Americans in Canada Subject to U.S. Alternative Minimum Tax (AMT)

American citizens who work abroad remain taxable in the United States on their worldwide income. However, they can enjoy certain tax breaks designed to alleviate the burden of paying taxes to two countries-the United States and the foreign country:

• An exclusion for foreign earned income (up to $87,600).
• A federal tax credit or a deduction for foreign income taxes.

Tax breaks and AMT

How do federal tax rules concerning the AMT hold up when they differ from rules in treaties with foreign countries? That was the question before the Tax Court in a case involving an American couple living and working in Canada.

For purposes of the AMT, the foreign tax credit in the year at issue in the case could not exceed 90% of AMT liability (today, all of the foreign tax can be used to effectively offset AMT liability). Despite the clear language of AMT rules, the couple argued that a Canadian-U.S. treaty allows write-offs sufficient to reduce their U.S. income tax liability to zero. Which controls? Federal tax law or the treaty? It's a question of timing.

A treaty provision doesn't necessarily have preferential treatment when federal tax laws are at stake. Conflicts between a revenue law and a treaty are resolved by applying the principle that the provision adopted later in time controls (the last-in-time rule). In this case, the Canadian-U.S. treaty went into effect before 1986. The AMT rule on the foreign tax credit became effective for 1986. Both the treaty and tax law have been changed since then.

According to the Tax Court, in this case, under the last-in-time rule the tax law controls. The couple cannot offset all of their AMT by their foreign tax credit in the year in which the 90% limit to the credit applied.

Source: William D. Jamieson et ux, TC Memo. 2008-118