Tax Residency Status
What is tax residency status?
Although tax residency isn’t always the most interesting of topics, it’s important to know, especially if you don’t want to get in trouble with the tax man.
In short, your tax residency status is determined by which country or territory has the right to tax your income and assets.
However, it’s not just about where you physically reside. Your tax residency status can also be affected by other factors, like how long you stay in a certain place, your ties to that place, and more.
But why is tax residency status important? In short, it establishes how much tax you owe and to whom you owe it. You’ll be subject to their tax regulations and be required to file a tax return with them if you’re regarded as a tax resident of that nation.
This can be quite complicated, so let’s explain more about it below to make it clearer.
How is tax residency status determined?
Tax residency status is determined based on a variety of factors.
For example, you will have to pay tax in Australia if any of the following is true:
You reside in Australia and have business or employment ties to the country.
Your domicile (permanent home) is in Australia.
You are in Australia for more than half the income year (more than 183 days).
Although there are similar rules in many countries, it is always a good idea to check the government website of the country you reside in (and do business in) to make sure.
It’s better to be safe than sorry!
What if I’m way behind on my U.S. tax returns?
There is a special IRS program to help you catch up on your U.S. taxes safely, without fines and penalties
It’s for American citizens that didn’t know they had to file U.S. tax returns each year, and have therefore fallen behind. Some more than 30 years! With the IRS Streamlined Procedure, say goodbye to overdue tax returns, late fees, and penalties. If you have children, we can backdate your Child Tax Credit Refund for 3 years.
Get a quote here.
What are the implications of my tax residency status?
There are wide-ranging implications depending on your tax residency status.
The implications of failing to properly establish your tax residency status can have big consequences. You can wind up owing back taxes, interest, and penalties. For instance, if you live in one nation but do not pay taxes there because you think you are a tax resident of another, you may be in for a nasty surprise.
No one wants to deal with that headache!
In fact, the implications of tax residency go beyond simply owing money. Your ability to get specific benefits or even your immigration status can be affected by not doing this right.
But what do you need to do to make sure your tax residency status is correct? Firstly, you should keep thorough records of your time spent in each country, as well as any property or investments you have. All in all, it’s always a good idea to talk to an expat tax expert who will go through everything you need to know if you are unsure.
Can a person be the tax resident of more than one country?
Of course! This is also known as “dual tax residency.” This often happens when you spend a lot of time in two different countries.
But this answer is quite vague, so let’s break it down a bit more.
Let’s say, for example, that you reside in one country but have rental income from a property in another country. Often, you will have to pay tax on the rental income in both countries.
Fortunately, many countries have established tax treaties that aid in preventing double taxation. In short, these treaties outline which nation has the primary authority to tax certain types of income and provide relief from double taxation in some cases.
How can a person avoid being a tax resident in a particular country?
So, with all this in mind, how can you avoid being a tax resident in certain countries?
Well, going by the various laws and regulations we’ve already listed above, there are a few ways you can get around them.
Stay for a shorter period
As you now know, you will generally become a tax resident if you spend 183 days or more in a country in a calendar year. Because of this, if you are planning on visiting/working in a country, make sure to limit your stays so you don’t go over the allotted time you are allowed to stay there without becoming a tax resident.
Make sure not to have a permanent residence there
Another option you could take is not having a permanent residence in the country you want to avoid being a tax resident in. If you’re just passing through and living in Airbnbs or hotels, you are likely to be seen as a tourist rather than a resident for tax purposes.
What are the consequences of not complying with tax laws related to tax residency?
If you don’t comply with the tax laws related to tax residency, you could face serious consequences.
First of all, if you fail to comply with the tax laws in the country where you are a tax resident, you could face fines and penalties. This can range from a small amount to a hefty penalty, depending on how badly you messed up. In fact, it is possible that you could even face legal action, with the government suing you. In fact, you could even face criminal charges!
On top of this, it could affect your immigration status, as the government may check your tax history and deny you a visa or citizenship application in the future.
And finally, you could face double taxation, which means that you could be taxed twice. This would not be very good for your wallet.
Get Expat Tax Help From the Experts
Overall, tax residency is a complicated matter with lots of negative implications if you get it wrong.
However, help is at hand! At Expat Tax Online, our experts can help you with all your tax queries, making sure you do everything right and don’t end up paying more tax than you need to.
Interested? Check out our American Expat Tax Fees and Packages here.
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