To Be or Not To Be A U.S. Resident Alien

Residency Status Is Important

The first thing you must know to file your tax return is whether you are a resident or nonresident for U.S. tax purposes. If you are a foreign national, you can be either a resident alien or a nonresident for tax purposes. If you are a resident alien, you are taxed like a U.S. citizen. If you are a non-resident alien for tax purpose, you are taxed with different rules and regulations and you file different return. You may be a part-year nonresident alien and part-year resident alien in the same tax year (dual status). You can be a resident of a tax-treaty country who might be able to elect treaty exemptions from tax. Sometimes, to be or not to be a U.S. resident alien for tax purposes, it may be your choice.

U.S. citizens/residents and nonresident aliens are taxed differently. All U.S. citizens or resident alien are subject to U.S. tax on their worldwide income regardless where they live and where the income comes from. You are eligible to claim all deductions and credits available to U.S. citizens. You can file Form 1040, 1040A or 1040-EZ, whichever is applicable to your situation. Nonresident aliens are taxed only on their U.S.-source income but will not be entitled to favorable filing statuses deductions, exemptions and credits. You must file Form 1040NR or Form 1040NR-EZ.

Your Residency Status

All U.S. citizens and resident aliens based on lawful permanent resident test are always defined as U.S. residents for the tax purposes. This status has not been rescinded or administratively or judicially determined to have been abandoned, you are considered to have met the green card test. The taxpayers have no choice for the status.
If you are a foreign national (not a U.S. citizen), you are considered a non-resident alien unless you meet one of two tests: the green card test or the substantial presence test for any given calendar year. If you do not meet either the Green Card Test or the Substantial Presence Test, then you are a non-resident alien.

Green Card Test

If at any time during the calendar year you were a lawful permanent resident of the United States according to the immigration laws. You generally have this status if the U.S. Citizenship and Immigration Service (USCIS) issued you an alien registration card, Form I-551, also known as a “green card.”

You are a U.S. resident for tax purposes beginning on the first day of the calendar year in which you are physically present in the U.S. as a lawful permanent resident. If you receive permanent residency status during the year, you are automatically a resident for U.S. tax purposes from that point forward.
You continue to have resident status under this test, unless you voluntarily renounce and abandon this status in writing to the USCIS, or your immigrant status is administratively terminated by the USCIS, or your immigrant status is judicially terminated by a U.S. federal court. Green card holders who departed the United states do not terminate their resident alien status for the tax purpose automatically when their immigration Status expired with the end of date of their cards. Resident aliens terminate their residence on the last day of the last year they are lawful permanent resident in the United States. (E.g. if last day of residency is September 10, the residency termination date is December 31 of that year.)

Substantial presence test (SPT)

You are considered a U.S. resident for tax purposes if you meet the substantial presence test for the calendar year. To meet the substantial presence test, you must have been physically present in the United States on at least:

  • 31 days during the current year, and
  • 183 days during the 3 year period that includes the current year and the 2 years immediately before. To satisfy the 183 days requirement, count:
    • All of the days you were present in the current year, and
    • 1/3 of the days you were present in the first year before the current year, and
    • 1/6 of the days you were present in the second year before the current year.

The “residency starting date” is the first day the alien was present in the U.S. during the calendar year in which he/she met the substantial presence test. For those who meet both tests, the residency starting date is the earlier of the two dates.
If you left the U.S. to re-establish your residence in your home country after you met the substantial presence test, your residency termination date is generally December 31 of the year you leave. You are therefore considered a U.S. resident for the entire calendar year. However, you can claim to be a dual-status alien for the year you leave if you meet the following conditions:

  •  You are not a U.S. resident during any part of the following year, and
  •  You establish that, after you left the U.S., your tax home was a foreign country and you had a closer connection to that country.

If you meet these conditions, you can choose to determine your residency termination date as the last day in the calendar year that you were physically present in the United States.

Exempt Individuals for the SPT purpose

Individuals may be classified as U.S. resident aliens if they meet the SPT. However, the days of presence in the U.S. of an exempt individual are not counted for the purpose of determining the SPT. If you are an exempt individual, you are a nonresident alien until you are no longer an exempt individual, or until you receive permanent residency status. An exempt individual may be anyone in the following categories:

  • An individual temporarily present in the United States as a foreign government-related individual;
  • A student temporarily present in the United States with an F, J, M, or Q visa who substantially complies with the requirements of the visa for 5 years in lifetime;
  • A non-student temporarily present in the United States with a J or Q visa (e.g. teaching, research, trainee, short-term scholar) who substantially complies with the requirements of the visa for two years out of the last six years, or
  • A professional athlete temporarily present to compete in a charitable sports event

For purposes of both the two and five year exempt individual limitation rules, the IRS uses a “calendar” year (January 1 through December 31), not twelve consecutive months. If the individual is present in the U.S. as an exempt individual for any part of a calendar year, it is counted as a full year.
For the purposes of determining exempt individual year for those in a student visa status (e.g. F-1 and J-1 student status), the student is only allowed one five-year time period. Those years do not need to be consecutive, but cannot total more than five.
A current J-1 non-student visa holder will not qualify as an exempt individual if he was exempt as a teacher, trainee, non-student or student for any two of the last six calendar years. The exempt individual rule is applicable to the current visa status at the time the test is applied. For those who have previously entered under both student and non-student status, all of the years of exempt individual status, regardless of whether the year was originally applied toward a student or non-student status should be applied to the total exempt years. In no case can the total of exempt years ever exceed five.

Close connection exception for the SPT

Even though you have passed the substantial presence test, you can be treated as a nonresident alien if

  • you are present in the United States for fewer than 183 days during the current calendar year,
  • you maintain a tax home in a foreign country for the entire current year, and
  • you have a closer connection to that foreign country in which you maintained a tax home than to the United States. A closer connection to the foreign country is achieved if the individual has maintained more significant contacts with the foreign country than with the United States.
  • During the current year, you haven’t taken any steps to apply for status as a lawful permanent resident of the United States, or you haven’t any steps to adjust to adjust your immigration status in the US.

You should attach Form 8840, Closer Connection Exception Statement for Aliens to your individual income tax return to claim this exception.

First-Year Residency Election

The first-year election permits foreign alien taxpayers to be treated as resident aliens in situations where they move to the United States too late in the year to qualify for that year under the substantial presence test. This election is available if the alien

  • • Does not qualify as a resident alien under the lawful resident test or substantial presence test for the calendar year for which the election is being made (i.e., election year)
  • Does not qualify as a resident alien for the calendar year preceding the election year
  • Qualifies as a resident alien under the substantial presence test in the calendar year immediately following the election year, and
    • Was present in the United States for at least 31 consecutive days in the election year and
    • Was present in the United States for at least 75% of the days in the period beginning with the first day of the 31-consecutive-day or longer period and ending with the last day of the election year.

A foreign citizen who makes the first-year election will be treated as a U.S. resident only for that portion of the year that begins on the first day of the earliest-presence period for which the individual can satisfy both the 31-day and the 75-percent tests.
A qualifying alien must make the election on his or her tax return for the election year. However, the election may not be made before the individual has actually met the substantial presence test for the following year. Once made, the election cannot be revoked without the consent of the IRS.
A qualifying alien is also allowed to make the residency election for his or her dependent children. This may allow the taxpayer to benefit from the dependency exemptions for nonresident dependent children who would not otherwise qualify. This first-year residency election may be made for dependent children on the parents’ tax return for the election year. It is not necessary to file a separate tax return for each dependent child in order to make a valid election.

Nonresident Spouse Treated as a Resident

If, at the end of your tax year, you are married and one spouse is a U.S. citizen or a resident alien and the other is a nonresident alien, you can choose to treat the nonresident as a U.S. resident. This includes situations in which one of you is a nonresident alien at the beginning of the tax year, but a resident alien at the end of the year, and the other is a nonresident alien at the end of the year.

If you make this choice, you and your spouse are treated as residents for your entire tax year for the purpose of your federal individual income tax. Both individuals must agree to be taxed on their worldwide income in the whole tax year. You must file a joint income tax return for the year you make the choice, but you and your spouse can file joint or separate returns in later years. Once the election was made, the choice to be treated as a resident applies to all later years until a tax year in which neither spouse is a citizen or resident at any time during the year. If the choice is ended for any of the reasons listed below, neither spouse can make a choice in any later tax year.

  • Revocation by either spouse;
  • Death of either spouse;
  • Legal separation; or
  • Inadequate record keeping (as determined by the IRS).

There are also special tax rules, forms and procedures for income payments to foreign nationals who are nonresident aliens for U.S. income tax purposes. Not all foreign nationals are nonresident aliens, however, because there are special rules under Internal Revenue Code and related IRS interpretations, forms and procedures for determining when a foreign national is a resident alien.