Know Your Tax Residence Status for Working in the US
When planning to move to the United States to work, there are many things to consider, and a very important one is your tax residence status.
Taxation can be complex, especially for people who move across borders. And understanding your tax residence status is key to complying with relevant tax laws and avoiding problems.
This article will explore what tax residency means, what determines your tax residency status, and how your tax residency status impacts your tax obligations when you work in the US with a TN visa.
What does “Tax Resident” mean?
When an individual is involved in cross-border employment, it is important to determine which nation they are considered a “resident” of for tax purposes.
Definition of Tax Residence
In its simplest form, “tax residence” refers to where people pay taxes based on where they live and often work (and not where the company they work for is based). Tax residence status refers to whether or not a country classifies an individual as a tax resident for tax purposes.
Different countries have different rules for determining an individual’s tax resident status. However, tax residency is usually determined by the length of time an individual has lived continually in a country.
When applied to cross-border tax issues, residence is often confused with citizenship, particularly when dealing with a citizen of the United States. But citizenship and tax residency are different.
In the United States, citizenship is a legal status given to those born or naturalized in the country. Citizenship doesn’t require the individual to be living in the United States. For example, one can be a citizen of the United States but live and work in another country.
For tax purposes, whether an individual is considered a tax resident depends on whether the person has been continually present in the U.S. over a period of time. This means an individual may no longer be considered a tax resident, if they do not live in the country up to a specified period of time.
Tax Residency of Foreign Workers in the United States
According to the U.S. Internal Revenue Service (IRS), non-citizens are considered nonresidents of the United States for tax purposes unless they can meet one of two tests.
Non-citizens are considered tax residents of the United States for tax purposes if they meet either (1) the green card test or (2) the substantial presence test for the calendar year (January 1 to December 31st).
Green Card Test
You are a resident, for U.S. federal tax purposes, if you are a lawful permanent resident of the United States (green card holder) at any time during the calendar year. This is known as the “green card” test.
You continue to have U.S. resident status under this test unless:
- You voluntarily renounce and abandon this status in writing to the USCIS,
- Your immigrant status is administratively terminated by the USCIS or
- Your immigrant status is judicially terminated by a U.S. federal court.
Substantial Presence Test
You will be considered a United States resident for tax purposes if you meet the substantial presence test for the calendar year. To meet this test, according to the IRS, you must be physically present in the United States (U.S.) on at least:
- 31 days during the current year, and
- 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:
- All the days you were present in the current year and
- 1/3 of the days you were present in the first year before the current year and 1/6 of the days you were present in the second year before the current year.
For more detailed information on tax residency, noncitizen foreign workers should consult with a qualified U.S. tax attorney or tax professional.
Tax Treatment for Canadian Nationals
To illustrate the different ways in which tax residency is treated, we provide the following example for a Canadian national working temporarily in the United States.
Example: A Canadian resident is assigned to a 24-month temporary assignment in the United States and intends to return to Canada at the end of the assignment.
Canada will continue to treat the individual as a resident because they have not permanently severed their ties to Canada (most likely, the individual continues to carry a Canadian driver’s license and has not disposed of other legal ties). The individual’s permanent and habitual home is Canada from a broader multi year perspective.
Under United States tax law, if the individual meets the substantial presence test, they are considered a tax resident. This would mean that they must be physically present in the United States on at least 31 days during the currency year, and 183 days during the 3-year period that includes the current year and the 2 years immediately preceding it. However, certain income tax treaties with the United States and a number of foreign countries exist that could reduce or exempt income tax liability.
Under these treaties, residents of foreign countries may be eligible to be taxed at a reduced rate or be exempt from U.S. income taxes on certain items of income received from sources in the U.S.
These rates and exemptions vary, therefore, foreign nationals should speak with a qualified U.S. tax attorney or tax professional well-versed in these treaties to provide further guidance regarding tax obligations.
Extended Work Assignments of Foreign Workers
Please note that foreign nationals on extended work assignments beyond four years may cause additional tax challenges. Foreign workers should discuss the implications of such extended assignments with a qualified U.S. tax lawyer or tax professional to understand their tax obligations before accepting an extended work assignment in the United States.
By way of example: A Canadian citizen accepts a four-year assignment in the US and intends to return to Canada at the conclusion of their assignment.
As a general matter, the extended length of this assignment could nullify the possibility of obtaining reduced income tax liability or exemptions under existing income tax treaties between the U.S. and Canada, where prolonged absences from the country of origin could impact the individual’s tax residency status.
Such matters could be further complicated if the foreign national has a spouse or other dependents still residing in the country of origin.
In the case of prolonged absences and extended work assignments beyond three years in the United States, foreign nationals should speak with a qualified U.S. tax attorney or tax professional well-versed in tax matters in their country of origin and the U.S. to provide further guidance regarding their tax obligations.
Why Is Tax Residence Important?
The identification of a taxpayer’s residence is significant because generally it is the nation of residence that has the right to tax the global income of the taxpayer, regardless of where the income was earned.
Role of the U.S.-Canada Tax Treaty
In determining the nation of residence, an understanding of the role that the US–Canada tax treaty plays is imperative.
Every country imposes its own domestic tax laws on its taxpayers, but when an individual or corporate entity is subject to the tax laws of two nations on the same item of income, expense, or status, there is a potential for conflict and double taxation. This is where the US-Canada tax treaty comes in!
The US-Canada Tax Treaty is officially known as the Convention Between the United States of America and Canada with Respect to Taxes on Income and on Capital. Its aim is to prevent double taxation by resolving conflicts between the US and Canada related to tax residency.
Treaty Application
Tax treaties can be described as arbitrators between conflicting tax laws.
When the domestic tax laws of participating nations apply to an individual, the treaty dictates the rules that must be followed to prevent adverse situations arising from conflicting assessments. That is, in situations where a taxpayer is eligible as a tax resident of both the US and Canada, the taxpayer’s tax residency is generally determined by the US-Canada tax treaty.
Tax Treaty Tie Breaker Rule
Canadian residents who spend a substantial portion of the year in the United States can take advantage of the treaty’s tie-breaker rule.
The tie-breaker rule states that Canadian residents who were in the U.S. for 183 days or more in the current year, may qualify for an exception under the US-Canada tax treaty.
Canadian nationals can be considered non-residents in the United States if they can establish they have stronger ties in Canada than the United States under the treaty’s “tie breaker” rule. This determination depends on factors including the location of the permanent home, or center of vital interests.
Tax Residence for NAFTA TN Visa Holders
The question of whether a Canadian citizen who works temporarily in the US with a TN visa is a tax resident of Canada or the US depends on many variables.
Depending on the number of days you spend in the United States each year, the IRS may consider you a US resident for income tax purposes. This means that in addition to your Canadian tax obligations, you may also be required to file US tax returns and other information reporting forms unless you can meet an exception of the substantial presence test.
Making this determination can be a complicated matter and be subject to severe tax penalties if found in noncompliance with U.S. tax law. That is why TN workers should speak with a qualified U.S. tax attorney or tax professional well ahead of their planned entry to obtain further guidance regarding tax obligations.
Temporary Nature of TN Visas
It is important to know that the temporary nature of TN visas means that a Canadian citizen who is working in the US with a TN visa does not automatically lose their Canadian tax residency status.
That is because when an individual intends to move to the US only temporarily as a nonimmigrant (as is the case with a TN visa), the individual continues to be a tax resident of Canada until they meet the substantial presence test in the US.
It is only when an individual’s stay in the US meets the threshold of the Substantial Presence Test (“183 days” over a three-year period) that the US considers them a tax resident for tax purposes.
A TN Visa holder who maintains a home in Canada and commutes over the border or spends short periods in the United States, returning home to Canada frequently, will maintain their Canadian tax resident status.
A TN Visa holder with Canadian tax resident status who meets the substantial presence test is a tax resident of the US. However, the US-Canada tax treaty has important tie-breaker rules and exemptions that may limit a person’s income tax liabilities. Additionally, spending 182 days or less in the U.S. each year can help minimize a TN visa holder’s tax filing obligations.
Understanding whether you are eligible for the tie-breaker rules and tax exemptions requires an extensive analysis. For that reason, a TN visa applicant should engage in tax planning well ahead of their planned entry to the U.S. and obtain guidance from a qualified U.S. tax attorney or tax professional to further assess their circumstances.
Conclusion
This article answered the question, “What is a Tax Resident?” Tax residency is whether an individual is considered a resident for income tax purposes. Determining this is very important, especially when an individual lives between two countries.
When Canadians move to the US on a TN Visa, the temporary nature of the Visa means they initially remain Canadian tax residents. However, a substantial stay in the US may qualify them as US tax residents.
Since the TN visa can be renewed indefinitely, TN visa holders are likely to meet the substantial presence test.
When an individual spends a substantial portion of the year in the United States, the foreign worker should plan ahead by speaking with a qualified U.S. tax attorney or tax professional to avoid issues relating to double taxation or help limit their tax liability.
Final Thoughts
Every taxpayer has a unique situation, and their tax residence can hinge on one or more variables. When in doubt, consult a qualified tax professional who deals with cross-border taxation on a regular basis.
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Author Jacob Sapochnick serves as the Managing Partner/CEO of a prominent law firm that focuses on immigration law. Boasting an extensive legal background spanning over a decade, he adeptly merges his enthusiasm for law with cutting-edge technology to aid clients worldwide in their journey to immigrate to the United States.