USA – Immigration and Taxes: Residency Issues

The types of visas established for immigration purposes (immigrant visas vs. non-immigrant visas) are generally NOT the deciding factor in determining residency for tax purposes. Many times a nonresident alien for IMMIGRATION purposes may be a resident for TAX purposes. Thus, investors, tourists, athletes, entertainers, interns, students and scholars etc.… who are not citizens of the United Sates and who do not hold a green card must determine annually whether they are resident or nonresident aliens for tax purposes (to be discussed later). This determination is very important since it will allow you to know which forms to file and how your income is taxed.

IMMIGRATION LAW

From an immigration perspective, a nonresident alien is a person who is not a citizen or permanent resident of the U.S. The Immigration and Naturalization Service (INS) grants a “temporary” stay to nonresident aliens, which will end when the purpose of that stay has been met.

A resident alien, for IMMIGRATION purposes, is the same as an immigrant, or a “greed card” holder—a non-U.S. citizen who has been authorized to live and work in the U.S. indefinitely.

TAX LAW

A nonresident alien for tax purposes is somebody who is NOT a U.S. citizen or a green card holder (permanent resident) AND who does not meet the substantial presence test (see SUBSTANTIAL PRESENCE TEST later). Generally, a nonresident alien either pays U.S. tax only on income derived inside the U.S. or else is exempt from paying U.S. income tax because of a treaty between the U.S. and the government of his or her country of residence for tax purposes. Most nonresident aliens receive no tax exemption for their spouse or dependents. A nonresident alien for tax purposes must file an income tax return on IRS Form 1040NR (U.S. Nonresident Alien Income Tax Return).

A resident alien FOR TAX PURPOSES must pay tax on income from all sources, worldwide, and may in certain limited circumstances enjoy benefits of tax treaty exemptions. Individuals who are resident aliens for tax purposes can claim exemptions for dependents, while nonresident aliens generally may not. A resident alien for tax purpose files a return on IRS Form 1040, 1040A, or 1040EZ.

When a person who has been a nonresident for tax purposes becomes a resident for tax purposes under the rules discussed below, he/she will be taxed differently for the part of the year before becoming a resident and the part after becoming a resident. This is discussed in IRS Publication 519 under the heading “Dual Status”.

RESIDENCY DETERMINATION FOR TAX PURPOSES

Resident for Tax Purposes 

A resident for tax purposes is a person who is not a U.S. citizen and who meets either the “green card” test or the “substantial presence” test described in Publication 519, U.S. Tax Guide for Aliens. With regard to residency determination for tax purposes:

• F and J student visa holders are generally considered residents after their first five calendar years in the U.S.

• J non-students (researchers, scholars, teachers, etc.) are generally considered residents for tax purposes after their first two calendar years in the U.S.

• H-1s are considered residents for tax purposes once they meet the “substantial presence” test.

Nonresident for Tax Purposes 

A nonresident for tax purposes is a person who is not a U.S. citizen and who does not meet either the “green card” test or the “substantial presence” test described in Publication 519, U.S.

Tax Guide for Aliens. With regard to residency determination for tax purposes:

• F and J students are generally considered nonresidents during their first five (5) calendar years in the U.S.

• J non-students (researchers, scholars, teachers, etc.) are generally considered nonresidents during their first two (2) calendar years in the U.S.

• H-1s are considered nonresidents unless they meet the “substantial presence” test

GREEN CARD TEST

A person is a resident for tax purposes if he/she is a lawful permanent resident of the U.S.  In other words, a person has this status if the Immigration and Naturalization Service (INS) have issued him a “green card”. The person does not need to be in possession of the “green card” itself. The right to lawful permanent residence is granted at the time of the final interview with Immigration and Naturalization Service officials.

SUBSTANTIAL PRESENCE TEST

Counting Days 

A person is a resident for tax purposes if he/she meets the substantial presence test for the calendar year. To meet this test, the person must be physically present in the U.S. on at least:

31 days during the current year, (the year for which the tax return is being filed) and 183 days during the three-year period that includes the current year and the two years immediately before that, counting:

• All the days the person was present in the current year, and

• 1/3 of the days the person was present in the first year before the current year, and

• 1/6 of the days the person was present in the second year before the current year

DAYS THAT ARE NOT COUNTED

A J non-student (professor, researcher, etc.) who is substantially complying with the requirements of the visa does not count days for the first two calendar years.

An F or J student who substantially complies with the requirements of the visa does not count days for the first five calendar years.

CIRCUMSTANCES THAT DISQUALIFY FROM THE SUBSTANTIAL PRESENCE

TEST

There are certain circumstances that would disqualify a person from meeting the “substantial presence” test:

• He is present in the U.S. on fewer than 183 days during the current tax year

• It is established for the current tax year that the person has a tax home in the foreign country and that he has a closer connection to that country than the US.

IRS Publication 519 explains what is required to establish a closer connection to a foreign country, including such things as the location of a person’s permanent home, family, personal belongings, etc.

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