For Americans living in Israel, one of the frustrating parts of the U.S. tax system is that paying a high rate of Israeli tax does not always mean that your U.S. tax liability disappears.

That is especially true when it comes to the 3.8% Net Investment Income Tax, commonly known as NIIT or the Obamacare tax.

For the last couple of years, two taxpayer-friendly court decisions offered some hope that Americans living in treaty countries could use foreign taxes to offset NIIT. On August 31, 2026, the U.S. Court of Appeals for the Federal Circuit reversed both of those decisions.

The cases involved taxpayers living in France and Canada, not Israel. But the reasoning matters tremendously for U.S. citizens living in Israel because the U.S.-Israel tax treaty contains very similar foreign tax credit language. The decisions also raise immediate practical questions.

What happens if you already claimed foreign tax credits against NIIT? Should you amend? What happens if you paid the NIIT and did not claim a credit? Should you file a protective refund claim in case the taxpayers eventually win on further appeal? And for taxpayers living in Israel, do the special IRS relief notices or the 10-year foreign tax credit statute give us additional time?

Key Points

  • The Federal Circuit reversed the taxpayer-friendly decisions in Christensen and Bruyea.
  • The court held that the applicable treaty foreign tax credits could not be used to offset the 3.8% NIIT.
  • The U.S.-Israel treaty contains very similar language, making these decisions highly relevant to Americans living in Israel.
  • Taxpayers who previously claimed a treaty-based credit against NIIT should review those returns, but that does not automatically mean every return should immediately be amended.
  • Taxpayers who paid NIIT without claiming the treaty position may want to consider whether a protective refund claim makes sense while further appeals remain possible.

What Is the Net Investment Income Tax?

NIIT is a separate 3.8% U.S. tax imposed under Internal Revenue Code Section 1411. This sounds like random tax jargon to call out the code section, but actually it is a critical point for why there is a debate if it can be offset by foreign taxes.

It generally applies to certain investment income of higher-income taxpayers, including capital gains, interest, dividends, rents, royalties, and certain passive income.

Congress enacted NIIT in 2010 as part of the health care legislation enacted alongside the Affordable Care Act. For purposes of these court cases, the most important feature of NIIT is not actually the 3.8% rate.

It is where Congress put the tax in the Internal Revenue Code. Most of the individual income tax system is contained in Chapter 1 of the Code. The foreign tax credit provisions under Sections 27 and 901 are specifically tied to taxes imposed under Chapter 1.

NIIT is different.

Section 1411 was placed in a separate Chapter 2A. The Federal Circuit treated that distinction as significant. The court concluded that Congress should be presumed to have understood the existing foreign tax credit structure when it enacted NIIT and that putting NIIT outside Chapter 1 meant that the ordinary foreign tax credit provisions do not reach it.

This distinction can produce a strange result for Americans abroad. A taxpayer can have enough foreign taxes to eliminate the regular U.S. income tax on an investment gain and still owe an additional 3.8% NIIT on that exact same gain.

Why Did Anyone Think Foreign Taxes Could Offset NIIT?

Everyone in these cases effectively agreed on one important starting point.

The normal foreign tax credit provisions in the Internal Revenue Code do not themselves provide a credit against NIIT. The taxpayer argument was different. They argued that the treaty provided an additional source of authority for the credit.

Many U.S. income tax treaties require the United States to allow foreign income taxes as a credit against U.S. tax. The treaties involved in Christensen and Bruyea contained language broad enough that the parties agreed that NIIT fell within the general concept of U.S. income tax covered by the treaty.

Think about the facts that this tax depends on how much income you make, and gives you no personal benefit. This is different than say social security, where the more you pay in, the more you get back. So it would seem to make sense that a foreign tax credit could work against it, logically.

So the taxpayer argument was essentially that the Internal Revenue Code does not give me a credit against NIIT. But the treaty does. That created a fascinating legal question. Can a tax treaty provide a credit that the Internal Revenue Code itself would not otherwise provide?

For some years, taxpayers had some favorable authority suggesting that the answer could be yes.

Christensen and Bruyea Gave Taxpayers Hope

Christensen involved U.S. citizens living in France. The taxpayers sold shares of a French company, paid French tax on the gain, and also paid U.S. NIIT. They argued that the U.S.-France treaty required the United States to allow the French income tax as a credit against the NIIT. The Court of Federal Claims rejected one of their treaty arguments but accepted another.

The court focused on a special portion of the treaty applicable to a person who was both a U.S. citizen and a resident of France. That particular subsection did not repeat the language stating that the foreign tax credit was subject to the limitations of U.S. law. The Court of Federal Claims concluded that this created a separate treaty-based credit that could offset NIIT.

Bruyea involved a U.S. citizen living in Canada. He sold Canadian real estate and paid Canadian tax on the gain. He also owed $263,523 of U.S. NIIT on that same income.

Bruyea argued that the U.S.-Canada treaty itself provided a foreign tax credit against NIIT even though the Internal Revenue Code did not. The Court of Federal Claims agreed.

That was a potentially huge development for Americans living abroad. If the treaty itself could create an independent credit against NIIT, taxpayers living in treaty countries could potentially eliminate significant double taxation that the normal Internal Revenue Code foreign tax credit rules did not address.

Then both cases went to the Federal Circuit.

The Federal Circuit Just Shut the Door

On August 31, 2026, the Federal Circuit reversed both taxpayer victories.

The court's reasoning really has three separate parts. The first is the Chapter 1 problem. Sections 27 and 901 provide foreign tax credits against taxes imposed under Chapter 1. NIIT is imposed under Chapter 2A. Accordingly, the Code itself does not authorize foreign tax credits against NIIT.

The second part is the treaty language. The taxpayers argued that the treaty provided a credit independently of the Code. The Federal Circuit agreed that the treaty creates foreign tax credit rights, but it focused on another phrase appearing in the treaties. The credit is allowed “in accordance with the provisions and subject to the limitations of the law of the United States.” The taxpayers tried to read that language narrowly. They argued that the phrase merely incorporated computational rules from the Code. In other words, the treaty creates the credit, while the Code simply tells you how much of that credit can be used.

The Federal Circuit rejected that distinction. The court said there was nothing in the treaty language limiting the phrase “provisions and limitations of U.S. law” only to computational rules. Instead, the limitation incorporates the broader U.S. foreign tax credit regime. If U.S. law does not permit the foreign tax credit against NIIT, then the treaty credit cannot be used to bypass that restriction.

In Bruyea, the court ultimately concluded that the Code and treaty “unambiguously” preclude the foreign tax credit from offsetting NIIT.

The third part of the reasoning involves the overall purpose of the treaty. The taxpayers emphasized that the treaty was designed to avoid double taxation. That sounds persuasive. After all, what could be more clearly double taxation than Canada, France, or Israel taxing an investment gain while the United States imposes an additional 3.8% tax on the same income?

But the Federal Circuit drew an important distinction. The treaty seeks to avoid or reduce double taxation. It does not guarantee that every possible instance of double taxation will always be eliminated. The court concluded that Congress creating a new tax in 2010 that does not qualify for the ordinary foreign tax credit does not automatically violate the treaty's broader principle of avoiding double taxation.

The general purpose of a treaty does not necessarily override the specific mechanics written into that treaty.

Christensen Closed a Second Possible Escape Route

Christensen involved an additional argument that was particularly interesting.

The main foreign tax credit provision in the U.S.-France treaty expressly stated that the credit was subject to U.S. law. But a separate provision specifically addressing U.S. citizens who were residents of France did not repeat that language.

The taxpayers argued that this omission was intentional. If the treaty drafters wanted the U.S.-law limitation to apply to that separate provision, they could have repeated it.

The Court of Federal Claims agreed. The Federal Circuit did not.

The Federal Circuit held that the treaty article had to be read as a whole. The U.S.-law limitation appeared at the beginning of the larger provision and operated as an overarching limitation on the provisions that followed. The treaty drafters did not need to repeat the same limitation in every subsection.

That makes the Federal Circuit decisions broader than simply saying Sections 27 and 901 do not apply to NIIT. The court is also telling us how it believes these treaty foreign tax credit provisions should be interpreted.

Would Allowing the Credit Give Americans Abroad an Unfair Advantage?

This was another interesting piece of the court's reasoning. A part which I originally thought was crazy, and after thinking about it more, understand it a bit better, but still personally disagree with.

The court was concerned that the taxpayers' interpretation could result in Americans living abroad receiving more favorable treatment than similarly situated Americans living in the United States.

Consider a U.S. citizen living in France who pays French tax on investment income. Under the taxpayer interpretation, that individual could potentially rely on the special treaty provision for French residents to offset NIIT. Now compare that person to a U.S. citizen living in New York who earns foreign investment income and pays foreign tax.

The New York taxpayer might be subject to the ordinary treaty credit provisions that everyone agreed remained constrained by the Internal Revenue Code.

The court viewed that result as anomalous.

It did not believe the treaty parties intended the treaty to create a special NIIT benefit simply because the U.S. citizen happened to reside abroad. There is an obvious response to that argument.

The person living abroad only receives the benefit because that person is actually subject to foreign tax on the same income. They are not receiving a free tax break. They are trying to prevent the same income from being taxed twice.

Nevertheless, the Federal Circuit viewed the potential difference between U.S. residents and foreign residents as additional evidence that the taxpayer interpretation was not what the treaty parties intended.

Now my own humble opinion on this particular point is that the court got it wrong. There are plenty of provisions in treaties that give greater benefits to those living abroad. For example, if you are a US citizen living in Israel you are exempt from paying US tax on Social Security income according to the treaty. Whereas if you live in the US, it is taxable. Further, it would make sense that people living abroad and not benefiting from the healthcare system in the same way as those living in the US, should not be as liable to support that healthcare system. The only way to offset taxes on NIIT if the treaty allowed it, would still only be with foreign taxes paid. So yes, if you live abroad and pay a large amount of foreign taxes, that should be able to be used against NIIT in ways that it doesn't for those living in the US with foreign income earned. But again, just my humble opinion.

What Does This Mean for U.S. Citizens Living in Israel?

This is where these cases become especially important for Americans living in Israel.

The U.S.-Israel treaty contains similar language. Article 26 provides the framework for relief from double taxation. Its foreign tax credit structure operates subject to the provisions and limitations of domestic law. That is the same basic type of language that played such an important role in Bruyea and Christensen.

That does not mean the Federal Circuit decided anything directly about the U.S.-Israel treaty. It did not.

But the reasoning is extremely difficult to ignore. The court has now interpreted substantially similar treaty language to mean that the treaty foreign tax credit remains constrained by the Internal Revenue Code's limitation on credits against NIIT.

Consider an example. Assume an American living in Israel sells an investment and recognizes a $500,000 capital gain. Israel taxes the gain at up to 30%.

Assume the U.S. long term capital gain rates are only 20% and the NIIT is 3.8%.

At first glance, you might think the U.S. tax problem is over. But NIIT is separate. If the full $500,000 is subject to the 3.8% NIIT, the taxpayer could still face an additional $19,000 of U.S. tax.

The taxpayer paying 30% has an additional 10% of Israeli taxes above and beyond the U.S. 20% income tax. Plenty of Israeli taxes available to potentially offset that 3.8%. That does not help.

The foreign tax credit can potentially reduce the regular Chapter 1 U.S. tax to zero while leaving the Chapter 2A NIIT sitting there untouched. That is the practical problem these cases highlight. It is also important to emphasize what these cases do not change. Foreign tax credits are still enormously important for Americans living in Israel. Israeli income taxes can still offset regular U.S. income tax when the normal foreign tax credit rules are satisfied. Treaty re-sourcing provisions and the normal Form 1116 framework remain relevant.

The problem addressed by these cases is much narrower.

Can foreign taxes be used to offset the separate 3.8% NIIT?

The Federal Circuit has now given the government a very strong appellate-level answer. No.

Are These Cases Finished?

Not necessarily. The taxpayers still have potential appellate options. They can seek rehearing from the Federal Circuit, including potentially rehearing by the full court. If that does not succeed, they can ask the U.S. Supreme Court to hear the cases.

That does not mean the Supreme Court will agree to hear them. The Supreme Court accepts only a very small percentage of petitions. There also is not currently a clean split between different federal appellate courts on this particular question, which makes Supreme Court review less likely.

Still, there are meaningful treaty interpretation issues involved. Two Court of Federal Claims judges previously found taxpayer-friendly routes. The Federal Circuit has now rejected those positions in precedential opinions. So I would not describe the litigation as necessarily finished.

I would describe the current law as strongly unfavorable to taxpayers while recognizing that additional appeals are still possible.

One other interesting issue remains unresolved. The government argued that even if NIIT conflicted with an older treaty, the later-enacted NIIT statute could potentially prevail under the “last-in-time” doctrine.

The Federal Circuit did not need to reach that argument. It concluded that there was no conflict because the treaties themselves incorporated the limitations of U.S. law.

That means there are still broader treaty questions around the edges of these cases even though the Federal Circuit decided the NIIT credit issue against the taxpayers.

What If You Already Claimed the NIIT Credit?

This is probably the most difficult practical question created by the new decisions.

Some taxpayers may already have filed returns claiming foreign tax credits against NIIT based on Christensen, Bruyea, or similar treaty arguments. Should those taxpayers immediately amend?

I do not think there should be an automatic answer.

There are really three separate questions that should be considered. The first is the underlying tax position. After these Federal Circuit decisions, the substantive argument for using these treaty provisions to offset NIIT has become significantly weaker. That is particularly true for a return being filed today. Someone taking the position now knows that a precedential federal appellate decision has rejected the argument. That is very different from someone who filed a return while favorable Court of Federal Claims authority existed.

The second question is penalties. A tax position can ultimately be wrong without necessarily resulting in penalties. A taxpayer who claimed a treaty-based NIIT credit while Christensen or Bruyea provided favorable judicial authority may have arguments that the position was reasonable when taken.

That analysis could depend on the timing of the return, the authorities available at that point, whether the taxpayer obtained professional advice, like a tax memo, and whether the position was adequately disclosed, and the precise penalty being asserted. So even if the underlying tax ultimately becomes due, that does not automatically mean penalties should apply.

The third question is interest. Interest is different from penalties. If the NIIT should have been paid with the original return, statutory interest generally continues to accrue on that unpaid tax. Having a reasonable legal position usually does not make that interest disappear. That creates a real decision for taxpayers who previously claimed the credit. Leaving the return alone preserves the possibility that the taxpayer litigation eventually succeeds. But if the position ultimately fails, interest may continue growing while everyone waits. Amending now stops that exposure from continuing to grow, but it may require paying tax that could potentially become refundable if the litigation later changes.

That is why I would not apply one rule to every taxpayer. A $1,000 NIIT issue and a $100,000 NIIT issue present very different practical decisions. The filing year matters. The amount matters. The quality of the original legal position matters.

And the taxpayer's appetite for continuing uncertainty matters.

What If You Paid the NIIT and Never Claimed the Credit?

Now consider the opposite taxpayer.

They paid the NIIT. They never attempted to use foreign tax credits against it. If the taxpayers in Christensen or Bruyea ultimately prevail in later litigation, that taxpayer may want to go back and claim a refund. But refund claims are subject to statutes of limitations. So I wouldn't file a tax return currently with the position, since the courts overruled it.

However, that is where a protective refund claim can become extremely useful.

A protective claim is essentially a way of saying:

I may be entitled to a refund, but whether I am entitled to it depends upon the outcome of unresolved litigation or another future contingency.

I want to preserve my refund rights now before the statute expires.

The point is not necessarily to ask the IRS to issue the refund today. In fact, the IRS may simply hold the claim while the underlying legal issue is unresolved. The purpose is to preserve the taxpayer's place in line. The IRS recognizes protective claims when entitlement to the refund depends on pending litigation or another contingency.

A valid protective claim generally needs to identify the taxpayer, the tax year, the nature of the claim, and the contingency that will determine whether a refund is ultimately due.

It does not always require the exact final refund amount to be known at the time the protective claim is filed. In this situation, the contingency could be the final resolution of Christensen and Bruyea. As there is no current appeal of the Federal Circuit decision, I don't think a protective claim can be filed at this time, but we need to keep a close watch to see if the taxpayers do appeal and continue further.

For an individual taxpayer, Form 1040-X may be the practical vehicle used to preserve the claim, together with an explanation that the refund request is contingent on the ultimate outcome of the litigation.

If the statute expires while everyone waits for the litigation to finish, a later taxpayer victory may not help someone whose refund rights were never preserved. That makes protective claims particularly relevant for taxpayers with substantial NIIT exposure, but only if this legal battle continues.

Does Notice 2025-53 Give Taxpayers in Israel More Time?

Potentially. This is where the normal refund statute becomes more complicated for taxpayers in Israel. The IRS issued a series of relief notices following the terroristic actions beginning on October 7, 2023.

Notice 2023-71 provided initial relief. Notice 2024-72 extended relief further. Notice 2025-53 extended a broad range of deadlines again, with qualifying deadlines postponed until September 30, 2026.

Notice 2025-53 covers certain deadlines falling between September 30, 2025 and September 30, 2026 for affected taxpayers. The relief applies not only to filing returns and paying tax, but also to other time-sensitive tax actions. That can include the deadline for filing certain claims for credit or refund.

This is important because Notice 2025-53 should not be viewed merely as another tax return filing extension. For the right taxpayer and the right year, it can affect refund claim timing as well.

There is also an important recent statutory development. The December 2025 Form 1040-X instructions explain that legislation enacted on December 26, 2025 changed the treatment of certain Section 7508A postponements for refund lookback purposes. For qualifying claims filed after December 26, 2025, certain postponement periods related to disasters or terroristic or military actions are treated as extensions when calculating the refund lookback period. That can effectively increase the amount of tax falling within the refundable period. This is technical, but potentially very valuable.

The statute of limitations for a refund claim involves two separate concepts. There is the deadline for filing the claim. Then there is the lookback period, which determines how much of the tax paid can actually be refunded.

The Israel relief provisions can potentially affect both pieces of that analysis. That does not mean every American living in Israel automatically has until September 30, 2026 to amend every historical tax return. The result depends on the year involved, when the original return was filed, when the tax was considered paid, whether an extension applied, which Israel relief notice covers the taxpayer, and when the particular refund deadline would otherwise have expired.

This is definitely an area where the exact dates matter.

What About the 10-Year Foreign Tax Credit Statute?

There is another potentially important rule. Foreign tax credit refund claims can have a much longer statute of limitations than ordinary refund claims.

Section 6511(d)(3) generally provides a special 10-year period for certain refund claims attributable to foreign taxes for which a credit is allowed. IRS guidance describes this as a special 10-year limitation period for refunds related to foreign tax credits. The current Form 1040-X instructions also specifically warn that the extended 10-year period applies only to amounts affected by changes in the foreign tax credit. This raises a very interesting question in the NIIT context.

If a taxpayer eventually succeeds in arguing that treaty-based foreign tax credits should have offset NIIT, would the resulting refund qualify for the special 10-year foreign tax credit statute? There is a strong reason to examine that rule. But I would not automatically assume that the answer is yes.

The entire dispute in Christensen and Bruyea is whether the treaty allows the foreign tax credit against NIIT in the first place. The Federal Circuit has now said that it does not. So there is an unusual circular issue. If the credit is not legally available against NIIT, is a refund of NIIT really an overpayment “attributable to” a foreign tax credit for purposes of the special 10-year period?

If later courts reverse the Federal Circuit and conclude that the treaty does provide the credit, the answer could become extremely important. That is why I would not tell taxpayers to simply rely on the 10-year rule and ignore the ordinary statute.

For someone with substantial dollars at stake, the more conservative approach may be to analyze whether a protective claim should be filed while the normal refund period is unquestionably open rather than betting that the special 10-year period will ultimately apply.

What Should Americans in Israel Do Now?

For taxpayers filing returns today, I would personally not be claiming Israeli foreign tax credits against NIIT based solely on the U.S.-Israel treaty. The Federal Circuit has now issued two precedential opinions rejecting materially similar arguments.

For taxpayers who already claimed the position, I would review the returns rather than automatically amending or automatically leaving them alone. The amount of NIIT involved, the year of the return, the authority available when the position was taken, potential penalty protection, and the continuing cost of interest should all be considered.

For taxpayers who paid significant NIIT without claiming a treaty credit, I would consider whether preserving a protective refund claim makes sense while Christensen and Bruyea continue through the appellate process. I would also pay very close attention to the statute of limitations.

For taxpayers in Israel, the answer may involve the normal refund rules, the special Israel relief under Notice 2025-53 and its predecessors, the newer Section 7508A lookback rules, and potentially the special 10-year foreign tax credit statute.

Those rules do not necessarily produce the same answer for every taxpayer or every year.

And perhaps most importantly, I would keep watching.

These Federal Circuit opinions were issued on August 31, 2026. We should know over the coming months whether the taxpayers seek rehearing and whether either case eventually moves toward the U.S. Supreme Court. I am monitoring both cases and will continue sharing updates as they happen.

If you are a U.S. citizen living in Israel, or an advisor working with Americans abroad, check back here regularly. I regularly share practical ideas and updates on U.S.-Israel cross-border taxation, and I will post again when there is another meaningful development in these cases. If you want help thinking through your own NIIT exposure, reach out.

Important Disclaimer

This article is intended for general educational and informational purposes only and is not legal, tax, accounting, or other professional advice. Tax rules are highly fact-specific and can change. Before taking any action based on the issues discussed here, you should speak with your own accountant, CPA, or tax attorney for advice tailored to your particular facts and circumstances.

AI Use Disclosure

I will never try to have you read AI slop. I use artificial intelligence tools as part of my writing and research process, including to assist with research, organization, drafting, and refining portions of the text. The ideas, analysis, concepts, structure, outline, editorial judgment, and decisions about what I believe will be useful to the reader are my own. I review, and revise, all content before publication.