When Will a Foreign Individual Be Considered a U.S. Resident for U.S. Income Tax Purposes?

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If an individual is a nonresident alien (meaning they are not a U.S. citizen), they will be subject to U.S. federal income tax only on U.S.-sourced income. Alternatively, if a nonresident alien either (i) has a U.S. green card, or (ii) satisfies the “substantial presence test,” they will be considered a resident alien and be subject to U.S. federal income tax on their worldwide income.

The difference in resident status is very impactful for purposes of U.S. tax, so if you are a foreign individual spending time in the U.S., proper tax planning measures should be considered.

Substantial Presence Test

Under the substantial presence test, a foreign individual is generally treated as a resident alien if he or she is present in the United States (i) on at least 31 days during the calendar year, and (ii) on a total of 183 days during the current year plus two preceding calendar years.

For purposes of applying the 183-day requirement, each day of presence in the U.S. during the current year counts as a full day; each day in the first preceding year counts as 1/3 of a day; and each day in the second preceding year counts as 1/6 of a day.

As an example, if a nonresident spends fewer than 120 days in the U.S. each year, then the substantial presence test cannot be met.

Year Days in Current Year Day Count for Presence Test Substantial Presence Test Met
1 120 120 No
2 120 120 + 40 (120/3) = 160 No
3 120 120 + 40 (120/3) + 20 (120/6) = 180 No

Exception to Substantial Presence Test

A nonresident who otherwise would meet the substantial-presence test may nevertheless be treated as not meeting that test for a calendar year if three conditions are met:

  1. First, the nonresident must be present in the United States for fewer than 183 days during the current calendar year;
  2. Second, the nonresident must maintain a “tax home” in a foreign country during the current calendar year;
  3. Third, the nonresident must have a “closer connection” during the current calendar year to a single foreign country (or, under a special rule described below, to no more than two foreign countries) in which the tax home is maintained other than to the United States.

Generally, any individual’s “tax home” is the place where he has the center of his employment or self-employment.

Further, a nonresident will be considered to have a closer connection to a foreign country other than the U.S. if the individual establishes that he has maintained more significant contacts with the foreign country than with the U.S. This is a facts and circumstances test, and factors to be considered include, but are not limited to:

  • The location of the individual’s permanent home;
  • The location of the individual’s family;
  • The location of personal belongings, such as automobiles, furniture, clothing and jewelry owned by the individual and his or her family;
  • The location where the individual conducts his or her routine personal banking activities;
  • The location where the individual conducts business activities (other than those that constitute the individual’s tax home);
  • The location of the jurisdiction in which the individual holds a driver’s license;
  • The location of the jurisdiction in which the individual votes;
  • The country of residence designated by the individual on forms and documents; and
  • The types of official forms and documents filed by the individual, such as Form 1078 (Certificate of Alien Claiming Residence in the United States), Form W-8 (Certificate of Foreign Status) or Form W-9 (Payer’s Request for Taxpayer Identification Number).

In order to claim the closer connection exception, Form 8840 (Closer Connection Exception Statement for Aliens with the IRS) must be filed.

The closer connection exception cannot be claimed if: (i) more than 183 days are spent in the U.S. during the current year; (ii) a U.S. green card has been applied for; and (iii) Form 8840 is not timely filed.

Treaty Benefits

Foreign persons may be exempt from U.S. federal income tax if there is an applicable U.S. income tax treaty with the foreign person’s country of residence. Each U.S. tax treaty provides a limitation on who the benefits of such treaty will apply to, but generally “dependent personal services” performed by a nonresident individual of a treaty country will be exempt from U.S. tax if:

  1. the alien does not spend more than 183 days in the U.S. during the year;
  2. his or her employer must be a non-U.S. person;
  3. the employee’s salary cost may not be deducted by a permanent establishment that the employer maintains in the U.S.

Please note, this language is from Article 14 of 2006 U.S. Model Income Tax Treaty, so is used as an example. Specific tax treaties applicable to the nonresident trying to claim treaty benefits would need to be examined.

Totalization Agreements

In order to prevent double taxation of income of income with respect to social security taxes, the U.S. has reached “Totalization Agreements” with a number of countries, which determine whether any alien will be subject to the U.S. Social Security/Medicare tax or the social security taxes of a foreign country.

The determination is based upon the employee’s work status in terms of who their employer is, and where the services are being performed.

A certificate of coverage issued by one country serves as proof of exemption from Social Security taxes on the same earnings in the other country.

State Income Tax

States are not bound by federal law or by U.S. tax treaties. Which means a nonresident alien’s earnings, though exempted by federal taxation, could nevertheless be subject to state income tax or state employment taxes.

The individual’s specific facts—time spent in specific states, income earned, contacts, and more—will need to be examined to properly determine any liabilities for state tax purposes.

Conclusion

Just because you are a nonresident does not mean you are not subject to U.S. federal or state income tax. Your facts will dictate your tax liabilities, so if you currently spend time in the U.S. or plan to, please reach out to Withum’s International Tax experts who can assist you with all of your tax planning needs and considerations.

Ask the Experts

CJ Stroh, Esq.
T (609) 520 1188
cstroh@withum.com

kphelan@withum.com

To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

Income tax

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