Individuals should consider the effect of treaty benefits on state income tax returns. Most states follow the Federal Treaties, but not all. At present, the following 13 states do not honor federal tax treaties: Alabama, California, Connecticut, Hawaii, Kansas, Kentucky, Maryland, Mississippi, Montana, NJ, ND & Pennsylvania.
Treaty benefits normally only extend to nonresident aliens. Once a nonresident becomes a resident, generally all tax treaty benefits are lost. This is because most tax treaties contain a provision known as a "savings clause". Under the savings clause, each country "saves" the right to tax its own residents as if no tax treaty were in effect. Many tax treaties contain exceptions to the savings clause, which may allow resident aliens to continue claiming certain treaty benefits. Examples of exceptions to the saving clause found in most treaties include extending benefits to students, traineers, teachers and researchers who qualify as residents.
Passive or Investment Income;
Dividends, interest, rentals, royalties, pensions, annuities, FDAP.
Under a tax treaty, this income may be exempt from US tax or subject to a reduced rate. If no treaty then it's 30%.
Most treaties exempt the gains on the sale of personal property. Real property in the US is generally taxable.
Personal Services Income:
Limited presence in the US, 183 days max during a year may be the case. Some treaties only allow so much compensation. Also, no permanent establishment or fixed base in the US may be required.
Other Types of Income;
Treaty benefits are also available for income received by artists, performers, athletes, directors and other specialized categories. Tax treaties may also include exemptions for pensions, annuities, and social security.
Exemption on Your Tax Return If you claim treaty benefits that override or modify any provision of the Internal Revenue Code, and by claiming these benefits your tax is, or might be, reduced, you must attach a fully completed Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), to your tax return.
You must file a U.S. tax return and Form 8833 if you claim the following treaty benefits:
You do not have to file Form 8833 for any of the following situations:
Form 8233, Exemption From Wihtholding on Compensation for Personal Services for a NRA to claim a treaty withholding exemption for income earned for certain personal services, scholarships, fellowships...