Where’s my income tax residence?

If you are a teacher in the USA, you know where you pay income tax because it is seamlessly deducted by your American employer every month. If you are a nurse for an employer abroad, you know where you pay income tax because it is seamlessly deducted by your foreign employer (even though you still must file and possibly pay in the US as well).

However, what if you are a retiree living the dream on some foreign coastline? What if you are a missionary employed by an American charity? What if you live abroad but make your money as a self-employed consultant? Where in the world do you pay your income taxes?

Your income tax residency is usually where you live

Generally speaking, your tax residency is where you live most of the year. Most countries, whether they have an income tax treaty with the US or not, have some income tax regulatory agency that states that a person who resides in their country for more than a certain amount of days is a defacto resident of that country for the purposes of income tax.

We don’t want to speak in absolutes here. There are about 200 countries in the world today, and we don’t claim to be experts on any of them (much less all of them), but it is often the case that someone living in a country for 183 days or more in a given year is an income tax resident of that country.

No matter if our employer is in the US or in a foreign country, no matter what kind of visa we have, and no matter if there is a tax treaty or not, we are generally residents where we live for more than half the year.

“But I think I should just be a tax resident of the USA!”

Knowing that many of Vagabond Finances readers are facing this issue head-on right now, I presented this problem to Thun Financial Advisors on one of their excellent webinars. I gave the following scenario:

We work for an American nonprofit, get an American paycheck, have family and friends in America, visit America every few years, have a small home in America which we rent out to others, and plan to retire in America but we’ve been renting the same apartment in our host country for 6 years and have no plans to leave. Where is our tax residency? Can’t we say it is only in the USA and only pay taxes there?

Thun Financial’s Q&A Webinar on 27 November 2018

While that’s not precisely my situation or likely yours, it does come pretty close to representing a lot of VF’s readers. Thun’s Charles D. Saunders replied:

It’s pretty straight-forward and the answer is “no.” Every sovereign country has the right to determine under what circumstances the people residing in that country – typically for more than 6 months but that may vary from country to country – are subject to paying income and other taxes in that country….

Because the US has citizenship-based taxation, all US citizens at home or abroad must properly file (not necessarily pay) their US taxes, but as a general rule we are nonetheless tax residents of the country in which we reside.

“But my center of interests is in the US!”

Many US expats have used the “center of interest” argument, saying that according to Article IV of most income tax treaties, you’re a tax resident of the country where you have your “center of interest.”

David Kuenzi, founder of Thun Financial Advisors, replied on point in that same webinar:

If you look at the rules in say Italy and Germany, they sometimes do talk about “your center of interest.” And we have heard people try to make the claim that as long as my “center of interest” remains back in the US, I’m not subject to German taxation. But, if you talk to German tax experts or Italian tax experts, they will say if you’ve lived in this country for six months, your “center of interest” is in Germany or in Italy respectively. And that’s not going to get you out of owing taxes in those countries, and I wouldn’t think anyplace else.

“What do I pay to my country of residence?”

Although we are on pretty solid ground stating that most of our host countries will consider us their income tax residents, that doesn’t mean we are always sure of if we pay, how we pay, or how much we pay to the countries in which we reside.

Some countries have no income tax. Your tax residency may be there, but they don’t tax your income. That’s cause for celebration!

While most countries tax residents on their world-wide income, others only tax income that comes from companies based in their country. (Be careful, however, because the “source” of your income in some tax documents doesn’t mean where the money came from but where you were when you earned it. That’s a story for another day.)

Tax Office

Other countries will technically consider you a tax resident by reason of your length of stay, but they may not tax someone with your type of visa or doing your kind of work. If it is clearly stated in writing somewhere that we’re not taxed, then that too is cause for celebration!

Many countries will very clearly state that we are their tax residents and that we need to pay income tax on our universal income. The amount of tax may hurt, but we can celebrate the fact that we have a clear answer.

When answers aren’t so clear

The celebration stops for those of us who know we’re considered a tax resident of our host country, but no one can figure out if or how we can pay taxes. Many nonprofit workers don’t fit common categories. This is a scary situation. A tax official or tax preparer may tell us that we don’t have to pay any taxes because we don’t “fit,” but they’ll rarely write it down. What happens in three years when the government asks us for taxes, back taxes and penalties? The risks are great; we need to be as sure as we can and as compliant as possible.

When Vagabond Finances asked Ian Faber of Faber Tax his opinion on tax residency, he gave the following balanced reply:

Tax residency can be a fluid situation that is driven by numerous facts and circumstances including the local tax law in the country where a person resides. It is always best to seek the appropriate expert guidance to confirm both local and US tax filing requirements.

While we believe that American expats are generally tax residents of the country in which they live, answers are not always black and white. We’ve got to do our due diligence on both sides of the pond, engage the expertise of others, and try to do what is right in the face of confusing cross-border regulations.

Mark Mason

Missions is my calling. Finances is my hobby. Helping you is my pleasure. "Mark" is my ultra-ego.