Application and scope of tax treaty residency tie breaker rules

[alainncat]

Dear TurboTax community,

My wife and I will be tax residents for tax purposes in both the US (substantial presence test) and Ireland (183 day presence test) in 2025. Ireland and the US have a double tax agreement (DTA) with residency tie breaker rules, under which our Irish tax residency will prevail. My question is this: do these tie breaker rules apply automatically, i.e. whether or not the DTA is actually invoked to resolve double tax events, or do they only apply if the DTA is invoked?

The first interpretation seems unlikely to me given that it would override domestic residency rules even in the absence of any double tax event. In fact, the DTA and its technical explanation seem to suggest that its residency definition only applies for the purpose of interpreting and using the DTA, but I'm not a tax lawyer. If the second interpretation is correct, will the tie breaker rules override domestic residency rules even for non-doubly taxed income (i.e. compel us to file as non-residents in the US), or only for the purpose of resolving double tax events, leaving our US and Irish residency status unchanged otherwise?

[pk]

@alainncat , I am not sure I haver all the information in your post to understand the situation that you are describing.

(a) Are you both citizen of US or of Ireland or what ?  

(b) Which is your tax home at the end of the year ? 

(c)    Are you saying that  both of you :

        1. are non-citizens of US and/or Ireland , lived in the Ireland for a six month period and moved to the USA for the next six month period   OR vice-versa ?

         2. are non-citizens of USA and/or Ireland, have been living in the USA for a period, left USA mid year and worked/lived in Ireland for the rest of the year  or Vice-Versa ?

  (d)  Which country are you more connected to financially /  banking/ driver's license / asset ownership  etc. etc. ?

AS you can see from my questions I am floundering, trying to understand your situation.

So please me by answering my questions and any other pertinent details.

I will circle back once I hear from you --yes ?

[alainncat]

Thanks @pk for your response and follow-up questions! We are citizens of neither the US nor Ireland (citizens of another EU country). To your second question, under domestic residency rules, we are residents of both the US and Ireland for the whole year this year. However, we will be sole residents of Ireland next year, as we moved from the US to Ireland this year and don’t foresee meeting the substantial presence test for US residency next year. And to your third question, we have retirement accounts in the US (from working there for a number of years) and other savings in our home country, but by the time-breaker rules of the Ireland-US DTA we are residents of Ireland for DTA purposes.

I’m essentially asking if we can use our US residency to file as residents (married couple filing jointly) and use the DTA to deal with double taxation (in this case, mainly our Irish employment income would be subject to tax in both countries but the DTA would exempt it from tax in the US, as Ireland automatically exempts US employment income prior to moving to Ireland), or if using the DTA automatically precludes us from filing as residents for the full year in the US (which I doubt would be the case).

[pk]

@alainncat ,  thank you for your answers to my questions.  What I get so far is as follows :

(a) You and spouse  lived in the USA for a number of years  ( assuming that you were not long-term resident rules ), and passed the SPT for the  calendar/tax year 2025.

(b) You left the USA during the  year 2025 and there for  are dual status  -- Resident for the period 01/01/2025 till exit date  ( say 06/30/2025 for argument's sake ).  So you file a 1040 return covering 01/01/2025  till 06/30/2025 and a Non-Resident return on 1040-NR for the period  07/01/2025 till 12/31/2025 and taxed ONLY on US sourced income.

(c) You entered  Ireland on 07/01/2025, became a resident for the year 2025 and took advantage of the  "Split Year Resident --  and thus  your US earnings for the period prior to entering Irish residency is not taxed by Ireland.  My reference here  is  Irish tax manual  -- ..>>> Part 34-00-11 - Split year residence- section 822 Taxes Consolidation Act 1997.

Is this what you are trying to achieve ---  US taxes only world income till your exit, Ireland taxes only world income thereafter and DTT applicable ONLY for  US sourced income ( post exit ) that is taxed by both USA and Ireland?

Or am I in left field ?

[alainncat]

Thanks for the follow-up, @pk! That's the situation we're in. However, it would be more advantageous for us to file as full year residents in the US (e.g., the standard deduction is not available in dual status returns), and use the DTA between Ireland and the US to avoid double taxation on Irish employment income, but I'm not 100% sure we can do that.

According to Pub 519 for preparing 2024 returns (Last Year of Residency:(

If you were a U.S. resident in 2024 but are not a U.S. resident during any part of 2025, you cease to be a U.S. resident on your residency termination date. Your residency termination date is December 31, 2024, unless you qualify for an earlier date, as discussed later.

Applying this to 2025 returns, our residency termination date will be December 31, 2025 (unless we elect for an earlier date), so under this rule we should be able to file as residents for the full year (2025).

However, Pub 519 also says (Effect of Tax Treaties:(

If you are treated as a resident of a foreign country under a tax treaty, you are treated as a nonresident alien in figuring your U.S. income tax. For purposes other than figuring your tax, you will be treated as a U.S. resident. For example, the rules discussed here do not affect your residency time periods, as discussed under Dual-Status Aliens, later.

According to this rule, the Last Year of Residency rule does not change, but when it comes to figuring our US income tax, our Irish residency under the tiebreaker rules of the Ireland-US DTA compels us to file as nonresidents in the US anyway. Am I interpreting this rule correctly, or could it mean that we will be treated as nonresidents in figuring our US income tax only in respect of income for which tax treaty benefits are claimed? Although I’d like it to be the latter, this rule reads as if we will be treated as nonresidents overall.

[pk]

@alainncat , as I see it 

1. Your  ideal  ( what you appear to be  trying to achieve);

                  (a)    For US Tax  purposes ----->  Keep US residency valid for the whole calendar year of 2025 -- so you get to use the standard deduction; exclude  Irish earnings from US tax  ( exclusion or foreign tax credit).

                  (b)   For Irish Tax Purposes  --->  Exclude  US income  by claiming Irish Tax residency  only from  the day of arrival.

2.  For the basics ----  you can be a resident of one country ONLY at a time;  the purpose of tie-breaker rule/ regime is to determine a winning residency i.e. one residency for the "pertinent " tax year.  Note that  each country has its own definition of Tax Year --- for US  ( and incase of  Non-Immigrant / Citizen ), there are rules  for start and end of the "tax year" -- "Dual Status" Tax Payer;    For Ireland  there is  "Split-Year" -- as I ref'd  in my earlier post.  The foregoing would  generally limit your "Double Taxation" clause / benefits ONLY to incomes that are taxed by both countries  -- from your post , it would appear to be the US-sourced in come  POST your residency start in Ireland  ( US taxes you on US sourced income and Ireland taxes you on world income, including the US sourced and Taxed income).

3. The only way  I see this working out ( and it may not be worthwhile and/or even doable ),:

                  (a) you continue to have substantial financial and other connection to the USA  for the whole of 2025, thus using  "substantial interest/ connection" -- home, financial , Driver's license, intention to return etc. etc.

                  (b) you are temporarily residing in Ireland , for employment etc.  and therefore not a resident and have no intention of residency.  This implies a temporary foreign assignment  by your US based employer to a local subsidiary or similar.  Note that from my reading of  Irish residency , it appears to be intention based  and finalized only after staying there for a significant period and declaration of intention ( unlike US where it is a fixed number of days of presence ).

My general conclusion is for you to just accept the facts as they are -- i.e. you are a Dual Status Tax Payer in the USA for the Calendar/ Tax year 2025 and  a "potential " resident of Ireland for the period of presence in the Ireland.  I do not believe that it would be worth your while to claim a full calendar year resident for the USA , just for the sake of deduction.  It opens up too many ands/ifs/buts and unless facts bear out, an impossible mountain to sustain.

Is there more I can do for you ?

[alainncat]

Thanks @pk, very helpful. You are correct on #1. On #2, that is how I read the second Pub 519 rule I cited in my last post, but for others reading this, I don't think the 'resident of only one country at a time' holds true in general. For example, we could have moved to a country with the same residency rules as Ireland but that does not have a DTA with the US (hence no residency tie-breakers). But back to our case, I think you are correct that we can't be residents of both the US and Ireland at the same time.

If it's of interest to you, Split Year Treatment does not affect Irish residency, only the way employment income from outside Ireland prior to moving to Ireland is treated for tax purposes. In other words, Ireland does not have a dual status as the US does. Thus, putting it all together:

1. US resident for 2025 under domestic rules? Yes (dual status available).
2. Irish resident for 2025 under domestic rules? Yes (dual status not available).
3. Do Ireland and the US have a tax treaty with residency tie-breakers? Yes.
4. Resident of which country under the tie-breakers? Ireland (given current circumstances).
5. Pub 519 'Effect of Tax Treaties' rule: 'treated as a nonresident alien in figuring your U.S. income tax.'

This is where I stand at this point. Thanks for helping me through these difficult questions!

All the best.