Federal Circuit Rules Americans Abroad Can't Credit Foreign Tax Against the 3.8% NIIT

The U.S. Court of Appeals for the Federal Circuit ruled on August 31, 2026, in companion cases Estate of Bruyea v. United States and Christensen v. United States, that Americans living abroad cannot use a tax treaty to credit foreign income tax against the 3.8% net investment income tax (NIIT), reversing taxpayer wins at the trial court level. The decisions close off a refund strategy that some Americans overseas had used to offset one of the more awkward pockets of double taxation in the U.S. international tax system.

What changed

Paul Bruyea, a U.S. citizen living in Canada, owed $263,523 in NIIT after selling Canadian real estate and paying Canadian tax on the same gain. Matthew and Katherine Christensen, U.S. citizens living in France, owed $3,851 in NIIT after selling French stock and paying French tax on that sale. Both households argued that their respective tax treaties, which let a treaty partner's residents credit U.S. tax paid against certain other taxes, should extend to the NIIT as well. The Federal Circuit disagreed, holding that language in both the U.S.-Canada and U.S.-France treaties limiting credits to what is allowed in accordance with the provisions and subject to the limitations of the law of the United States incorporates the Internal Revenue Code's own restriction on crediting the NIIT, not just a general cross-reference to U.S. tax law.

Who is affected

The ruling lands on the sizable population of American citizens and green card holders living abroad who owe NIIT on interest, dividends, capital gains, rental income, or other passive investment income, an obligation that follows U.S. citizens regardless of residence. It is especially costly for Americans in high-tax countries such as France, Canada, and much of Western Europe, where the local tax on the same investment income can already run well above U.S. rates, leaving the NIIT layered on top with no offset.

Why the NIIT sits outside normal treaty protection

The core problem, as the Federal Circuit read it, is structural rather than a drafting oversight. The NIIT lives in a separate chapter of the tax code from the regular income tax that most treaty foreign-tax-credit provisions were written to address, and Congress never amended the treaties or the credit statute to explicitly extend relief to this newer tax when it was created in 2013. Because the relevant treaty language conditions any credit on what U.S. domestic law separately allows, and U.S. domestic law does not allow a credit against the NIIT specifically, the treaty text ends up incorporating that gap rather than overriding it. The court's reasoning applies the same way regardless of which treaty partner is involved, since the limiting phrase appears in similar form across most U.S. tax treaties.

The after-tax math

The NIIT applies at 3.8% to net investment income above statutory thresholds, $250,000 of modified adjusted gross income for married couples filing jointly. Example: an American in Canada who sells a Canadian rental property for a $2 million gain and pays Canadian capital gains tax on that sale would, under this ruling, also owe the full 3.8% NIIT, roughly $76,000 on that gain, with no treaty-based credit available to reduce it, even though ordinary U.S. income tax on the same gain can typically be offset by the foreign tax paid. That $76,000 becomes a real, uncreditable layer of double taxation purely because of where the NIIT sits in the tax code's structure.

Moves to discuss with your advisor

Americans living abroad with investment income should discuss with a cross-border tax advisor whether the foreign tax paid can instead be claimed as an itemized deduction under Section 164 against NIIT-related income, timing strategies for realizing large gains, or structuring investments to reduce net investment income exposure, since the treaty credit route is now foreclosed absent a treaty renegotiation. Households who filed protective refund claims for past years based on the trial-court wins in these cases should ask their advisor how this reversal affects those pending claims.

What to watch

Because the ruling turns on treaty language shared by many of the roughly 60 U.S. income tax treaties, its logic is likely to extend well beyond Canada and France to Americans living in most other treaty countries, though litigants in other circuits could still attempt to distinguish the outcome. Any legislative fix would require Congress to act, and no such proposal has advanced as of this ruling.

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