Saving International Taxes with Tax Treaty’s Tie Breaker Rules for the Green Card Holder

The tax treaty tie breaker rule can allow a green card holder not to be a U.S. tax resident. 

The tax treaty tie breaker rule overrides the U.S. tax code.  The tax treaty tie breaker rule requires an individual to be a resident of the country where he has the closest connection. 

With the tax treaty tie breaker rule a green card holder who is a citizen of a country with a tax treaty may non-resident for U.S. income taxes.  Tax treaties override the U.S. tax code.

As a non-tax resident, you live and work in the U.S. but only pay tax on your U.S. income and not your foreign income.

Here is what happens:  If you are a dual-resident taxpayer (a resident of both the United States and another country), a tax treaty’s “tie-breaker” rule determine if you are a U.S. income tax resident.   

The income tax treaty between the countries always have a provision that provides for resolving conflicting claims of residence (tie-breaker rule).

When you are a resident of the other country under the tie-breaker rule,  you are entitled to the treaty benefits as a resident of that country.  Plus,  you are a nonresident alien for U.S. income tax purposes,  This allows you to avoid U.S income taxes on your foreign income including your income earned in tax havens. 

For purposes other than income taxes, you will are as a U.S. resident. For example, you must report your foreign bank accounts and your ownership of foreign entities.

If you are a dual-resident taxpayer claiming treaty benefits as a resident of the other country, you file a Form 1040NR  and compute your tax as a nonresident alien.

Important:  You must attach an IRS Form 8833 to your IRS Form 1040NR.  This form explains to the IRS how the tax treaty makes you a non-resident.

But, be Careful! If you are a long-term resident, who starts to claim treaty benefits as a resident of another country under a tax treaty.  You can be subject to the Expatriation Tax.  

Betty has been a long-term resident living in Chicago for the last 20 years. She is Spanish citizen and has a U.S. green card.

Tired of the Chicago weather, she buys a home in  Spain.  She returns to Chicago a few times a year to visit her daughter and grandchildren.   The Spain.-U.S. Tax Treaty classifies her as a non-resident to the U.S.  The Expatriation Tax applies.  She owes tax to the IRS.

Learn the best U.S. tax treaty shopping rules for citizens of Australia, Canada, the U.K. and Europe on this link.

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