Possible US Net Investment Income Tax (NIIT) exclusion for expats using SSTA

If you have significant investment income, or just have a high salary, you may have noticed the new 3.8% surcharge that appeared last year on your US taxes.

The tax is curious since the way it was written, it wasn’t clear if this was a social security tax (in which case expats living in countries with Social Security Totalization Agreements wouldn’t need to pay), or an income tax, in which case you should be able to avoid double-taxation using foreign tax credits.

In the initial regulations, the IRS said that foreign tax credits would definitely not apply against this tax, since the tax is part of a new tax code. However, whether this is a social security tax wasn’t clear, since the social security agreements are a bit more broad.

Looks like the initial results are in, thanks to some courageous Canadian tax payers:

Today I received notice from a practitioner that a taxpayer had taken the position, discussed in the article, that the NIIT was inapplicable, on the basis that he resided in a country with a social security totalization agreement (``SSTA``). The position was denied upon initial assessment (as expected). The taxpayer protested, and the IRS allowed the position - the NIIT was not chargeable. A victory!
This exclusion speaks only to the countries with which the United States has SSTAs. We don`t know whether the foreign tax credit approach will work.

Another caution:  This is merely an assessment of one return - it is not a statement of policy by the IRS. Let`s see how other cases unfold.

News Flash: Further update January 20, 2014. A number of returns taking the SSTA approach have been accepted - some have "slid" through, and others have been denied, and were the subject of protest letters. So far, those protests have been accepted. Good news, so far, but again, it is not a statement of policy by the IRS

So if you are feeling lucky, perhaps give it a shot. In any case, you have another two years for your 2013 return, and if the IRS publishes a regulation on this, you can probably get a refund.

Update (4/16/2015): As a commenter notes, this is a very risky position to take, since at best your return will be initially rejected (“sliding through” isn’t going to happen anymore), and once you get a human looking at your return, you’d better be 100% there’s nothing else objectionable there. You also need to consider the cost of the audit/etc since you’ll probably be paying a professional to argue with the IRS, so if it’s only a couple hundred dollars, maybe it isn’t worth it.