US versus UK Tax Residency Rules

At Team CB, we deal with a lot of clients who move between the UK and US, and we constantly get asked about tax residency issues. There is a great deal to consider, but the following high level summary will help to point you in the right direction. <b> Basic Rules</b> For US domestic tax laws, you are a US tax resident if you meet the ‘3 year look back rule’, which is triggered if you spend at least 31 days in the US in the current tax year. The formula uses: • 100% of the current tax year days • 1/3 of the previous tax year days • 1/6 of the second preceding tax year days. If you add these amounts up and come up with 183 days or more as an average, you are a US tax resident under US domestic tax laws. Further details can be found on the following link: <a href="https://www.irs.gov/individuals/international-taxpayers/substantial-presence-test" title="Substantial Presence Test"> https://www.irs.gov/individuals/international-taxpayers/substantial-presence-test</a> <b> Connection Tests</b> There are two tests that can get you out of this. 1. Closer Connection Test – this works if you do not spend more than 183 days in the current tax year in the US and you maintain a closer connection to another country. You can file a non-resident US return in this instance and report only US sourced income on that return. Form 8840 lists facts to determine if you have a closer connection (Part IV). We file a number of US tax returns on this basis, and it not only creates a rebate of withheld taxes but it can also create a foreign tax credit claim in the UK. The link below explains more: <a href="https://www.irs.gov/pub/irs-access/f8840_accessible.pdf" title="Form 8840"> https://www.irs.gov/pub/irs-access/f8840_accessible.pdf</a> 2. The other test is the Treaty Tie Breaker test (tax form 8833), which comes into play when you spend more than 183 days in the US in the current tax year alone. You tie break first to a country based on where your permanent homes are. If you have permanent homes in both places, then you look to your centre of vital interests (similar to 8840 questions) to determine where you are resident (where your family resides, where your professionals such as doctors, lawyers, etc are, voter registration, bank and investments). If you can’t determine where your centre of vital interests are situated, you look to habitual abode; then to Nationality; then to competent authority per Article 4 of the treaty. Important consideration; if you make a treaty claim and are in the US for 183 days in the current tax year, you have information filings (foreign corporations, foreign bank account reporting for cumulative accounts over $10,000 at any one time) to consider as well. These come with significant penalties for non-filing. For further details, please see the following link: <a href="https://www.treasury.gov/resource-center/tax-policy/treaties/Documents/uktreaty.pdf" title="Tax Policy and Treaties"> https://www.treasury.gov/resource-center/tax-policy/treaties/Documents/uktreaty.pdf</a> <b> Other Considerations</b> We generally advise our clients to avoid entering into any yearly rental leases and to avoid purchasing a car in the US if they are trying to make a claim of non-residency and maintain a home in the UK for the period. However, US and UK tax is based on where services are performed. If you are in the US for significant periods of time, you will probably need to pay some taxes on work performed there. Often, this is deducted in the form of withholding tax, also known as Non Resident Alien tax, and can be as high as 30% of gross fees (federal) and 7% (state). You would still need to file a non-resident return in the US and claim one of the exemptions above to state you are a UK tax resident. Depending on how you are paid (employee vs independent contractor) there could be issues for any client to consider on whether they are conducting business in the US. Also, there are rules for determining which country charges either US Social Security or UK National Insurance on pay, this depending on the work relationship. In order to make a closer connection or treaty based claim, you need to file a timely filed US tax return (non-resident). Otherwise, the IRS could argue you do not have a valid claim. As a final note, States do not have treaties with counties and are based on fact. For instance, California has a 9 month presumption rule that an individual is resident. Otherwise, it’s based on facts and circumstances similar to facts stated above. We love dealing with the US – the land of the free, and of seriously complex tax rules!