered a U.S. tax resident for that year. 

Note: There are exceptions to the Substantial Presence Test, such as for students, teachers, and others, which may exempt them from being treated as U.S. residents even if they meet the calculation.

The Green Card Test

This provides that if you hold a green card (i.e., a lawful permanent resident), you are automatically considered a U.S. tax resident, regardless of your physical presence in the country. This status remains in effect until the green card is formally surrendered or revoked. Note that if you meet the green card test at any point during the calendar year but do not satisfy the substantial presence test for that year, your residency start date is the first day you are physically present in the U.S. as a lawful permanent resident.

Note that establishing U.S. tax residency also triggers additional reporting requirements, including the obligation to file an FBAR (Foreign Bank Account Report) if you maintain certain foreign financial accounts exceeding specified thresholds. Understanding these obligations is essential to remain compliant with U.S. tax laws.

Tax Treaty Tie-Breaker Rules

Sometimes, an individual may qualify as a resident under both U.S. domestic law and the laws of another country. In these cases, tax treaties between the U.S. and the other country provide "tie-breaker" rules, applied in a specific order, to resolve the conflict and determine which country has the primary taxing right. The typical order is as follows:

• Where they have a permanent home available to them
• Where they have closer personal and economic ties
• Where they usually live
• Their country of citizenship

Dual-Status Taxpayers

Some people find themselves in a unique situation where they are considered a U.S. tax resident for part of the year and a non-resident for the remainder. These “dual-status taxpayers” often encounter this situation in the year they arrive in or depart from the U.S., or when there is a change in their immigration status during the year. If you are a dual-status taxpayer, then your tax obligations are divided according to the timing of residency such that during the period you’re considered a resident you will owe U.S. taxes on your worldwide income, and for the non-resident portion of the year, you will only have to pay federal taxes on your U.S.-sourced income.  

State Tax Residency 

In addition to federal tax laws, states have their own criteria for determining tax residency, directly affecting state tax-related obligations. A person can be a non-resident for federal purposes but still be considered a resident for state tax purposes—or vice versa. While the specifics vary by jurisdiction, as a general matter, state residents must file state tax returns and report their worldwide income, and non-residents may still be required to report and pay taxes on income sourced from the state, including wages earned within the state, rental income from property located there, or business profits tied to in-state operations. 

The Sourcing of Income and Why it Matters 

Building upon our discussion of residency issues, it's essential to understand what income the U.S. taxes in relation to the origins of that income. This understanding is fundamental to international taxation. For the U.S., as with other countries, the source of income is not merely an accounting detail; it forms the basis of its taxing authority. This distinction influences not only which income is taxed but also impacts tax treaties, foreign tax credits, and exclusions like the Foreign Earned Income Exclusion (discussed below). The sourcing rules work in tandem with the taxpayer's status, making the origin of income as significant, if not more so, than residency status in determining whether a particular income item is subject to U.S. taxation. The determination of income source depends on its type and origin as follows: 

• Compensation for Services (Wages and Salaries): If you perform services within the U.S., the compensation received for those services is generally U.S.-sourced income, regardless of the employer's location or nationality. Conversely, if the services are performed outside the U.S., the income is generally foreign-sourced. The place of performance is generally where the work is physically performed. However, for remote work, specific rules may apply depending on the nature of the employment and the agreements in place. This same principle of "place of performance" generally applies to independent contractors as well.
• Rental Income: Income derived from renting real property is sourced based on the property's location. Rent from a property located in the U.S. is U.S.-sourced income, while rent from a property located abroad is foreign-sourced income. 
• Investment Income: Investment income is generally broken down into three broad categories: dividends, which are sourced based on the residence of the corporation paying the dividend; capital gains from the sale of stock are generally sourced to the seller's tax home, regardless of where the stock is traded, or the company is located; and interest income, the sourcing of which can depend on the specific type of debt instrument. For example, interest from a U.S. bank account is U.S.-sourced, even if the account holder is a nonresident alien. Interest on corporate bonds is sourced to the issuer's residence
• Royalties: Royalty income is generally sourced based on where the right to use the intellectual property (IP) is granted or exercised, not necessarily where it is physically manufactured or consumed.
• Gains from the Sale of Property: The sourcing of income derived from the sale of property differs for real property and personal property in that the former is sourced to the location of the property, and income from the latter is generally sourced to the seller's tax residence.

Strategies to Avoid or Mitigate Double Taxation 

Paying taxes in two countries can create a significant financial burden. Fortunately, the U.S. tax system offers several strategies to prevent or mitigate double taxation, ensuring that U.S. taxpayers aren’t taxed twice on the same income. These tools include tax treaties, the Foreign Tax Credit (FTC), and the Foreign Earned Income Exclusion (FEIE). Careful planning is essential to determine the most beneficial approach in each individual's circumstances.

Foreign Tax Credit (FTC)

Subject to the caps and limitations discussed below, the FTC provides a dollar-for-dollar reduction of your U.S. income tax liability for offsetting the income taxes you've paid to a foreign government on income that is also subject to taxation by the U.S. This credit primarily applies to taxes you've paid directly, such as when a foreign government withholds taxes from your wages or when you make estimated tax payments to a foreign tax authority. 

The credit you can claim is capped at the amount of U.S. tax you would have owed on that same foreign income had it been earned domestically. For example, if your U.S. tax liability on your foreign income is calculated to be $5,000, and you paid $6,000 in taxes to the foreign government, your FTC will be limited to $5,000. Conversely, if you paid $4,000 in foreign taxes on that same income, your FTC will only be $4,000, and you will still have a remaining U.S. tax liability of $1,000.

Furthermore, to prevent taxpayers from using excess credits from one type of income to offset U.S. tax on another, the FTC calculation considers different categories or "baskets" of income. The most common categories are "general category income" (which includes wages and business income) and "passive category income" (which includes investment income like interest and dividends). You must calculate the FTC limitation separately for each category.

Pro Tip: If you can't use the full amount of your FTC in the current year because of these limitations, you're not entirely out of luck. The unused portion of the credit can generally be carried back one year and then forward for up to ten years, providing future opportunities to reduce your U.S. tax liability.

Foreign Earned Income Exclusion (FEIE)

The FEIE allows eligible U.S. taxpayers to exclude a certain amount of their foreign-earned income from U.S. taxation. For the tax year 2024, the maximum exclusion amount is $126,500. To qualify for the FEIE, you must have a tax home in a foreign country and meet one of two tests:

• The Bona Fide Residence Test: You must be a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. This means you have established a residence in the foreign country for an indefinite or extended period and intend to return to your U.S. tax home. 
• The Physical Presence Test: You must be physically present in a foreign country (or countries) for at least 330 full days within a single, unbroken 12-month period (subject to certain exceptions). 

Note that the exclusion applies only to earned income—wages, salaries, and self-employment income—not unearned income like dividends or rental income. Furthermore, the exclusion only applies to federal taxes, and some state taxes may still apply depending on your state of residence. 

Pro Tip: While you can’t use both the FEIE and the FTC on the same income, you can use the FTC for foreign taxes paid on income above the FEIE limit. For example, if you earn $150,000 in foreign earned income, you can exclude $126,500 using the FEIE and potentially claim an FTC for foreign taxes paid on the remaining $23,500.

Tax Treaties

Tax treaties, often referred to as double taxation treaties (DTTs) or double taxation agreements (DTAs) are agreements between the U.S. and other countries designed to clarify how income is taxed when both jurisdictions could potentially claim taxing rights. These treaties often take precedence over the general rules of the Internal Revenue Code, ensuring that taxpayers are not unfairly taxed twice on the same income. Primary benefits of tax treaties include:

• Reduction or Elimination of Withholding Taxes: Treaties often lower withholding rates on specific types of income, such as dividends, interest, and royalties. For example, a tax treaty might reduce the U.S. withholding tax on dividends paid to a treaty-country resident from the standard 30% to 15%.
• Permanent Establishment Rules: Treaties define what constitutes a "permanent establishment" (e.g., a fixed place of business) in a country, determining whether a business has sufficient presence to be taxed there.
• Residency Tie-Breaker Rules: Treaties include rules to resolve conflicts where an individual qualifies as a tax resident of both countries. These rules consider factors such as where the individual has a permanent home, closer personal and economic ties, or habitual residence.
• Exemptions for Certain Income Types: Treaties may exempt specific income types from taxation in one jurisdiction, such as pensions, social security benefits, or income from government service.
• Non-Discrimination Provisions: Many treaties include clauses to ensure that nationals of one country are not treated less favorably than nationals of the other country under the tax laws.

Beyond these general tax treaties, the U.S. also participates in totalization agreements, which specifically address the coordination of Social Security and Medicare taxes with partner countries.

Pro Tip: It’s important to note that for the most part, DTTs are not self-executing. This means their provisions (and hence potential benefits) do not automatically apply to a taxpayer's situation without specific actions or filings. To claim benefits under a treaty, such as reduced withholding or tax residency determinations, taxpayers must follow specific procedures, such as filing IRS Form 8833 or providing necessary documentation to foreign tax authorities. 

As you can see, international taxation is a highly complex topic, and determining which tax authority has a rightful claim to your income – and ensuring you don't end up paying twice on the same earnings – requires a deep understanding of overlapping tax systems and regulations. Through AAL’s directory, you can find numerous attorneys with extensive experience in practicing international tax law to help you understand your obligations, minimize your liabilities, and make sure you're on the right side of both the IRS and foreign tax authorities.