Page 2 - U.S. Tax Residency: Some Black-and-White Rules, Some Gray

ness; if the individual does not maintain a regular place of business, a tax home is the individual’s regular place of abode. The individual must maintain the tax home for the entire year, and the tax home must be in the same country to which the individual is claiming a closer connection.
tax return to claim a closer connection. The closer connection exception is only available for purposes of substantial pres- ence—a green card holder (or even one in the process of applying for a green card) cannot claim a closer connection to a foreign county.
“Center of vital interests” is not a defined term in the U.S. model treaty, but the commentary to the Organization for Economic Cooperation and Development model treaty indicated that it is the country to which the individual's personal and economic relations are clos- er, making it quite similar to the closer connection test.
A closer connection means having more significant contacts with the foreign country, with the following among the criteria relevant to that determination: n The location of the individual's perma- nent home
Treaty residency. An individual who is a U.S. resident based on either having a green card or being substantially pre- sent may be able to avoid being taxed as a U.S. resident if the individual is also treated as a resident of a foreign country under the laws of that country and under the tiebreaker rules of the income tax treaty between the United States and that foreign country [Treasury Regulations section 301.7701(b)-7]. There may be variations in the tiebreaker rules from treaty to treaty, but the rules under the U.S. model treaty are reasonably repre- sentative of those under actual in-force treaties, and those rules provide that, if an individual is treated as a resident of each country under that country’s domes- tic laws, for purposes of the treaty—
n he shall be deemed to be a resident only of the country in which he has a permanent home available to him;
n if he has a permanent home available to him in both countries, he shall be deemed to be a resident only of the coun- try with which his personal and econom- ic relations are closer (center of vital interests);
n if the country in which he has his cen- ter of vital interests cannot be deter- mined, or if he does not have a perma- nent home available to him in either country, he shall be deemed to be a res- ident only of the country in which he has an habitual abode;
n if he has an habitual abode in both countries or in neither of them, he shall be deemed to be a resident only of the country of which he is a national;
n if he is a national of both countries or of neither of them, the competent author- ities of the countries shall endeavor to settle the question by mutual agreement.
A treaty tiebreaker election is made by filing Form 8833 along with that year’s income tax return. (If treaty residency status is deemed to change in the middle of a tax year, the individual is a dual sta- tus taxpayer, and the income tax report- ing can become quite complicated.) Note that, under IRC sections 877(e)(1) and 7701(b)(6), if a green card holder makes a treaty tiebreaker election, it is the equivalent for tax purposes of relinquish- ing the green card, which could expose the individual to expatriation tax conse- quences and require the filing of Form 8854, depending upon how long the indi- vidual has held the green card.
n The location of the individual's family n The location of personal belongings, such as automobiles, furniture, clothing, and jewelry owned by the individual and his family
n The location of social, political, cul- tural or religious organizations with which the individual has a current rela- tionship
n The location where the individual con- ducts routine personal banking activities n The location where the individual con- ducts business activities (other than those that constitute the individual's tax home)
One critically important difference between the closer connection election and the treaty tiebreaker election is that, under the former, the individual making the election is deemed not to be a U.S. resident for any income tax purpose, whereas under the latter, the individual making the election is deemed not to be a U.S. resident only for purposes of com- puting the individual’s tax liability. For other purposes, including filing foreign informational reporting forms such as the Foreign Bank Account Report (FBAR), the individual is still deemed to be a U.S. resident.
n The location of
which the individual holds a driver's license
n The location of the jurisdiction in which the individual votes
n The country of residence designat- ed by the individual on forms and documents
n The types of official forms and docu- ments filed by the individual, such as Form 1078 (Certificate of Alien Claiming Residence in the United States), Form W-8 (Certificate of Foreign Status), or Form W-9 (Payer's Request for Taxpayer Identification Number).
For these purposes, a permanent home can be owned or rented and can be a house, an apartment, or a furnished room, but must be continuously avail- able rather than available only for stays of short duration.
Residency start date and termination date. As noted above, the general rule is that in the last year of residency, an indi- vidual is resident the entire tax year. The individual’s residency termination date— and therefore the date on which the indi- vidual ceases to be taxed as a U.S. per- son—can, however, be a date earlier than December 31 (specifically, the final date of actual presence in the United States
the jurisdiction in
Form 8840 is attached to an income
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