Tag Archives: Substantial presence test

CARES Act Relief: How US citizen taxation leads to sending relief money to individuals outside the United States and denies relief money to individuals inside the United States

Introduction

This post is based on my Quora answer to the question: “Do you agree with the policy of not issuing checks to US citizens who jointly file taxes with someone who has an ITIN?

Part I – Objective Analysis

This post focuses on the class of individuals entitled to relief. It does not discuss how the relief is administered.

The statute authorizing the relief is found in Section 6428 or Subtitle F (the Procedure And Administration section of the Internal Revenue Code). The following sections specify WHO is entitled to the relief:

§6428. 2020 Recovery rebates for individuals

(d) Eligible individual

For purposes of this section, the term “eligible individual” means any individual other than-

(1) any nonresident alien individual,

(g) Identification number requirement

(1) In general

No credit shall be allowed under subsection (a) to an eligible individual who does not include on the return of tax for the taxable year-

(A) such individual’s valid identification number,

(B) in the case of a joint return, the valid identification number of such individual’s spouse, and

(C) in the case of any qualifying child taken into account under subsection (a)(2), the valid identification number of such qualifying child.

(2) Valid identification number

(A) In general

For purposes of paragraph (1), the term “valid identification number” means a social security number (as such term is defined in section 24(h)(7)).

(B) Adoption taxpayer identification number

For purposes of paragraph (1)(C), in the case of a qualifying child who is adopted or placed for adoption, the term “valid identification number” shall include the adoption taxpayer identification number of such child.

In summary this means that:

Those who are conditionally entitled to relief include, ANY individual except a nonresident alien, provided that they:

– have a Social Security Number (who is eligible for a Social Security Number?); and

– do NOT file jointly with an individual who does not have a Social Security Number

Who is a “nonresident alien” and therefore NOT an “eligible individual”?

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Considering the EB-5 Visa? The IRC S. 877A Expatriation Tax Demonstrates that "Not All US @TaxResidency Is The Same!"


Understanding U.S. Tax Residency …
The United States uses a form of “deemed tax residency“.
The Internal Revenue of the United States deems that all “individuals” (wherever they live in the world – including citizens and residents of other countries) except “nonresident aliens” are subject to taxation in the United States on their world wide income. One qualifies as a “nonresident alien” unless one is a:
1. A U.S. citizen
2. A U.S. resident as defined by Internal Revenue Code Sec. 7701(b)
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Determining Tax Residency In the United States: Citizenship and other forms of deemed tax residence

Introduction


The advent of the OECD Common Reporting Standard (“CRS”) has illuminated the issue of “tax residency” and the desire of people to become “tax residents of  more “tax favourable” jurisdictions. It has become critically important for people to understand what is meant by “tax residency”. It is important that people understand how “tax residency” is determined and the questions that must be asked in determining “tax residency”. “Tax residency” is NOT necessarily determined by physical presence.
What is meant by tax residence? Different rules for different countries
All countries have rules for determining who is a “tax resident” of their country. Some countries have rules that “deem” people to be tax residents. Other countries have rules that base “tax residency” on  “facts and circumstances”. Canada is a country that bases “tax residency” on either “deemed” tax residency OR tax residency based on “factual circumstances”.
What if a person qualifies as “tax resident” of two countries?
When an individual (who is NOT a U.S. citizen) is a “tax resident” of two countries, it is common to consider any tax treaty between those two countries. Often the tax treaty will contain a “treaty tie breaker” provision which will allocate “tax residence” to one of the two countries. (Note that the “savings clause” which is found in standard U.S. tax treaties prevents U.S. citizens from having most tax treaty benefits. Note “treaty tie breaker” provisions are available to Green Card Holders.)
In summary: for the purposes of the “CRS”, tax residence is determined by BOTH a country’s domestic laws AND tax treaty provisions that assign “tax residence” to one country.
Even though the United States has chosen to NOT participate in the OECD “Common Reporting Standard” (CRS), and is NOT a “reportable jurisdiction, the OECD reminds us of the rules for determining “U.S. tax residency”.


Deemed tax residency in the United States …


The IRS discussion of “U.S. Tax Residency” includes:
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Determining Tax Residency in Canada: Deemed resident vs. factual resident


Let’s begin with the law as stated in the Income Tax Act of Canada …
Taxation in Canada is governed by the Income Tax Act of Canada. Sections 1 and 2 of the Act read in part as follows:

Short Title
1 This Act may be cited as the Income Tax Act.
PART I Income Tax
DIVISION A Liability for Tax
2 (1) An income tax shall be paid, as required by this Act, on the taxable income for each taxation year of every person resident in Canada at any time in the year.

(This does NOT say that ONLY those “resident in Canada” are required to pay Canadian tax. In fact there are circumstances under which nonresidents of Canada are also required to pay different kinds of Canadian tax.)
Searching for the meaning of “resident in Canada” …
Tax Residency” is becoming an increasingly important topic. Every country has its own rules for determining who is and who is not a “tax resident” of that country. The advent of the OCED CRS (“Common Reporting Standard”) has made the determination of “tax residence” increasingly important.
At the risk of oversimplification, a determination of “tax residency” can be based on a “deeming provision” or decided by a determination “based on the facts”. Some countries base “tax residency” on both “deeming provisions” and a “facts and circumstances” test.
Tax Residency in Canada – “Deemed residence” or “ordinary residence based on the facts” …
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Obama budget: "Dual citizens from birth" who are NOT "US residents" should be taxed as non-residents


 
“It’s unjust, it’s inhumane, I didn’t choose where I was born!”
This accurately describes the sentiments of those who are the target of FATCA Hunt. “Place Of Birth Taxation” is unfair to ALL those it affects. The most visible and egregious example of the unfairness is it’s application to “Accidental Americans“.
The context just imagine …
Imagine having been born in the United States, never having lived in the United States and then being “captured in FATCA Hunt”. It appears that the Obama administration has realized that the most visible unfairness of “place of birth” taxation is the application to Accidental Americans.
As a result, both the 2016 and 2017 Obama budget proposals have contained provisions to allow “Accidental Americans” to relinquish U.S. citizenship without being subject to the S. 877A Exit Tax or without having to certify U.S. tax compliance with respect to worldwide income. Those who qualify would be required to certify U.S. tax compliance on the basis that they were/are subject to the U.S. tax system as “non-resident aliens”. This raises the twin questions of:
1. Who is a “non-resident” alien? – See Internal Revenue Code S. 7701(b); and
2. How is a “non-resident” alien taxed? – See Internal Revenue Code S. 2(d) and S. 871.
I wrote a detailed post, referenced by the following tweet, about this issue in 2015.


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Physical presence as a necessary condition for being a US "resident" under the Internal Revenue Code

Introduction
Every country in the world with the exceptions of Eritrea and the United States claim tax jurisdiction based on “residence”. Although the tests for “residence” may differ, “residence based taxation” means that it is possible to sever your tax connection to a country by severing residence.
The nations of Eritrea and the United States impose taxation based on citizenship. U.S. citizens (primarily those “Born In The USA”) can NEVER sever their tax connection to the United States as long as they remain citizens. When it comes to U.S. citizenship-based taxation it is possible to NEVER have lived in the United States and still be subject to taxation!
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