Court ruling confirms 3.8% tax on United States expats with no foreign credits

US expats can't reduce the 3.8% Net Investment Income Tax with foreign tax credits, leaving cross-border earners exposed to double taxation on overseas investments.

Appellate ruling confirms double tax on foreign investment income

The US Court of Appeals for the Federal Circuit ruled Aug. 31 that foreign tax credits can't offset the 3.8% Net Investment Income Tax (NIIT) under US tax treaties.

The paired appellate decisions in Estate of Paul Bruyea v. United States and Christensen v. United States reversed earlier, taxpayer-friendly rulings from the Court of Federal Claims involving the US,Canada and US,France tax treaties.

The court established that the Internal Revenue Code and bilateral treaties strictly bar using foreign tax credits against the NIIT. Under federal law, foreign tax credits authorized by Sections 27 and 901 apply solely against standard Chapter 1 income taxes.

Because Section 1411 imposes the 3.8% NIIT under Chapter 2A, the court ruled that neither domestic tax law nor existing treaty provisions create an independent credit to reduce that specific liability.

Financial exposure for expats and remote earners

The ruling directly affects US citizens, resident aliens and digital nomads living abroad who trigger statutory income thresholds while paying local taxes on investment gains. The 3.8% surtax applies to the lesser of net investment income or the amount by which modified adjusted gross income surpasses statutory ceilings:

• $200,000 for single filers

• $250,000 for married couples filing jointly

• $125,000 for married individuals filing separately

For nomadic earners and expats in high-tax jurisdictions, this creates unavoidable double taxation. An expat in France or Canada with $50,000 in capital gains above the filing threshold owes an un-creditable $1,900 directly to the Internal Revenue Service, regardless of how much tax was already paid to foreign authorities on that same income.

Taxpayers navigating settling in the United States or managing overseas tax residency must factor the extra 3.8% cash outlay into their annual tax liability calculations for open and future filings.