Before a green card holder uses the Treaty Tiebreaker provision of a U.S. Tax Treaty, he/she must consider what is the effect of using the Treaty Tiebreaker on:
A. His/her immigration status under Title 8 (will he/she risk losing the Green Card?)
B. His/her status under Title 26 (will he expatriate himself under Internal Revenue Code S. 7701(b)) and subject himself to the S. 877A Exit Tax provisions?
This is another in a series of posts on the tax treaty tiebreaker (which is a standard provision in most U.S. tax treaties). Tax treaty tiebreakers are rules that are used to assign a person’s tax residency to one country when an individual is a tax resident of both countries. In the context of U.S. tax treaties, treaty tie breaker rules are used when an individual is both:
1. A U.S. person for tax purposes (U.S. citizen or U.S. resident); and
2. A tax resident of another country.
It is very common to use tax treaties to assign tax residency to a country when an individual is a tax resident of more than one country.
For example, Article IV of the Canada U.S. tax treaty provides for a rule to assign an individual’s “tax residency” to either Canada or the United States when an individual is a tax resident of Canada and and a tax resident of the the United States.
The savings clause prohibits U.S. citizens from using the tax treaty tiebreaker from avoiding being a tax resident of the United States.
Article IV of the Canada U.S. tax treaty includes:
2. Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his status shall be determined as follows:
(a) he shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him; if he has a permanent home available to him in both States or in neither State, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closer (centre of vital interests);
(b) if the Contracting State in which he has his centre of vital interests cannot be determined, he shall be deemed to be a resident of the Contracting State in which he has an habitual abode;
(c) if he has an habitual abode in both States or in neither State, he shall be deemed to be a resident of the Contracting State of which he is a citizen; and
(d) if he is a citizen of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.
It is clear that the tax treaty tiebreaker provision does NOT exclude green card holders from it’s application. In fact, the impact of the tax treaty tie breaker may be the reason why the Canada Revenue Agency advises that green card holders are NOT U.S. residents for FATCA reporting purposes.
The application of the tax treaty tiebreaker makes one a nonresident alien, WITH RESPECT TO INCOME TAXATION, for U.S. tax purposes but NOT for other purposes (including FBAR and other information returns).
The nonresident alien and the 1040NR
Nonresident aliens file a 1040NR. A nonresident alien filing a 1040NR is filing to report and pay tax on income connected to the United States. A 1040NR is NOT used to report “non-U.S. income”. General information for the 1040NR is here. IRS Publication 519 – The U.S. Tax Guide For Aliens” is here.
Possible advantages for a green card holder using the tax treaty tiebreaker to file the 1040NR
1. A green card holder, by virtue of the tax treaty tiebreaker, would NOT be subject to U.S. taxation on foreign income”which includes Subpart F income and PFIC income.
2. A green card holder, by virtue of the tax treaty tiebreaker, would NOT be required to file Form 8938, Form 8621 and is subject to modified reporting requirements for Form 5471.
A green card holder, using the tax treaty tiebreaker IS still a U.S. Person. He is a U.S. Person who is deemed to NOT be a U.S. person for the limited purposes of the“tax treaty tiebreaker. He is a U.S. Person, who is NOT treated as a U.S. Person and who is therefore able to file a 1040NR.
There are millions of U.S. persons (citizens and green card holder) abroad who have not been filing U.S. taxes
Many of them are coming into compliance using the IRS Streamlined Foreign Offshore Program. As a general principle, streamlined is NOT available to nonresident aliens. This makes sense. After all, a nonresident alien is NOT a U.S. person for tax purposes.
Is streamlined available to a U.S. Person, who is filing a 1040NR, because he is treated as a nonresident pursuant to the tax treaty tiebreaker?
I suggest the answer comes from the instructions for streamlined which include:
Eligibility for the Streamlined Foreign Offshore Procedures
In addition to having to meet the general eligibility criteria, individual U.S. taxpayers, or estates of individual U.S. taxpayers, seeking to use the Streamlined Foreign Offshore Procedures described in this section must: (1) meet the applicable non-residency requirement described below (for joint return filers, both spouses must meet the applicable non-residency requirement described below) and (2) have failed to report the income from a foreign financial asset and pay tax as required by U.S. law, and may have failed to file an FBAR (FinCEN Form 114, previously Form TD F 90-22.1) with respect to a foreign financial account, and such failures resulted from non-willful conduct. Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.”
Let’s focus specifically on this part of the requirements:
(2) have failed to report the income from a foreign financial asset and pay tax as required by U.S. law,
If one is filing a 1040NR, then one is reporting ONLY U.S. source income. The whole point of the 1040NR would be to NOT have to report income from foreign financial assets. Think of the specific examples of Subpart F income and PFIC income.
Therefore, (although I will confess to never having analyzed this in terms of the streamlined rules) I suggest that one could NOT use the Foreign Offshore streamlined program to file the 1040NR.
It’s NOT that green card holders who use the tax treaty tiebreaker are NOT U.S. Persons. It’s that filing a 1040NR means that there is no reason to report income from a foreign financial asset (meaning that one fails the eligibility test for streamlined)!
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