Closer Connection Exception: Determining Tax Home; Treaty Tie-Breakers, Form 8840

Description

U.S. residents pay tax on worldwide income, while nonresidents are generally only subject to tax on U.S. source income. This is reason enough to take a second look at taxpayers who meet the substantial presence test, as the substantial presence test determines whether a foreign national who does not hold a U.S. green card is considered a resident for U.S. tax purposes. However, an individual who would otherwise meet the substantial presence test in the current year may be considered a nonresident for such year if the individual is present in the U.S. for less than 183 days during the current year, maintains a tax home in a foreign country during the entire current year, and has a closer connection during the current year to one foreign country in which the individual maintains a tax home, than to the United States. In order to claim the closer connection exception, an individual must file Form 8840, Closer Connection Exception Statement for Aliens, either with a timely filed U.S. income tax return or separately, to explain the basis of the individual's claim that they satisfy the requirements of the closer connection exception.

Furthermore, even when a foreign national does not satisfy the closer connection exception and is considered a U.S. resident under the substantial presence test, the individual may also be a resident of a foreign country under the foreign country's domestic tax rules. If the foreign country in which the individual is a resident has an income tax treaty with the United States, the treaty tie-breaker rules may enable the individual to be treated as a U.S. nonresident even though the individual would otherwise be considered a U.S. resident under the substantial presence test.

Individuals with ties to other countries can dramatically reduce tax and compliance obligations by utilizing the closer connection exception or the treaty tie-breaker provision. As such, international tax practitioners need to be familiar with the qualification requirements for these valuable exceptions.

Listen as our panel of international income tax experts explains the eligibility and filing requirements related to the closer connection exception and treaty tie-breaker provision, including how to determine a taxpayer's tax home, the facts and circumstances that support the claim that an individual has a closer connection to a foreign country, how to apply the treaty tie-breaker provision of an income tax treaty, and the applicable forms that are required to be filed.