Double Tax Relief

How It Works and Why It Matters

Double taxation occurs when the same income is taxed by two different countries — for example, when a U.S. taxpayer earns income abroad and both the foreign country and the U.S. impose tax on it. To avoid the unfair burden of being taxed twice, many countries, including the U.S., provide double tax relief through several key mechanisms.

Foreign Tax Credit

The foreign tax credit allows U.S. taxpayers to reduce their U.S. tax liability by the amount of foreign income taxes they’ve already paid.

  • Example: If you earn salary income in France and pay French income taxes, you may claim a credit against your U.S. tax for the French taxes paid.

  • Limits: The credit cannot exceed the portion of your U.S. tax liability attributable to foreign-source income (per IRS Form 1116).

  • Benefit: Reduces the chance of double taxation without eliminating U.S. filing obligations.

Foreign Earned Income Exclusion

The foreign earned income exclusion (FEIE) allows qualifying U.S. taxpayers living and working abroad to exclude up to a set amount of foreign earned income from U.S. taxation ($130,000 for 2025, adjusted annually).

  • Requirements: You must meet either the bona fide residence test (living in a foreign country for an entire tax year) or the physical presence test (present in a foreign country for 330 days in a 12-month period).

  • Limitations: Only applies to earned income (like wages), not investment or passive income, and doesn’t eliminate the need to file a tax return.

Tax Treaties

The U.S. has income tax treaties with many countries that help coordinate which country has taxing rights over certain types of income.

  • Key features:

    • Reduce or eliminate withholding taxes on dividends, interest, royalties, or pensions.

    • Provide tie-breaker rules when an individual qualifies as a tax resident of both countries.

    • Clarify how to apply credits or exemptions under domestic law.

  • Important note: Taxpayers often need to actively claim treaty benefits by filing IRS Form 8833 or similar disclosures.

Why Double Tax Relief Matters

Without these relief mechanisms, cross-border workers, expatriates, international businesses, and investors would face unreasonably high tax burdens. By using credits, exclusions, and treaties effectively, taxpayers can reduce or eliminate the risk of paying more tax than required.

However, these rules can be complex, with numerous eligibility criteria, calculations, and forms. Taxpayers are strongly advised to seek professional guidance to ensure they:

Claim the right type of relief.
Avoid double dipping (e.g., using both the credit and exclusion on the same income).
Stay compliant with filing obligations, even when no U.S. tax is ultimately due.

In summary: Double tax relief ensures fairness in international taxation, but navigating it requires careful attention to U.S. tax rules, foreign tax systems, and applicable treaties.

For more details on how to apply these mechanisms to your situation, check the IRS guidelines or click Contact to schedule a call with a cross-border tax specialist.