Income Tax Obligations and Rules for U.S. Residents and Nonresidents
Resident or Nonresident
There are two tests for determining whether you are considered a resident: the green card test and the substantial presence test. If you meet either one of these tests, you are considered a resident for U.S. income tax purposes. If you do not meet either test, you are considered a nonresident. But, there are situations in which you may choose to be treated as a resident. And you could also be a nonresident for part of the year, and a resident for the rest of the year. In this case, you would be considered a dual-status taxpayer.
Green Card Test
This test refers to your status as a lawful permanent resident of the United States under the immigration law. If you have an alien registration card, known as a green card, issued by U.S. Citizenship and Immigration Services, you are considered a U.S. resident for income tax purposes. You meet this test if you had a green card at any time during the year. But if it is your first or last year of residency, you may have a dual status for the year.
Substantial Presence Test
Even if you do not have a green card, you will be considered a U.S. resident for income tax purposes if you are physically present in the United States for a certain period of time during the year. There are two parts to this test:
1. You meet the first part of the test if you were physically present in the U.S. on at least 31 days during the current tax year.
2. The second part requires that you were physically present in the U.S. on a total of at least 183 days during the current tax year and the two preceding tax years. To complete the 183 days, not all of your days of physical presence count. You would include all your days of physical presence in the current tax year, 1/3 of your days in the first year before the current year, and 1/6 of your days in the second year before the current year.
Days of Physical Presence
Any day you were present in the United States at any time during the day counts toward meeting the physical presence test. You do not have to be physically present the entire day. But there are some exceptions to this rule. The situations in which your days present in the U.S do not count as days of physical presence in the United States for purposes of the substantial presence test are described below.
Commuters from Canada and Mexico
You do not have to count the days you commute to work in the United States if you live in Canada or Mexico and you regularly commute to work in the U.S.. If you work more than 75% of the time in the U.S. you are considered to be a regular commuter. “Commuting” for this purpose means going to work and returning to your home within a 24-hour period.
Travelers In Transit
Days you are in the U.S. for less than 24 hours, in transit between two places outside the U.S. do not count as physical presence. You are in transit if your activities in the U.S. are primarily related to traveling to your foreign destination. But if you attend a business meeting or carry on some other type of activity while in the U.S., you would not be considered in transit.
Foreign Vessel Crew Members
Days you are in the U.S. when you work as a crew member on a foreign vessel traveling between the U.S. and another and a foreign country or U.S. possession are not days of physical presence for tax purposes. But, as in the previous case, if you engage in any type of trade or business activity while you are in the U.S., these days would count as physical presence.
Medical Condition
You do not count days you are in the U.S. because, despite your intention to leave, you are unable to leave due to a medical condition that developed while you were in the U.S. Establishing your intention to leave the U.S. will depend on the circumstances. For example, if you can establish that you came to the U.S. intending to stay for a period of time that would be not be long enough to meet the substantial presence test, and your medical condition developed during that period, obligating you to stay longer, you may qualify for this exception.
You cannot exclude days of physical presence under the medical condition exception if you were prevented from leaving the U.S. at first, due to your medical condition, and later were able to leave, but you remained in the U.S. longer than a reasonable period. If you return to the U.S. for medical treatment of a condition that developed during an earlier stay, those days you are present in the U.S. when you return for treatment would count as days of physical presence. Your days in the U.S. will also count as days of physical presence if your medical condition existed before arriving in the U.S. and you were unaware of it.
If you qualify to exclude days of physical presence due to a medical condition, you must file Form 8843, Statement for Exempt Individuals and Individuals With a Medical Condition.
Exempt Individuals
Persons referred to as “exempt individuals” do not have to count their days in the U.S. as days of physical presence. These individuals include:
�· Persons temporarily in the U.S. on a foreign government-related assignment,
Ã?· Teachers or trainees temporarily in the U.S. under a “J” or “Q” visa,
Ã?· Students temporarily in the U.S. under a “F”, “J”, “M”, or “Q'”, visa,
�· Professional athletes temporarily in the U.S. to compete in a charitable athletic event.
Individuals on a foreign government-related assignment include full-time employees of an international organization, and persons who are in the U.S. on diplomatic status. The members of the person’s immediate family would also qualify for this exclusion. These include spouses and unmarried children, provided their visa status in the U.S. derives from, and depends on the exempt individual’s status as an exempt individual. Unmarried children must be under age 21, must regularly reside in the exempt individual’s household, and must not be members of another household.
The days that teachers or trainees are in the U.S. will not count as days of physical presence provided they abide by all the conditions of their visa status; that is, they do not engage in any other activities prohibited by U.S. immigration law. This exception includes members of the exempt individual’s immediate family, as defined above. But there is a restriction on this exclusion. Teachers and trainees will not be considered exempt individuals if they were previously exempt as teachers, trainees, or students during any part of 2 of the preceding 6 calendar years. But this restriction does not apply if you were exempt as a teacher, trainee, or student during any part of 3 or fewer of the preceding 6 years and a foreign employer paid all your compensation during the current tax year, and all your compensation during each of the 6 preceding years that you were a teacher or trainee in the U.S.
As in the case of teachers and trainees, students in the U.S. will be exempt provided they abide by the conditions of their visa. This exception also includes members of the individual’s immediate family. There is also a restriction in terms of the length of time students can be exempt from the substantial presence test. You cannot be exempt as a student if you have been exempt as a student, teacher, or trainee for any part of more than 5 calendar years, unless you can establish that it is not your intent to permanently reside in the United States. You may be able to establish this by demonstrating that you have maintained a closer connection to a foreign country, and have not taken affirmative steps to change your status to a lawful permanent resident.
The exemption for professional athletes in the U.S. is for charitable sporting events, and not for paid events. An event is considered to be charitable if its main purpose is to benefit a charitable organization, all the net proceeds from the event go to charity, and volunteers perform all the work. Only the days of actual competition can be excluded for purposes of the substantial presence test. Days in the U.S. that are spent practicing, traveling between events, or carrying on other activities would count as days of physical presence.
When You Have A Closer Connection to a Foreign Country
Even though you have been physically present in the United States on a sufficient number of days to meet the substantial presence test; that is, at least 31 days in the current tax year and a total of at least 183 days during the current year and the two preceding years, based on the formula, you may still be considered a nonresident for tax purposes if you have a closer connection to a foreign country.
If you are present in the U.S. for less than 183 days in the current tax year, you have a home in a foreign country, and you have a “closer connection” to the foreign country in which you have a home, or with two foreign countries, you may be considered a nonresident. You have a closer connection to two foreign countries if your “tax home” is in one foreign country on the first day of the year, you changed your tax home to another foreign country during the year, and continued to make that country your tax home for the rest of the year. You must have had a closer connection to each foreign country than you did to the United States, and you must have been subject to tax as a resident in each foreign country during the period you had your tax home there.
Your tax home is not necessarily the same as your place of residence or your family home. Your tax home is the general area of your main place of employment, business, or post of duty. It is the place where you permanently or indefinitely work as an employee or where you are self-employed. If you do not have a regular place of business because of the nature of your work, your tax home is generally the place where you regularly live.
Establishing a Closer Connection to a Foreign Country
Either you or the Internal Revenue Service (IRS) can establish that you maintained more contacts with a foreign country than with the United States. One of the factors to be taken into consideration is the country of residence you designate on forms and documents you complete. The official tax forms you file can also be a determining factor. These include:
Ã?· Form W-9 – Request for Taxpayer Identification Number and Certification
Ã?· Form W-8BEN – Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding
Ã?· Form W-8ECI – Certificate of Foreign Person’s Claim for Exemption From Withholding on Income Effectively Connected With the Conduct of a Trade or Business in the United States
Filing Form W-9 would tend to indicate a closer connection to the United States, while Forms W-8BEN and W-8ECI tend to indicate a closer connection to a foreign country.
The location of your permanent home, your family, and your personal belongings can also establish a closer connection to a foreign country. This would include the place where you have your current social, political, cultural, or religious affiliations; where you carry on business activities other than those that establish your tax home; and the jurisdiction in which you hold a driver’s license and are registered to vote.
You will not be considered to have a closer connection to a foreign country if you have taken steps to change your status to that of a permanent resident of the United States. If you have filed any of the following forms, or one of these forms has been filed on your behalf, you will probably not be considered to have a closer connection to a foreign country:
Ã?· Form I-508 – Waiver of Rights, Privileges, Exemptions and Immunities
Ã?· Form I-485 – Application to Register for Permanent Residence or Adjust Status
Ã?· Form I-130 – Petition for Alien Relative
Ã?· Form I-140 – Immigrant Petition for Alien Worker
Ã?· Form ETA-750 – Application for Alien Employment Certification
Ã?· Form DS-230 – Application for Immigration Visa and Alien Registration
Form 8840
If you are claiming exemption from the substantial presence test because you have a closer connection to a foreign country, you must file Form 8840 – Closer Connection Exemption Statement for Aliens. This form is available for downloading from the IRS website at www.irs.gov.
This form must be filed by the due date for filing your tax return, even if you do not have to file a return based on the filing requirements. If you have to file a tax return as a nonresident, you would use Form 1040NR – U.S. Nonresident Alien Income Tax Return, or the simpler version, 1040NR-EZ. You would file Form 8840 with your income tax return. If you do not have to file a tax return, you would file Form 8840 by itself. The due dates for filing your tax return can be found in the instructions for Form 1040NR, Form 1040NR-EZ, and in IRS Publication 519 – U.S. Tax Guide for Aliens. All of these forms, instructions, and the publication are available for viewing and downloading from the IRS website.
Dual Status
Usually, during your first year or last year of residency in the United States, you will be both a resident and a nonresident during different periods of the same year. In this case, you are considered a dual-status resident for U.S. income tax purposes. You will be subject to tax on your worldwide income for the part of the year you are a resident, and on your U.S. source income for the part of the year you are a nonresident.
First Year of Residency
There are some specific rules to determine what part of your first year of residency you are considered a resident and what part you are considered a nonresident. These rules are based on whether you qualify as a resident under the green card test, the substantial presence test, or both.
First Year Residency Under the Substantial Presence Test
If you become a resident according to the substantial presence test, your period of residency generally begins on the first date you are physically present in the U.S. But you can exclude up to 10 days of physical presence for purposes of determining your residency starting date if you can establish that your tax home was in a foreign country and you had a closer connection to that country during those 10 days. For example, if you come to the U.S. on a business trip, for an interview, or for a visit, for 10 days or less, and you later move to the U.S. and establish residency, your period as a resident would probably begin on the subsequent date, when you moved to the U.S. You can exclude days from more than one stay in the U.S. provided the total was not more than 10 days. And, this exception is for determining your residency starting date. Once you establish residency through the substantial presence test, those days must be included in your period subject to tax as a resident.
In order to exclude up to those 10 days of presence, you must file a statement with the IRS. This statement must include your name, address, U.S. taxpayer identification number, U.S. visa number, if applicable, your passport number and the country that issued it, and the tax year for which your statement applies. You must also indicate on the statement the first date you were present in the U.S., the dates you are excluding, and sufficient facts to demonstrate that your tax home was in a foreign country and you had a closer connection to that country during the days you are excluding.
First Year of Residency Under the Green Card Test
If you meet the green card test, but not the physical presence test, your first day of residency is the first day you are present in the U.S. as a lawful permanent resident. If you meet both the green card test and the physical presence test, your first day of residency is the earlier of the first date you were physically present in the U.S. or the first date you were present in the U.S. as a permanent resident.
If it is established that you are a resident for tax purposes in one year and you leave the U.S. and return the following year as a U.S. resident, for income tax purposes you will be considered a resident starting at the beginning of that following year, rather than the date on which you return.
First Year Choice
It is possible to make a choice to start your residency period in a year that you do not meet either the green card test or the substantial presence test, provided you meet the substantial presence test and qualify as a resident the following year. In order to make this first-year choice, you must have been present for at least 31 days in a row the first year, and from the period starting with the first day you were in the U.S. and ending on the last day of the year, you must be present in the U.S. for at least 75% of the number of days. In this case, up to 5 days of absence from the U.S. can be treated as days present in the U.S. With this choice, your period of residency in the U.S. for income tax purposes, would begin on the first day of that 31 or more day period, even though you would not have become a resident under the green card test or substantial presence test until the following year.
If you make the first year choice, you must attach a statement to the tax return you file for that first year. This statement must include your name and address, the date your 31-day period of continuous presence began, and the starting date of the period in which you were present in the U.S. at least 75% of the time. You cannot file this statement or your tax return until you meet the substantial presence test the following year. If you have not done so by the due date for filing your return, you can request an extension to file. You request an extension by filing Form 4868 – Application for Automatic Extension of Time to File U.S. Individual U.S. Income Tax Return. This extension will give you until August 15th to file your return. But if you expect to owe any tax for that first year, you should figure your tax as if you were a nonresident for the entire year, and pay the amount you expect to owe when you file Form 4868. Otherwise, you could be subject to a penalty for late payment, and interest on any balance owed.
Last Year of Residency
If you were a U.S. resident last year, but are not a resident during any part of the current year, your residency terminates on December 31st of last year, unless you qualify for an earlier termination date. If you were a resident under the substantial presence test, your residency termination date is the last day you were physically present in the U.S. If you were a resident according to the green card test, your residency ends on the date you are no longer a lawful permanent resident. If you met both tests, your termination date would be the earlier of the two.
But, if you are a U.S. resident during any part of the current year, and were also a resident during any part of last year, you will be taxed as a U.S. resident through the end of last year.
You must file a statement with the IRS to establish the termination date of your residency, indicating your name, address, U.S. taxpayer identification number and U.S. visa number, your passport number and the country in which it was issued, the tax year for which the statement applies, your last date of presence in the U.S. or the date on which your status as a lawful permanent resident ended, and sufficient facts to establish that you had your tax home in a foreign country and had a closer connection with that foreign country after your last day of presence in the U.S.
Choosing Resident Status
A dual-status alien can choose to be treated as a resident for the entire year, rather than for part of the year. If you are a nonresident alien at the beginning of the year, you become a resident during the year and are a resident at the end of the year, you are married to a U.S. citizen or resident at the end of the year, and your spouse joins you in making this choice, you can elect to be treated as a U.S. resident the entire year. This also applies if both you and your spouse were nonresidents at the beginning of the year, but were residents at the end of the year.
If you make this choice, both you and your spouse will be treated as U.S. residents for the entire year and will be subject to U.S. income tax on your worldwide income. You and your spouse must file a joint return for the year, and must attach a statement to your return, including your names, address, and taxpayer identification numbers. The statement must indicate that you both qualify to make the choice and that you elect to be treated as U.S. residents for the entire year.
Nonresident Spouse Treated as a Resident
If you are a nonresident and are married to a U.S. citizen or resident at the end of the year, you can elect to be treated as a resident for tax purposes. This is true even if both you and your spouse were nonresidents at the beginning of the year, but your spouse was a resident at the end of the year. If you make this election, both spouses will be considered residents for the entire year, you will both be subject to U.S. income tax on your worldwide incomes, and you will not be able to claim any tax treaty benefits as a resident of a foreign country. You must file a joint return for the year you make this choice, but you can file either joint or separate returns in later years.
You make this choice by attaching a statement to your joint tax return for the year you make this election. The statement must be signed by both spouses and must indicate that one spouse was a nonresident and the other spouse a U.S. citizen or resident at the end of the year, and that you are choosing to treat both spouses as U.S. residents for the entire year. The statement must also include your names, address, and taxpayer identification numbers.
Tax Treaties
The substantial presence tests for determining whether you are treated as a resident or nonresident for U.S. income tax purposes do not override the provisions for determining residency that are contained in tax treaties that the United States has with other countries. You can still claim income tax treaty benefits if you are a dual resident, that is, you are a resident of both the U.S. and another country, and are covered under the tax laws of each country. If according to the tax treaty, you are a resident of a foreign country, you will be treated as a nonresident of the United States for U.S. income tax purposes. For purposes other than income tax, you may be treated as a resident of the United States.
If you are a dual resident claiming tax treaty benefits, you must file Form 1040NR or 1040NR-EZ as a nonresident taxpayer. You will also have to file Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), if you receive payments or have income of over $100,000 for the year.
