US Court Confirms 3.8% NIIT Cannot Be Offset by Foreign Tax Credits

American citizens who invest while living abroad just got unwelcome clarity on their tax bills. On August 31, the US Court of Appeals for the Federal Circuit ruled that foreign tax credits cannot be used to offset the 3.8% Net Investment Income Tax (NIIT), even under existing US tax treaties. For US expats and digital nomads with investment income, that means the surtax stands regardless of what they already pay to a foreign government on the same gains.

What changed

The decision came in two paired cases, Estate of Paul Bruyea v. United States and Christensen v. United States, which involved the US-Canada and US-France tax treaties. Both reversed earlier rulings from the Court of Federal Claims that had favored taxpayers.

The court's reasoning turns on where different taxes sit in the Internal Revenue Code. Foreign tax credits, authorized under Sections 27 and 901, apply only to standard income taxes in Chapter 1 of the code. The NIIT, created by Section 1411, sits in Chapter 2A. Because it lives in a separate chapter, the court found that neither domestic law nor treaty provisions create a credit to reduce it. In short, the 3.8% surtax cannot be washed out with credits for foreign taxes paid.

Who is affected

The NIIT applies once modified adjusted gross income crosses statutory thresholds: $200,000 for single filers, $250,000 for married couples filing jointly, and $125,000 for married filing separately. The 3.8% rate hits the lesser of net investment income or the amount by which income exceeds those ceilings.

That structure matters most for US citizens and resident aliens living in higher-tax countries such as Canada and France. Even after paying substantial local tax on investment returns, they still owe the NIIT on top. The source gives a concrete example: an expat with $50,000 in capital gains above the threshold faces roughly $1,900 in NIIT owed directly to the IRS, with no ability to credit foreign taxes already paid on that income.

What it means for nomads

For internationally mobile Americans, the practical takeaway is straightforward but costly: budget for the 3.8% as an unavoidable line item if your investment income and total earnings push you past the thresholds. Unlike ordinary income taxes, where foreign tax credits often eliminate double taxation, the NIIT offers no such relief.

This is worth factoring into decisions about when to realize capital gains, how to time asset sales, and whether large one-off gains might briefly push you over the income ceilings. Because the ruling applies to both open and future filings, expats with cross-border portfolios may want to review past returns and plan ahead with a tax professional familiar with US expat rules. The ceiling amounts are not indexed the way many other tax figures are, so more nomads may cross them over time as portfolios and incomes grow.

Originally reported by Stamped Nomad.