15 Residency Status, Treaties and the Foreign Tax Credit
Question for this chapter. If you live in the U.S. but keep ties to another country, which country treats you as a tax resident, and does a treaty or the foreign tax credit stop you from being taxed twice on the same income?
Answer. Each country decides residency under its own rules, looking at how long you were present and where your home and life are based, so you can be treated as a resident of both. When a treaty exists, it provides a tie-breaker order and relief for certain kinds of income. Tax paid to your home country can often be subtracted from your U.S. tax through the foreign tax credit, but that relief depends on conditions, so double taxation does not always disappear.
What to check
- Whether any of your days in the U.S. are set aside because of student, teacher or trainee status, and for how long that status has applied
- How your home country defines residency, since some count days and others look at home and center of life
- Whether the U.S. has a treaty with your home country and which kinds of income it covers
- Whether taking a treaty position means you need to attach a disclosure form to your return
- Whether the foreign tax credit or the deduction method suits you, and which conditions apply to the credit
What to confirm. Confirm each person's residency status in both countries first, because that result decides which return you file and which treaty and credit options are open to you.
One-line summary. Sort out residency in each country first, then look at what a treaty changes and how foreign tax already paid can be subtracted.
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