“Dual Resident” Tax Planning

Individuals who exceed 183 days of US presence in any tax year may become an income tax resident under US internal law for that tax year, in addition to being a tax resident of their “home country.” For our Canadian and United Kingdom clients (as well as residents of other countries who share an income tax treaty with the US), “dual residence tie-breaker” rules in such tax treaties will determine, as between your home country and the U.S, which country has the right to tax your worldwide income. The treaty-based residence “tie-breaker” rules are a series of cascading inquiries, which prioritize specific types of connections with each country to determine your residence for purposes of applying the Treaty. In most cases, these rules treat “dual resident” snowbirds vacationing in the US who are nationals of the treaty country as exclusively residents of that country for purposes of applying the applicable tax treaty (such persons are hereinafter referred to as “Treaty Nonresidents” of the US).

If you are found to be a “Treaty Nonresident,” income you earn outside the U.S. will usually not be subject to U.S. income tax, despite the fact that you have become an income tax resident under U.S. internal law (and would otherwise normally be subject to tax on your worldwide income). This can be especially important to “dual” resident shareholders in non-US companies who, if they were not Treaty Nonresidents, may be required to pay US income tax on certain of the foreign corporation’s undistributed earnings.

Notwithstanding your possible status as a Treaty Nonresident, however, the IRS and US Treasury still take the position that “dual” residents remain US tax residents for most US information reporting purposes. This can result in a Treaty Nonresident having to file several, complex annual information reports with the IRS and/or Treasury each year to report certain types of cross-border income, transactions and ownership interests in non-US entities and financial assets. We assist our clients in evaluating which information reports are required to be filed and in discharging those obligations. (As discussed below under the heading “Delinquent FBAR Reports and Other Foreign Asset and Information Reporting,” we also assist our clients to have failed to file such reports through inadvertence or otherwise to come into compliance by entering special IRS programs which allow penalty-free, back-filing of required information reports in cases of non-willful failure to file.)

In order to put the US Internal Revenue Service on notice that you are claiming the treaty tax benefits associated with being a Treaty Nonresident (including the right to exclude Treaty-protected income from US tax), you are required to timely file Form 1040 NR (U.S. Nonresident Individual Income Tax Return), attaching Form 8833, Report of Treaty-Based Return Position. Failure to do so will leave the US government expecting tax to be paid on your worldwide income and may set up a fight with the IRS who claim that they will not honor a late-filed Form 8833. Although the IRS cannot sustain that position (and late-filing Treaty Nonresidents need not fear being treated as a US resident alien for purposes of calculating tax), late-filing Form 8833 may result in the imposition of significant penalties and is to be avoided.

We have years of experience assisting “dual residents” and Treaty Nonresidents to avoid US tax on non-US source income. We welcome any inquiries you may have concerning your specific tax situation. Feel free to call us at (760) 578-5093, contact us via email at Brent@LanceCrossborder.com or by using our online contact form. We will respond to all relevant inquiries quickly, without any obligation.