As an expat, it is essential to understand how tax treaties and totalization agreements will affect your tax situation. A tax treaty is an agreement between the United States and a foreign country that provides facilities for those who would otherwise be taxable in both countries. As a U.S. citizen or green card holder, you are subject to global income taxation. If you are tax resident in a foreign country, tax treaties and totalization agreements could bring you significant financial benefits. Before we delve deeply into the technical details, let`s first take a look at the difference between these two people, because they involve American people, who understand only U.S. citizens and resident aliens. Totalization agreements are international tax treaties designed to eliminate double taxation on social security and Medicare taxes in the United States. These agreements are made to house foreign workers who pay FICA taxes but do not receive social security or Medicare benefits after the age of 65. The agreements are between the United States and other individual countries and international taxpayers who earn money in the United States. The goal of the totalization agreements is to eliminate the double taxation of a foreigner`s income in the United States and to provide social security benefits commensurate with the same foreign workers. Whether a worker is covered either by Social Security and Medicare in the United States or by the social security system in a foreign country is where the worker resides and whether the employment in a foreign country is short-term or long-term. As of August 2017, the United States has 26 active totalization agreements.
The agreement can help those who have worked in both the United States and Hungary but have not worked long enough in both countries to qualify for social benefits. Under the agreement, each country can count work credits in the other country if it helps the applicant qualify for what is called total benefits. 3 An agreement can contain only one of these rules, not both. Thus, in the agreements, employment coverage is allocated either on the basis of a delegated activity or on the basis of place of residence. Any agreement (with the exception of the agreement with Italy) provides an exception to the territorial rule, which aims to minimize disruptions in the career of workers whose employers temporarily send abroad. Under this exception for „self-employed workers,“ a person temporarily transferred to work for the same employer in another country is covered only by the country from which he or she was seconded. A U.S. citizen or resident who, for example, is temporarily transferred by a U.S. employer to work in a contract country, is still under U.S. action.