I heard a rumor that there is a dollar ceiling around $200,000/year above which the Canada-US income tax treaty doesn't apply, or at least changes its behavior. What could that be referring to?


There are two methods of claiming a reduction on your US taxes due to taxes paid in Canada on the same income [typically applicable to a US citizen living in Canada, who files taxes in both countries due to US citizenship, but primarily owes taxes to Canada due to working there]:

(1) Foreign Tax Credits ("FTC's") may allow you to claim your Canadian taxes paid as a direct reduction of your US taxes otherwise owing on the same income stream. This way is a bit more complex, and can work out to your favour or to your detriment depending on specifics [ie: if you pay a higher rate of Canadian tax than US tax, you may get to carry forward extra FTC's for future years where your Canadian taxes may otherwise be lower]

(2) The Foreign Earned Income Exclusion ("FEIE") generally allows you to simply strike your Canadian-earned income off of your US tax return. If you have no other form of income, your US return is about as simple as possible: no income = no taxes. However the FEIE has a limit to the amount claimable each year - currently about 118k per year, or about 240k for 2 individuals Married Filing Jointly. This is likely what you have heard reference to. But who knows, incorrect tax rumours are everywhere, so what you heard may have been a completely different issue or just a fabrication!

Remember - don't file your taxes based on rumour, file them based on well-researched tax advice!

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