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. 🙂
yes but that paperwork might attract IRS attention and I don’t want to give up my hard earned pension money. My current choice is to be a turtle.
@jeffDTom,
Thanks for the comment. I took it and made it into a blog post to illustrate why Americans give up citizenship. I don’t want your story to be lost in a comment thread.
My report to you is that for now, at least, you can cancel that U.S. passport with no more than some annoying paperwork. The government seems sublimely disinterested in expatriates like you. If your choice is to terminate your U.S. citizenship, it will be easily accomplished and you will be free to re-enter the USA any time you want on your new passport. That is what I have seen, and I have done a lot of these cases.
I know the following rant might not belong in this thread, but I felt like writing you this stuff so you and your friends who read and participate on your site know my situation which is not unlike that of many other US persons abroad who are not lucky enough to be stationed abroad by a US company who compensates them for double taxation and greases the gears of bureaucracy for them. You are not my lawyer, I am not a lawyer, I am not giving legal advice, just lay opinion, get your own lawyer, make up your own mind at your own risk etc.
I personally was denied banking services in the US soon after I established myself in Europe. I was unable to maintain a brokerage account and lost thousands in gains that I was not allowed to realize. The brokerage, Donaldson, Lufkin, Jeanrette closed my account without prior notice (the letter arrived weeks later). My banking relations for simple things like credit cards and checking account in the US (needed to pay student loans and other occasional purchases in the US) have been strained to say the least. European banks told me to buzz off when I tried to open brokerage accounts. When I call my local branch bank in the US they tell me I have to come in physically to do anything (so I have to call the headquarters of the bank and scream every time even though they have copies of my US passport, SSN, drivers license). I have been denied the economic freedoms accorded others who were not born in the freaking USA. I remember that at least two ex-girlfriends were able to open and maintain US savings accounts (modest, a few thousand just to keep money in the US during studies or for vacations in the US) with no SSN and no trouble. Now, despite my US nationality, the banks tell me to go to H every time I try to do anything. I have been refused much-needed jobs due to my birthplace and despite my European nationality. My home state will not renew my drivers license anymore unless I show up in person (which is impossible because I am now unemployed and on the verge of bankruptcy). My Congressmen are oblivious, myopic, US-centered, and do not understand my problems. Obtaining a US credit report is a like something out of Kafka— past and current addresses are mangled by the computer systems that cannot store foreign adderesses properly so according to them I have a foreign street address in a US state. I have had accounts closed without prior notice and almost gotten arrested for using a credit card that I did not know had been cancelled. I have not been counted in the US census since living abroad. I am lucky to be able to vote because I re-registered 20 years ago when I left and have kept in touch with the county election office (they have been wonderful, always pretty good service despite their limited resources and manual processing). The US treats its citizens abroad like xxxx (replace with your choice of cusword) and attempts to tax them too. My home country told me years ago after I was naturalized that I must not declare income and assets earned and taxed there to the US, but now they seem to be backing down on their position in view of FATCA which is so much a general warrant against the 4th that I want to vomit. Even my mandatory pension plan in Europe seems to be taxed to the point of negative returns due to US policy. I deserve the same rights and the same tax bill as a neighbor living in the same town with the same income and deductions. This has been denied me, even though I am an upstanding citizen in the country where I now live, have a clean record, pay taxes, and even served on a jury without complaining.
Sometimes I would like to renounce. But that would draw attention to me, I am even afraid of an extraordinary rendition at the Embassy/Consulate due to some political ties an estranged family member has. Furthermore, I am loathe to renounce as I don’t hate Americans or America (although I think many Americans are oblivious): I just want the US government to behave itself and stop screwing its citizens in the way the Brits did to us prior to the Revolution. Renouncing would be like giving up the fight which I feel I must seek to win as a good patriot must.
@JeffDTom,
Correct. This method only applies to people who do not have U.S. passports. They only have the permanent resident visa for the United States (this is the visa that everyone calls the “green card.”)
I assume this method does not help dual nationals (US+other nationality) living abroad?