In today’s global economy, athletes and entertainers perform personal services as they travel from country to country. The issue of residence is an important factor in determining the individual‘s reportable income for United States tax purposes. If the individual is deemed to be a resident alien for income tax purposes, then the taxpayer would be subject to tax on worldwide income. If it is determined that the taxpayer is a nonresident alien, there would be limitations on the income reportable in the United States. According to Internal Revenue Code (Section 7701(b)), there are two tests for non United States citizens that must be considered in order to determine residency status for income tax purposes for individuals.
The Green Card Test
An individual is a lawful permanent resident of the United States at any time if such individual has the status of having been lawfully accorded the privilege of residing permanently in the U.S. as an immigrant in accordance with the immigration laws and such status has not been revoked (and has not been administratively or judicially determined to have been abandoned).
- The Substantial Presence Test
The individual must be physically present in the United States
- on at least 31 days during the current calendar year and
- 183 days or more during a rolling three year period.
The calculation for this three year period consists of the sum of the number of days the individual is present in the current calendar year, plus one third of the days present in the preceding calendar year, plus one sixth of the days present in the second preceding year. Physical presence in the United States is defined as any day that an individual is physically present in the United States for any part of the day.
However, there are certain days that are excluded from this computation for professional athletes. They are considered to be an “exempt individual” if they are temporarily present in the United States to compete in a charitable sports event. This event must be
- organized for the primary purpose of benefiting an organization that is described in Section 501(c)(3) and exempt from tax under Section 501(a),
- all of the proceeds of which are contributed to such organization , and
- which utilizes volunteers for substantially all of the work performed in carrying out such event.
Please note that the days to be excluded have been interpreted to be days that the athlete actually competes in the charitable event; not the days including activities related to the event such as travel days between events, promoting the event and practicing for the event. If the athlete is able to exclude these days, the individual must file Form 8843 with the Department of the Treasury. The form is due with the individual tax return for the year that the individual files as a resident alien. A listing of the event, the dates of competition and the federal identification numbers of the charitable organizations are required to be listed on the form. In addition, a statement is required to be attached to the form that verifies that all of the net proceeds of the event were contributed to the charitable organizations.
There are certain exceptions to the Substantial Presence Test where upon a foreign entertainer or athlete can be considered a nonresident with regard to the current year. They are:
- The exception for exempt individuals (in regard to excluded days as discussed above) or for certain medical conditions found in Code Sec. 7701(b)(3)(D) and
- The closer connection tax home exemption found in Code Sec. 7701(b)(3)(B) and (C). If the individual is seeking to avoid residency status, they must (1) be present in the United States for less than 183 days during the current year and (2) have a tax home in a foreign country for the entire current year with which he has a closer connection than the United States. Your tax home is the general main place of business, employment, or post of duty, regardless of where you maintain your family home. In addition, your tax home is the place where you permanently or indefinitely work as an employee or a self employed individual. If you do not have a regular place of business because of the nature of your work, then your tax home is the place where you regularly live.
In order for the individual to establish a closer connection to a foreign country than the United States, the facts and circumstances include, but are not limited to the following:
- The location of the individual’s permanent home
- The location of the individual’s family
- The location of the individual’s personal belongings, such as cars, furniture, clothing and jewelry
- The location of where the individual conducts their current social, political, cultural, professional, or religious affiliations
- The location of where the individual conducts their business activities (other than those that constitute the individual’s tax home)
- The Jurisdiction where the individual holds a driver’s license
- The jurisdiction in which the individual votes
- The charitable organizations to which h the individual contributes
- The country of residence that the the individual designates on forms and documents
- The types of official forms and documents that the individual files, such as Form W-9 (Request for Taxpayer Identification Number and Certification), Form W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States Withholding), or Form W-8ECI (Certificate of Foreign Person’s Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States).
If the individual meets the closer connection tax home exemption, they must file Form 8840 (Closer Connection Exception Statement for Aliens) and attach it to the tax return that will be filed for that tax year (Form 1040NR).
If an individual does not meet either the Green Card Test or the Substantial Presence Test (thereby being treated as a nonresident alien), the individual can elect to be a resident alien under the rules detailed within the Internal Revenue Code. It may be beneficial to make this election as there are certain deductions and filing requirements that can benefit the individual in order to minimize tax liabilities. A possible scenario can have a married individual with children who has earned most or all of his income in the current year. The individual can avail himself of deductions paid, such as mortgage interest (whether paid in the United States or in the foreign country) and also file a joint return, have use of the standard deduction if beneficial, and personal exemptions. However, a comparison must be made between the tax effects of filing as a resident alien and filing as a non resident alien before this election is filed.
In cases where an individual may be a resident of both the United States and a foreign country for income tax purposes (a dual resident taxpayer), the residency rules to determine United States residency do not override the tax treaty definitions of residency. The income tax treaty between the two countries must contain provisions that provide for resolution of conflicting claims of residence. These are known as tie-breaker rules that contain certain tests to be met. In specific order, the individual’s residence is determined by (a) the country in which a permanent home is available to him,(b) the country which is the center of the individual’s vital interest in terms of personal and economic relations,(c) where the individual maintains their habitual abode, and (d) the individual‘s nationality.
Nonresident aliens have to file Form 1040NR and also attach Form 8833 (Treaty- Based Return Position Disclosure) whereupon treaty-based positions taken are explained.
In a world where entertainers and athletes are planning their careers and touring schedules months and years in advance and governments are requiring more tax disclosure in an effort to maximize tax compliance and tax revenues, tax planning is crucial in the area of residency.Glenn Tanzer is also the Chair of the NYSSCPA Entertainment and Sports Committee located in New York City.