1040 NR and definition of "US taxable income"

The link at GSU is correct in its interpretation on how resident and nonresident aliens are taxed: Residents on worldwide income and they file a 1040. Nonresident aliens on US source income and they file a 1040-NR. Any income you earn performing services in the US holding an E-1 visa, is US source income regardless of where the payments come from. The page at GSU does not tell you who is a resident and who is a nonresident for tax purposes. There is a link on that page to IRS Pub 519, US Tax Guide for Aliens.

In that Pub you will find a definition of the substantial presence test. If you have a substantial presence in the US, you are treated as a resident alien for tax purposes and all of your worldwide income becomes subject to US taxes. You state that you are present in the US for more than 183 days. That is enough to pass the substantial presence test and make you a resident alien for tax purposes. You would file a 1040, not a 1040-NR. As a resident alien you may avail yourself of all the tax benefits in the law that are available to US citizens. Lastly, assuming that Italy is your home country, there is a tax treaty between the two nations. However, as you spend more than

183 days in the US, there is no exemption from US taxes on income paid to you from a foreign employer for work performed in the US. In addition, under the treaty, Italy does not necessarily have to tax the income you earn in the US that is taxed by the US unless they so desire. This is known in tax treaties as the "savings clause." If Italy is taxing your compensation earned in the US, you would be eligible for a foreign tax credit on your US tax return (1040) for taxes you pay to Italy on the same income being taxed by the US. This is explained in IRS Pub 514 and the instructions for Form 1116. See link below.

As Alan responded, you meet the substantial presence test to be considered a U.S. resident for tax purposes because of your presence in the U.S. for more than 183 days. Even though you clearly meet the substantial presence test, you still can qualify to be taxed as a nonresident alien if you are able to demonstrate a "Closer Connection" to Italy than to the U.S. If you assert a closer connection exception to the substantial presence test, you must attach IRS Form 8840 to your tax return. The closer connection exception criteria are explained on page 7 of Publication 519.

Condor

I agree with the earlier posters that you meet the substantial presence test and therefore would be treated as a resident of the U.S. if not for the treaty. The closer connection exception referred to by Condor is not part of the treaty and does not apply to your situation because you are in the U.S. for more than 183 days during the year (see instructions to Form 8840). You need to look at the "tie- breaker" provisions of the treaty to determine whether you can claim relief under the treaty to not be considered a resident of the U.S. If you do claim to not be treated as a U.S. resident under the treaty, you may need to file a separate form on your tax return claiming a treaty-based return position (I can't recall the form number right now).

Also, if Italy is taxing you on the U.S. income, you will not qualify for the "normal" foreign tax credit rules because the income will not be "foreign source" income. As a result, you would need to look at the treaty to see what the provisions are for avoiding double taxation. These provisions may allow you to "resource" a portion of the US source income to be treated as foreign source income, or it may provide other rules.

Andrew Mitchel, Esq. Essex, Connecticut

I should have realized this in my original post. As Italy is electing to tax the compensation earned in the US by someone who is a resident or citizen of Italy, it is foreign sourced income to Italy. As such, under Article 23 of the treaty, Italy would provide the foreign tax credit against its income taxes.

Does this mean that the US will get to tax the income in full, while Italy will get tax only if their tax rate on this income is higher than the US?

It appears that there is something odd about this whole story.

The taxpayer is working in the US but receives an Italian pay stub. Either the company has verified and the employment is deemed to be occurring in Italy or they are supposed to be registered within the US with an EIN and appropriate FICA and employers taxes paid on this employment. Another choice is that the employer is withholding taxes under the tax treaty for payments made to a non-resident.

While the taxpayer is being paid by the Italian company and his/her pay is being billed to the American company does not change the oddity of this situation.

I have a client who is working in a foreign country, yet is paid domestically. The foreign sub-company must still pay the employer's taxes on that salary to the foreign country. However, my client must pay taxes first to the foreign country on the income, then claims credit for those taxes domestically using the local tax slip. (At least, used to do this... they switched companies this year and, after six years of doing this type of return, I am finally going to get a simplified tax return for him.)

First of all, thanks everyone for the very informative posts. Double Tax treaty: using that, every year I obtain a credit from Italy for what I paid in US, my problem is that the reimboursment in Italy is lower than what I paid in US (basically because the maximum credit that Italy allows cannot exceed the amount of taxes paid in Italy, and for various reasons I pay more taxes in US)

"tie breaker rule": this is very interesting! I have found a link to the tax treaty

Considering article 4, point a), I should be considered resident in Italy (even if living in Us for more that 183 days). In a case like this, can I use the form 8833 If so, how should I file the 1040NR, the income should be considered "0" there?

There is no treaty position to declare as there is no part of the treaty that exempts you from tax in the US. You are a resident alien for tax purposes (see Section 7701(b) of Title 26 US Code) because you pass the substantial presence test. You file Form

1040 and pay US tax on your taxable income.

It appears that you are also a resident of Italy and subject to their taxation either because you are an Italian national or a lawful permanent resident of Italy or you are domiciled there. They will tax you and provide relief in the form of a tax credit for US taxes you pay on the same income they are taxing. The credit will not be larger than what you have to pay Italy. In other words, you are going to pay tax based on whichever country has the higher taxes.

Article 4 is saying that that whenever you see the term "resident of a contracting state" in the treaty, use the rules in that Article. The Article then says that if you fall into the category of being a dual resident (and you appear to fall into this category as I assume you are domiciled in Italy), use a set of rules to determine which country will treat you as a resident for purposes of the treaty definition. This does not preclude the US from taxing your income just because Italy is the one treating you as the resident for purposes of the definition. It makes your income foreign source income to Italy and that is why Italy provides the tax credit.

See above... you do not file a 1040-NR as you are a resident alien under the substantial presence test. You file Form 1040.

I agree.

I generally agree with most of what Alan says. However, I disagree with the form number (should be 1040NR) if you can claim that you are resident of Italy under the treaty tie-breaker provisions. However, this does not mean that you can avoid U.S. tax. You will calculate U.S. tax on Form 1040NR for the U.S. source income.

Andrew Mitchel, Esq. Essex, Connecticut

Well, you actually forced me to get out the treaty and technical explanation. You are correct that under Article IV, he will be treated as a resident of Italy and a nonresident of the US, if his permanent home is in Italy.