Closer Connection Rule of Tax Residency Under US Tax Law Simplified !

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If you are a foreign citizen , but has passed the substantial presence test which makes you resident alien for tax purposes and affects taxability of income . do not lose heart. You have still chance for claiming the status of being a non-resident alien under US tax code  if you you fulfill all the following three conditions  :

  1. You are present in the United States for less than 183 days during the year,
  2. You maintain a tax home in a foreign country during the year, and
  3. Have a closer connection to one or two countries (not more than two !)

Meaning of Tax Home.

Your tax home is the place where you permanently or indefinitely work as an employee or a self-employed individual or carry on your business from a fixed place.

If you do not have either a regular or main place of business because of the nature of your work, then your tax home is the place where you regularly live.

In any other case , your tax home is wherever you work.

How to determine closer connection with a country ?

The first and foremost criteria is that your tax home must be located in the same foreign country to which you are claiming to have a closer connection. Then ,IRS has right to examine  if you had close significant contacts with that country than USA  . For this , following is the guiding circumstances for determining the significant contacts :

1. The country of residence you designate on forms and documents.
2. The types of official forms and documents you file, such as Form W-9, Form W-8BEN, or Form W-8ECI.

3. The location of:

a. Your permanent home,

b. Your family,
c. Your personal belongings, such as cars, furniture, clothing, and jewelry,
d. Your current social, political, cultural, professional, or religious affiliations,
e. Your business activities (other than those that constitute your tax home),
f. The jurisdiction in which you hold a driver’s license,
g. The jurisdiction in which you vote, and

h. Charitable organizations to which you contribute.

It does not matter whether your permanent home is a house, an apartment, or a furnished room. It also does not matter whether you rent or own it. It is important, however, that your home be available at all times, continuously, and not solely for short stays.

When you cannot have a closer connection.

In following circumstances , the claim of closer connection with a country other than USA automatically fails :

  1. You have personally applied, or took other steps during the year, to change your status to that of a permanent resident, or
  2. You had an application pending for adjustment of status during the current year.Steps to change your status to that of a permanent resident include, but are not limited to, the filing of the following forms.

Form I-508, Waiver of Rights, Privileges, Exemptions and Immunities
Form I-485, Application to Register Permanent Residence or Adjust Status
Form I-130, Petition for Alien Relative, on your behalf
Form I-140, Immigrant Petition for Alien Worker, on your behalf
Form ETA-750, Application for Alien Em- ployment Certification, on your behalf Form DS-230, Application for Immigrant Visa and Alien Registration

Can You Claim Closer connection to two foreign countries?

Yes, if you can demonstrate that you have a closer connection to two foreign countries  if you meet all of the following conditions.

  1. You maintained a tax home beginning on the first day of the year in one foreign country.
  2. You changed your tax home during the year to a second foreign country.
  3. You continued to maintain your tax home in the second foreign country for the rest of the year.
  4. You had a closer connection to each foreign country than to the United States for the period during which you maintained a tax home in that foreign country.
  5. You are subject to tax as a resident under the tax laws of either foreign country for the entire year or subject to tax as a resident in both foreign countries for the period during which you maintained a tax home in each foreign country.

Please note that you can not claim closer connection for more than two countries.

Obligation on Claiming Closer Connection

It is required under law that you will have to file the Form 8840 along with your tax . If you do not have to file a return, then you must send the form to the Department of the Treasury, Internal Revenue Service Center, Austin, TX 73301-0215, by the due date for filing Form 1040NR or Form 1040NR-EZ. 

It must be noted that if you do not  file Form 8840 within due time  you cannot claim a closer connection to a foreign country or countries unless of course you prove by clear and convincing evidence that you took reasonable actions to become aware of the filing requirements and significant steps to comply with those requirements.