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March 5, 2012 - Phil Hodgen

How to make a treaty election to be a U.S. nonresident

I received a comment on a blog post asking how to make the treaty election to be treated as a nonresident of the United States.  I answered how to make the treaty election in the comments, but it is a useful enough question that I thought it deserves a blog post of its own.

Why make a treaty election?

You make an election under an income tax treaty if you would be treated as a resident of the United States and a resident of another country for income tax purposes.  You don’t want to be taxed as a resident in two places at once, on the same income.

Who can make the election?

Only true residents of a country can use the income treaty between that country and the USA.  This is due to a provision installed in almost every treaty called a “limitation of benefits” clause.  There are a few ancient treaties that still don’t have these clauses, but the U.S. government is busily re-engineering old treaties to eliminate them.

So if you are a resident of the other country, you can make this election.  If you are a resident of a third country, you can’t.

Example

You are a resident of the United Kingdom.  You have income from U.S. sources and you want to use a tax treaty provision to reduce or eliminate your U.S. tax.  You can make an election by claiming benefits under the U.K./U.S. income tax treaty.  You cannot claim the benefits of the Canada/U.S. income tax treaty because you do not live in Canada.

How to make the election

The election is made on Form 8833.  (PDF)

Check this box

The second bullet point which says “The taxpayer is a dual-resident taxpayer and is disclosing a treaty-based position as required by Regulations section 301.7701(b)-7” is the box you need to check.

Form 8833, Line 1(a)

At Line 1(a) write in the country where you live.  This is the treaty you will be using to make the election.

Form 8833, Line 1(b)

At Line 1(b) you will need to find and fill in the correct Article number from the treaty.

Here is how you do this.  Ask the internet to bring you a copy of the income tax treaty between your country and the United States.  Look for Article IV.  That’s where it is usually found.  In a few old treaties, it is Article III.  Yes, they use the antique Roman convention for writing the Article numbers because these treaties are written by diplomats.

Within Article IV (or (Article III) there will be a paragraph that has language about dual resident taxpayers.  Read it until you find the language about being a resident of two countries simultaneously for tax purposes.  E.g., in the Canada/U.S. income tax treaty, this is Article IV, Paragraph 2.  The insider jargon for this part of the treaty is the “tie-breaker provision.”  If both countries see you as a resident for tax purposes, this is what you will use to break the tie.  (It is easier than lining up to shoot penalty shots at the end of the game, I guess.)

Start at the top of the tie-breaker provision and examine each one in sequence.  Does this apply to force a result for you to be treated as a resident of one country over another?  If yes, write it in.

Example

The commenter said he worked for 80 days in the United States in 2011.  His real home was in Canada.  In that case, he would say that Article IV(2)(a) of the Canada/U.S. income tax treaty causes him to be a resident of Canada and a nonresident of the United States for income tax purposes.

Form 8833, Line 5

This is the “essay answer” part of the form.  Just write something in here explaining reality as you see it.

Example

The commenter said he was in the U.S. under a TN visa, and worked for 80 days.  I’m not going to put words into his mouth (because I don’t know the true situation) but if I were preparing his Form 8833 I might do something like this:

I am a resident and citizen of Canada and worked temporarily in the United States for 80 days under a TN visa in 2011.

You don’t need to get scientific.  Remember that someone working for the Internal Revenue Service is going to open an envelope and read your paperwork.  Make that person’s life as easy as possible so he/she can understand what you’re doing.  That’s the best way to get your paperwork to disappear into the system.  You don’t want to confuse the government, because that causes you to get letters asking you to explain stuff.

Don’t leap before you look

It is not necessarily a good idea to make this treaty election.  So don’t do this without thinking.  Here are a couple of reasons why:

  • Other U.S. Tax Reporting. Making the treaty election means that you will calculate your income tax liability to the United States as if you are a nonresident.  But for all other purposes (other than the actual tax bill) you are a resident.  So you will be subjected to the entirely execrable Form TD F 90-22.1 and Form 8938 disclosure requirements.  Other stuff (like Form 5471) might apply.  In other words, you may be in for a World of Hurt.  Be careful.
  • Inadvertent Expatriation. Making the treaty election can be an event of expatriation for green card holders.  Do this wrong and you may create a huge and unwanted tax event in your life–as if you sold everything you owned on the effective date for the treaty election.

Oblig.

Insert standard legal disclaimer here.  I’m not your lawyer.  Go hire someone and get good advice.  Don’t believe anything you read on the internet.  Everyone knows the internet is built for pr0n, not tax information.  🙂

 

Nonresidents with US Activities