The distinction between a resident alien and a nonresident alien is crucial for your tax liability. Resident aliens are taxed like U.S. citizens, on their worldwide income, while a nonresident alien is generally subject to U.S. taxation only on income that is effectively connected with the conduct of a U.S. trade or business and on specified types of U.S. source income. Your status as a nonresident alien individual affords you many opportunities to take advantage of the U.S. tax laws.
We must verify your status as a nonresident alien as the first step in the tax planning process. This procedure is complicated due to the many compliance issues associated with residency. Sometimes residency is determined under an applicable tax treaty; however, if no treaty exists, you are treated as a resident only if one of the following three conditions is met:
- You are a “lawful permanent resident” of the U.S. at any time during the calendar year (i.e., you have been issued a “green card”),
- You meet the “substantial presence test” (i.e., you have been present in the U.S. on at least 183 days during a three-year period that includes the current year), or
- You elect to be treated as a resident alien.
COVID-19 Travel Disruption Relief. The IRS has provided individuals and businesses with relief related to travel disruptions arising from the COVID-19 emergency. Under this relief, of U.S. presence that are presumed to arise from travel disruptions caused by the COVID-19 emergency will not be counted for purposes of determining U.S. tax residency and for purposes of determining whether an individual qualifies for tax treaty benefits for income from personal services performed in the United States.
Lawful permanent residence test. The lawful permanent residence test, often referred to as the “green card test”, is based on an alien’s immigration status. If an individual has been granted a green card, he or she is a lawful permanent resident of the United States. As soon as the individual physically enters the United States while holding a green card, he or she is a resident alien.
Substantial presence test. This substantial presence test is based on the number of days the alien is physically present in the United States for at least 183 days during a three-year period. The counted days refers to a yearly sum that is based upon the number of nonexempt days the alien physically spends in the United States during the current tax year and the two preceding tax years.
The presence test is calculated as the days present in the United States totaling:
- the current calendar year (at least 30 days required in the current year), and
- the two preceding years:
- one-third of the number of days of presence in the first preceding year, and
- one-sixth of the number of days in the second preceding year.
Exempt days. Exempt days are not counted in the substantial presence test and include the following:
- days commuting to work in the United States (if the taxpayer regularly commutes) from Canada or Mexico,
- days in transit in the United States for less than 24 hours,
- days in the United States as a crew member of a foreign vessel,
- days suffering from a medical condition that leaves one unable to travel, and
- days that one is an exempt individual.
Once the two tests are performed and if a test is met, the residency starting date is the earlier of either the date the green card test or the date the substantial presence test is met.
Other residency considerations. The absence of all of the preceding conditions generally indicates that you are a nonresident alien. Of course, there are exceptions to the general rules. For example, an alien individual who meets the “substantial presence test” may still be considered a nonresident alien if a “closer connection” is established with a tax home outside the United States. You may also qualify for dual status residency; if so, your tax year is divided into two separate tax periods. You are then taxed as a resident during one period and as a nonresident during the other.
There are specific rules for establishing and terminating residency, abandoning residency, and expatriating. In addition, all departing aliens (resident or nonresident) must obtain a certificate from the IRS, known as a sailing or departure permit, stating that they have complied with the U.S. income tax laws.
Contact the Crosslin tax team to discuss your situation and to review your presence and days residing in the United States to determine your residency status and reporting for U.S. federal income tax purposes. We are here to help!