Chapter 1 – U.S. Tax Status:  Nonresident Alien or Resident Alien

Aliens

Individuals that are neither a U.S. citizen nor U.S. national are commonly referred to as “aliens” within the U.S. tax scheme.  And each tax year an alien must properly determine his or her U.S. tax status under federal tax law in order to understand which body of tax laws govern taxation.  There are essentially 2 types of “aliens”:

  1. Nonresident
  2. Resident

In general, nonresident aliens are subject to U.S. taxation only on their U.S. source income while resident aliens are subject to U.S. taxation on their worldwide income, similar to U.S. citizens and permanent residents (i.e., green card holders).

Since the scope of taxation differs greatly between these two alien statuses, proper classification is financially critical.

Alien Classifications:  Nonresident, Resident and Dual-Status

Nonresident Alien

A nonresident of the U.S. for U.S. federal income tax purposes is a non-U.S. citizen or national who fails both the lawful permanent resident test (i.e., Green card test) and the substantial presence test.

Resident Alien

A resident of the U.S. for U.S. federal income tax purposes is a non-U.S. citizen or national who meets either the lawful permanent resident or substantial presence test.

Dual-Status Alien

If a person qualifies as a tax nonresident for one part of a tax year and as a tax resident for the other part of the same tax year, the person has what is known as a “dual-status” tax year.  Dual-status tax years are common in years where a person either relocates to or from the U.S.

For the portion of the year a person qualifies as a nonresident, tax is computed by referencing laws applicable to nonresident aliens.  For the portion of the year a person is considered a resident, tax is computed by referencing laws applicable to resident aliens.

While a person having a dual-status tax year must compute their annual income tax obligation by reference of two different bodies of tax laws, only one income tax return is required to be filed for the year.  See “Resident Alien vs. Nonresident Alien Filing Procedures” in Chapter 4 for information on which federal income tax form to file.

U.S. Tax Residency Tests

Lawful Permanent Resident Test

A person meets this test – and is considered a tax resident – if they have been legally admitted under U.S. immigration law to enter and remain in the United States.  Such persons are commonly referred to as holding a “green card”.  Lawful Permanent Residents are U.S. federal income tax residents regardless of where they reside (i.e., either within or outside the U.S.).  They remain tax residents until lawful permanent resident status is either revoked or abandoned under U.S. immigration laws.  It’s important to note that lack of U.S. income tax compliance by a green card holder can result in abandonment of his or her green card.

The U.S. residency start date for an individual meeting the lawful permanent resident test (but not the substantial presence test) is typically the first day during the tax year such person is present in the United States as a lawful permanent resident.

Substantial Presence Test

Meeting the substantial presence test is a function of how many days a person physically spends within the United States.  The test requires an individual to accurately count the number of days physically present within the U.S. during a three-year qualifying period.

An individual will be considered a U.S. tax resident under the substantial presence test if he or she meets both of the following requirements during the qualifying period:

  1. Is a foreign citizen or national who is physically present in the United States for at least 31 days during the current tax year and,
  2. Is physically present 183 days during a 3-year qualifying period (i.e., the current tax year and the 2 preceding tax years) using the following formula:

ALL of the days present in the U.S. during the current tax year,

PLUS

1/3rd of the days present in the U.S. during the first prior tax year,

PLUS

1/6th of the days present in the U.S. during the second prior tax year.

The U.S. residency start date for an individual meeting the substantial presence test (but not the lawful permanent resident test) is, in general, the first day the individual was physically present in the U.S. during the current tax year.  There is an exception to this general start date rule commonly referred to as the “de minimis presence” exception.  This exception allows an individual to delay – by up to 10 days – the residency start date.


Example:

William, a U.K. citizen, is employed by a U.S. company and travels to the U.S. frequently to conduct business.  He maintains his home in the U.K. and does not hold a U.S. green card. (i.e., he fails the Lawful Permanent Resident Test).

During the current tax year, William first enters the U.S. on February 1. He has numerous other short trips to/from the U.S. during the current tax year.

Over the past 3 years, William’s U.S. travel has resulted in the following number of days present within the U.S.

Tax YearDays in U.S. WorkedDays in U.S. Not WorkingTotal Days Present in U.S.
Current80  +37= 123
1st Preceding80 +40= 120
2nd Preceding90 +30= 120

Using the Substantial Presence Test (SPT) formula, the number of days William has spent in the U.S. during the qualifying period is computed as follows:

Tax YearTotal Days Present in U.S.Days Counted SPT Equivalent Days of Presence
Current123 X1.0= 123
1st Preceding80 X1/3= 40
2nd Preceding90 X1/6= 20
Total183

Since William was present in the U.S. for 31 days during the current tax year AND has at least 183 days of physical presence in the U.S. during the qualifying period, he meets the substantial presence test.  Using the facts of this example, William would be considered a tax resident of the U.S. on February 1, his first day of presence in the U.S. during the current tax year.


If an individual meets both the lawful permanent resident test and the substantial presence test in the same year, the residency starting date is the earlier of:

  • The first day the individual is present in the United States during the year he or she passes the substantial presence test, or
  • The first day the individual is present in the U.S. as a Lawful Permanent Resident (green card holder).

Day of Presence Defined

In general, a day of presence for purposes of the substantial presence test is defined as any day or partial day during which an individual is present in the U.S. at any time.

A day of presence does not include days an individual:

  • Commutes to work in the U.S. from a residence in Canada or Mexico,
  • Is in the U.S. for less than 24 hours when in transit between two places outside of the U.S.,
  • Is in the U.S. as a crew member of a foreign vessel,
  • Is unable to leave the U.S. because of a medical condition that develops while you he or she was in the U.S. or,
  • Is considered an “exempt” individual.

Exempt Individual Defined

For purposes of not counting days towards meeting the substantial presence test, an exempt individual includes:

  • An individual temporarily present in the U.S. on a qualifying visa as a foreign government-related individual,
  • A student, teacher or trainee temporarily present in the U.S. under either a “F”, “J”, “M” or “Q” type visa, who is substantially compliant with the requirements of the visa and,
  • A professional athlete temporarily in the U.S. to compete in a charitable sports event.

Days excluded either due to medical condition or as an exempt individual must be reported a part of individual’s annual person income tax return using Form 8843, Statement for Exempt Individuals and Individuals with a Medical Condition.  Failure to file this form in a timely manner will, in general, result in otherwise exempt days being counted toward meeting the substantial presence test.

Exception to the Substantial Presence Test – Closer Connection to a Foreign Country

If an individual meets the requirements of having a closer connection to a foreign country, he or she will not be considered a resident of the United States for federal income tax purposes even if they otherwise meet the substantial presence test.

To establish a closer connection to a foreign country, an individual must:

  1. Be present in the U.S. for less than 183 days during the current tax year,
  2. Maintain a tax home in a foreign country and,
  3. Have a closer connection to the tax home country.

Determining if an individual’s tax home and closer connection are with a foreign country depends on a number of factual items which must be carefully evaluated.  As such, any such determination is naturally subject to a degree of uncertainty.

Form 8840, Closer Connection Exception Statement for Aliens, must be filed to claim the closer connection to foreign country exception to the substantial presence test.

Note:  The closer connection to a foreign country exception to the substantial presence test may not be utilized by an individual who has either initiated the process of applying for a U.S. green card or has such an application pending.

Special Elections

Election to Be Treated as a Resident Alien for Part of Arrival Year (First Year Only)

A special election is available to a foreign national who is unable to meet the substantial presence test in the year he/she arrives in the United States but wants to be taxed as a resident for a part of that initial year.  To make this election, he or she must satisfy all of the following criteria:

  • The foreign national was a nonresident for all of the preceding year.
  • The foreign national meets the substantial presence test in the year following arrival.
  • The foreign national is present in the United States for at least 31 consecutive days in the year of arrival.
  • During the year of arrival, the foreign national meets the continuous presence test— that is, he/she is present in the United States for at least 75% of the days between the first day of the thirty-one-day period and the last day of the year of arrival. For purposes of applying the 75% test, up to five days of presence outside the United States can count as days of presence in the United States.

The U.S. tax return containing the first-year residency election may not be filed until the foreign national has satisfied the residency requirement under the substantial presence test for the following year.  The foreign national may request an extension of time to file until the necessary period passes for satisfying the test in the following year, but tax must be paid with the extension application on the basis that the substantial presence test will be satisfied in the following year.

By making this election, a nonresident alien effectively becomes a dual-status alien.

Once made, the first-year election may not be revoked without the approval of the Internal Revenue Service.

Election to Treat Nonresident Alien Spouse as a Resident (Married Taxpayers Only)

If, at the end of the tax year, one spouse is a nonresident alien and the other spouse is either a U.S. citizen or resident alien, the couple may elect to treat the nonresident alien spouse as a resident for the entire tax year.

If a couple makes this election, the follow rules apply:

  • Both individuals are treated for income tax purposes as residents for the entire tax year.
  • Both individuals are taxed on their worldwide income.
  • The couple must file a joint federal income tax return for the tax year in which the election is made.
  • Neither individual can claim under any tax treaty not to be a U.S. resident.

If this election is made for any tax year, both individuals shall be ineligible to make this election for any subsequent tax year.

The election to be treated as a resident alien is suspended (not ended) for any tax year (after the tax year for which the election was made) if neither spouse is a U.S. citizen or resident alien at any time during the tax year.

In general, the election may be terminated by:

  • The timely, active revocation by either spouse,
  • The death of either spouse,
  • Legal separation under divorce decree or,
  • Termination by Secretary (i.e., Internal Revenue Service).

If the election is terminated, neither individual shall be eligible to make the same election for any future tax year.

Election to Treat Dual-Status Alien as a Full-Year Resident (Married Taxpayers Only)

If an individual is a nonresident alien at the beginning of the year but a resident alien of the U.S. at the close of the year and such individual is married to either a U.S. citizen or resident alien, the couple may elect to be treated as U.S. residents for the entire tax year.

To make this election, each individual of the married couple must satisfy all the following criteria:

  • The individual was a nonresident alien at the beginning of the tax year.
  • The individual was either a resident alien or U.S. citizen at the end of the year.
  • The individual’s spouse joins the individual in making the election.

This election is available to married taxpayers even if both were nonresident aliens at the beginning of the year and resident aliens at the end of the year.

If a couple makes this election, the following rules apply:

  • Both individuals are treated for income tax purposes as residents for the entire tax year.
  • Both individuals are taxed on their worldwide income.
  • The couple must file a joint federal income tax return for the tax year in which the election is made.
  • Neither spouse can make this election for any later tax year, even if separated, divorced or remarried.

Tax Treaty:  Residency Tie-Breaker

Notwithstanding the above residency tests, a foreign individual’s U.S. resident alien status may be overridden if the individual is also considered a tax resident of a country that has an income tax treaty with the United States.  A careful examination of an individual’s facts and circumstances is required to invoke this provision of an income tax treaty.

Individuals meeting the lawful permanent resident (i.e., green card) test should only invoke the income tax treaty residency tie-breaker provision with the understanding that doing so may result in revocation of their green card or an administrative decision that they have abandoned their green card; a potentially serious implication.

U.S. Residency Termination

Tax Residents Meeting the Lawful Permanent Resident test (i.e., green card test)

A resident alien who meets the green card test is considered resident until the day that his or her status as a lawful permanent resident officially ends—that is, when he or she formally revokes the lawful permanent resident status or when an administrative decision is made that this status has been abandoned.  Until that time, the green card holder is a U.S. tax resident even when outside of the country.

Tax Residents Meeting Only the Substantial Presence Test

The treatment of a departing resident alien who does not hold a green card varies depending on the particular circumstances.

If the individual does not meet the substantial presence test for the year of departure, the individual is a nonresident alien for the entire year.

If the individual meets the substantial presence test in the year of departure, the individual is considered a resident alien for the entire year, unless the individual establishes that, following the departure date, the individual has a closer connection with a foreign country. The individual documents and declares the closer connection by attaching a residency termination statement to his or her tax return.  If a closer connection is so established, the last day of U.S. residence will be the day of departure and the individual will effectively be a dual-status resident for the year of departure.

Note:  Regulations governing departing non-green-cardholders stipulate that unless the residency termination statement is filed, an individual who meets the substantial presence test for the year of departure will be considered resident for the entire year.  It therefore appears that a departing individual who meets the substantial presence test for the year might choose not to file the residency termination statement, in order to be considered a full-year resident of the United States.  The choice should presumably be made in light of the same considerations that influence the first-year election to be treated as a full-year resident.

Tax Residents Meeting Both the Green Card and Substantial Presence Tests

The residency termination date for an alien meeting both the green card test and the substantial presence test is the date on which the alien no longer has lawful permanent residence or the date on which the alien is last present for the substantial presence test, whichever is later.

Similar to the rules regarding an individual’s U.S. residency start date, an individual may disregard up to ten days of U.S. presence following the termination of a U.S. assignment when determining his or her residency termination date.