The Effect of Tax Treaties Overview for Dual-Residents Explained

The Effect of Tax Treaties Overview for Dual-Residents Explained

The Effect of Tax Treaties Overview for Dual-Residents

When a US person is a dual-resident of the United States and a foreign country, one of the most complicated aspects (usually) becomes handling the tax implications of two competing jurisdictions. The United States is one of the only countries that follow a Citizen-Based Taxation Model, and therefore the tax rules may be markedly different than other county’s tax rules and regulations. If a person is a dual-resident of the United States and a tax treaty country, they may be able to benefit from the tax treaty to reduce or eliminate double-taxation. Unfortunately, the tax treaty rules can be more complex for dual-residents vs non-dual residents. Let’s take a brief introductory look at the effect of tax treaties overview for dual-residents.

As provided by the IRS:

Effect Of Tax Treaties Dual-Residents

      • The rules given here to determine if you are a U.S. resident do not override tax treaty definitions of residency.

      • If you are a dual-resident taxpayer, you can still claim the benefits under an income tax treaty.

      • A dual-resident taxpayer is one who is a resident of both the United States and another country under each country’s tax laws.

      • The income tax treaty between the two countries must contain a provision that provides for resolution of conflicting claims of residence (tiebreaker rule).

      • If you are treated as a resident of a foreign country under a tax treaty, you are treated as a nonresident alien in figuring your U.S. income tax.

      • For purposes other than figuring your tax, you will be treated as a U.S. resident. For example, the rules discussed here do not affect your residency time periods.

What does this Mean?

Taking it piece by piece, when a person resides in two different countries, they are considered dual residents. As a dual resident, they are subject to taxation in the United States and abroad. If there is a tax treaty in place, then the treaty may impact whether the person is taxed as a US Person (worldwide income) or foreign resident (US-sourced income). In order to determine if a person is treated as a US person or foreign resident is impacted by the residence rules of the treaty (specifically the Tie-Breaker rule) – noting, that this will not impact other non-tax issues.

Taxpayers out of compliance should speak with a Board-Certified Tax Law Specialist to assess the different international tax amnesty programs in order to safely get back into compliance.

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