The first step in advising a foreign individual who is neither a U.S. citizen nor a green card holder on U.S. income tax laws is to determine the person's residence for income tax purposes. But what is to be done when the individual is resident in multiple jurisdictions? A recent LB&I International Practice Unit offers a quick understanding of the tax issues I.R.S. examiners raise when dealing with individuals who are dual residents for tax purposes. Virtually all income tax treaties entered into by the U.S. contain a tiebreaker rule under which the exclusive residence of an individual is determined for purposes of applying the income tax treaty. Fanny Karaman and Beate Erwin explain how these rules are applied. One point to remember is that the tiebreaker test for treaty residence purposes does not affect an individual's obligation to file an F.B.A.R. form.

INTRODUCTION

Income tax planning for an individual preparing to immigrate to the U.S. involves both understanding the jurisdictional concepts of U.S. tax law and making intelligent life decisions to take advantage of the rules. In comparison to a business investment in the U.S., which involves the use of funds to accomplish a specific goal, individuals wishing to come to the U.S. make a series of personal changes that will affect all aspects of their lives. U.S. tax planning considerations are merely one part of the puzzle that must be solved. The key to the planning often requires a timely decision to accelerate or defer income, gain, or loss, so as to avoid unnecessary exposure to tax while in the U.S. In addition, it entails knowledge of the tax cost involved in the event an individual wishes to continue to live in an accustomed life style.

This article is the first in a series that will discuss the rules affecting individuals moving across borders. The series will address important considerations before, during, and after undergoing a period of U.S. tax residence, income tax planning opportunities for persons wishing to immigrate to the U.S., and ethical considerations that may apply when providing advice to the foreign individual. Departure taxes in other countries are beyond the scope of this article.

This installment discusses the tests by which a foreign individual is deemed to be a U.S. tax resident under domestic law and provisions for determining residence under income tax treaties. Domestic law applies the “Substantial Presence Test” and the “Green Card Test.” If an individual meets the conditions of either test, he or she will be considered to be a resident for income tax purposes.

GREEN CARD TEST

A foreign individual becomes a resident with respect to a calendar year if he or she is a lawful permanent resident of the U.S. at any time during that calendar year. A lawful permanent resident is an individual who has been lawfully granted the privilege of residing permanently in the United States as an immigrant in accordance with the immigration laws.