The definition of a US income tax resident is not as simple as you might think. The US rules are very different from other countries and sometimes even go against common sense! Below 4 tests to assist you in determining whether you are a US tax resident for income tax purposes.
Why is residency important?
Assessing whether you are a US income tax resident matters because it will determine what income the US has authority to tax you on. If you are a non-resident, you will only be taxed on your US source income. If you are a US resident you will be taxed on your worldwide income and you will also have to report your worldwide asset to the US tax agency (IRS).
To know more about reporting worldwide assets: https://kbfinancials.biz/reporting-your-foreign-accounts-in-3-easy-steps-fincen114/
Test #1: US citizenship test
You are a US tax resident if you hold the US citizenship. You obtain the US citizenship when: (1) you are born in the US (de jure birthright), (2) you are born from US parents who are US citizens, (3) you apply to become a US citizen (naturalization). You remain a US citizen until you go through the official process of renouncing your US citizenship.
Note – Accidental American – If you live outside the US and you do not realize you are a US citizen, you are an “Accidental American” – to read more about “Accidental American”: https://kbfinancials.biz/am-ricain-accidentel/
Test #2: Green card test
You are a US tax resident if you are a Lawful permanent resident (LPR) of the US. You are an LPR if you hold a green card or you are eligible for a green card through an immigrant visa (such as an EB5). Your residency starts the first day you are in the US with your green card or your visa EB5. Your residency ends the day you officially surrender your green card by filing form I407.
Note – the dangers of the green card: Your residency does NOT end just by leaving the US or by allowing your green card to expire. To know more about the “3 hidden dangers” of the green card: https://kbfinancials.biz/la-carte-verte-am-ricaine-us-green-card/
Test #3: Substantial presence test (SPT)
You are a US tax resident if you are physically present in the US for at least 31 days in the current year, and satisfy the 183 days rule over the current & prior 2 years. Some days are excluded from the computation such as: (1) days commuting to work from Canada or Mexico, (2) days as a crew member, (3) medical days, (4) and in certain circumstances, days as a diplomat, professor, member of an international organization, student or athlete. Your residency starts on your first day of physical presence in the US when you meet the test. Your residency ends the day you leave the US and you no longer satisfy the SPT test.
To read more on the SPT: https://www.irs.gov/individuals/international-taxpayers/substantial-presence-test
To read more on how the IRS check your days (I-94): https://i94.cbp.dhs.gov/I94/#/recent-search
To read more on excluded days from the SPT test with a US visa : US visas: The comparison table
Note –the closer connection: If you meet the SPT test, you may still qualify to be treated as a non-resident if (1) you spent less than 183 days in the CURRENT year, (2) you maintain a tax home in a foreign country and (3) you have a “closer connection” to that foreign country To know more about the closer connection: https://www.irs.gov/individuals/international-taxpayers/closer-connection-exception-to-the-substantial-presence-test
Test #4: Election test
You are a US tax resident if you make one of the elections below with the IRS.
1/ The first-year choice to be treated as a resident (IRC 7701.b.4)
This election allows a non-resident to be treated as a resident for the current year if (1) he meets the SPT test the following year, (2) he is present in the US in the current year for at least 31 days AND (3) he is present in the US in the current year for at least 75% of the days. The residency starts the first day you meet the test. To read more about the First year choice : https://www.irs.gov/individuals/international-taxpayers/tax-residency-status-first-year-choice
2/ The nonresident spouse treated as a resident (IRC 6013.g/h)
This election allows a non-resident to be treated as a resident if (1) the non-resident is married to a US person, (2) the other spouse agrees to the election, and (3) both spouses file a joint tax return. The residency starts the first day of the taxable year. To read more about the nonresident spouse: https://www.irs.gov/individuals/international-taxpayers/nonresident-spouse
Note – the Estate & gift tax residency – The above rules are for INCOME tax purpose. For non-US citizen, the residency rules for estate and gift tax are different and are based on the concept of DOMICILE. You have a US domicile if you are physically present in the US with no fixed intention to depart.
Note – the State residency – the above rules are for FEDERAL income tax purpose. Each state in the US has its own definition of tax residence – such as a definition based on domicile and/or an extended period of physical presence in the state.
Bear in mind that federal and state laws CHANGE frequently and the information in this document may not reflect recent changes in the laws. For current tax or legal advice, please consult with a professional.
The LINKS in this article to third party website are not intended as implying our endorsement, sponsorship, or recommendation of the third-party information and we do not guarantee these sites’ accuracy.
Each taxpayer is UNIQUE and so is the tax strategy tailored to his/her specific situation. The information contained in this article is not tax or legal advice and is not a substitute for consulting with a professional. For assistance with YOUR international tax needs, please contact Karine Bauer, EA, JD – HERE
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Updated on February 4th , 2024.