My Residence is Where I Live, Right?
Because all tax authorities make a distinction between residence and domicile, the answer to this question depends on an individual’s circumstances. A person’s tax residence is not always the same as the place where one lives. Different from the test for determining a person’s citizenship, ascertaining a person’s tax residence does not always call for a simple procedure.
Domicile requires an intention to make a place one’s fixed and permanent home. Residence, on the other hand, requires only a temporary, physical presence. This means that a person can have a domicile in one country and tax residence in another. For most people, domicile and residence are the same. But there is an increasing number of people for whom this is not the case. People in the latter category are those that have established residences in more than one country, those that retire in a different country from where they spent their working lives, and those transferred by their employers to work in foreign countries. I will only discuss how the first group is affected in the rest of this article.
If a person has residences in more than one country, the person should plan in a way to minimize taxes. This is not an illegal exercise. For example, a person with residences in various countries is faced with the prospect of being taxed more than once on the same income. Should there be a tax treaty in effect between the two countries, chances are the treaty will contain “tie breaker” rules that are used to resolve which country gets taxes, with the other country conceding it will not do the same. For example, let us say a US citizen, Y, also has a residence in Australia. Let us assume both the US and Australia claim the right to tax Y’s income. Pursuant to the US- Australia double tax agreement, the person’s residence is ascertained by determining where the person’s permanent home is, where there is an habitual abode, and with which of the two countries the individual has the closest economic relationship. Citizenship and where an individual’s family lives are also considered. Only one country ultimately can tax the person.
Let us say a citizen of Singapore, X, has residences in both the US and Singapore. X spends time in both. Here there is no tax treaty between the two countries. From the US’ perspective, a person that spends more than 183 days during a year in the US is considered a US resident. Look-back rules also apply, so that a person who only spends at least 31 days in the US will also be considered a resident if he or she also spent during the preceding two years a weighted average of 183 days here. Pursuant to Singapore’s laws, a person is considered a resident of that country if he or she spends more than 183 days of a particular year there. Thus, it could happen that X will be taxed on the same income in both the US and Singapore. With no tax treaty in place, there are no tie-breaker rules to resolve the issue. In these circumstances an individual should contact the IRS and explain the circumstances. Should X be able to prove that his tax residence is in Singapore, X will not have to pay income taxes in the US— the person has no US trade or business. X will have to prove that tax residence in Singapore, and a closer connection with Singapore than with the US. X may need to make considerable disclosures to the IRS with regarding worldwide business affairs, something that causes discomfort for some taxpayers. With proper planning, X can avoid having to pay taxes to both countries.
So – the answer to, “My residence is where I live?” isn’t always, “right,” but could sometimes be “wrong.”