Foreign citizens living in the United States

06 Dec, 2015 TAX LAW 0

Chapter 42
Foreign citizens living in the United States

Determining Your Status

Whether you are a resident alien or a nonresident alien is of critical importance when you compute how much U.S. income tax you will pay. Your residency status will determine your filing status, the tax rate schedule applicable to your income, and the amount of your income that will be subject to U.S. income tax. Under the tax rules, an alien must meet either one of the two following tests in order to be considered a resident of the United States for tax purposes:

The green card test. Have you been lawfully admitted to the United States for permanent residency? In other words, do you have a green card?
The substantial presence test. Have you been present in the United States for a substantial period of time? If you have been present in the United States for at least 31 days in the current year and if the total days you are present in the United States during the current year, plus one-third of the days present in the preceding calendar year, plus one-sixth of the days present in the second preceding calendar year, are equal to at least 183 days, you will meet the substantial presence test and be considered a resident alien in the current year.

Example 1. You were in the United States during 2014 for 75 days. During 2013, you spent 321 days in the U.S., which included 14 days of vacation. In 2012, you were in the United States for 30 days. Applying the three-year test to your travel to the U.S. results in 187 days. The days are counted as follows. One-sixth of the days in 2012 (five days), plus one-third of the days in 2013 (107 days—you may not exclude vacation days), plus the days in 2014 (75 days). You are therefore treated as a U.S. resident for 2014.

Example 2. You were in the United States during 2014 for 25 days. In 2013 you were present in the U.S. for 300 days and during 2012 you were in the United States for 360 days. Counting your days using the three-year test results in 185 days for 2014. However, because you were not in the U.S. during 2014 for at least 31 days, you do not meet the substantial presence test for 2014.

If you are considered a U.S. resident under the substantial presence test (and you were not a U.S. resident in the prior year), your residency period generally begins on the first day you were present in the United States in the current year. However, if you have a brief visit (or visits) to the United States, and the total days you spend in the United States during the visit (or visits) amount to 10 days or less, you may, under certain circumstances, ignore those days for purposes of determining when your residency period begins.

Example. You move to the United States on June 1, 2014, and spend a sufficient number of days in this country in 2014 to meet the substantial presence test. Prior to your actual arrival on June 1, you spent 10 days in the United States from February 2 through February 11 to house hunt and to meet with your U.S. employer while you maintained your tax home in a foreign country. Your U.S. residency period begins on June 1. In the event you had stayed in the United States until February 12 (11 days), your U.S. residency period would have begun on February 2.

A similar rule applies in the year in which your U.S. residency terminates. Your residency period generally ends on the 31st of December. However, if you can show that you have closer connections to a foreign country for the remainder of the year, your U.S. residency generally ends on the last day you are present in the United States. Visits to the United States totaling 10 days or less following your departure may be disregarded in determining the last day of your U.S. residency.

TAXPLANNER

To take advantage of this closer connection rule and terminate your residency on the last day you are present in the United States, you would be required to attach a statement to your U.S. tax return for that year detailing the facts that support your closer connection to a foreign country.

Example. In 2014, you lived in the United States continuously from January 1 through October 31, when you moved to a foreign country and established a closer connection to it. Generally, you are considered to be a resident of the United States through December 31. Your U.S. residency would be considered to terminate on October 31 if you established your closer connection to the foreign country by attaching a statement to your U.S. tax return. If you return to the United States on business trips or on vacation during November and December and spend 10 days or less in total in the United States, your residency period terminates on October 31. If you spend more than 10 days in total in the United States in November and December, your U.S. residency period will be extended beyond October 31. The actual termination date will depend on the specific dates of your visits. You would also want to take into consideration any tax treaty benefits that might be available to you.

TAXPLANNER

Closer connection exception to substantial presence test. If you meet the substantial presence test described above, but you are present in the United States less than 183 days during the year, you should examine your ties to another country. You might qualify for an exception to the substantial presence test if you can demonstrate that your ties to another country are stronger than your ties to the United States. You must file a statement (IRS Form 8840) with your tax return supporting your claim, or, if no return is required, a statement alone must be filed with the IRS.

If your ties are weak and you want to try to strengthen them, consider:

Maintaining a home in that country
Obtaining a driver’s license issued by that country
Joining a religious, political, or cultural organization in that country
Maintaining or establishing a membership in a social organization in that country
Having a bank account in that country
Having personal property in that country such as cars, clothing, or jewelry
Continuing to vote in that country

Example. Refer back to Example 1 in the section describing the substantial presence test. In the example, you meet the substantial presence test for 2014 because the total number of days in the three-year test is 187 (remember, if you have 183 days or more you are treated as a U.S. resident). However, because you were in the U.S. for fewer than 183 days during 2014, you may be able to be treated as a U.S. nonresident if you can establish a closer connection to another country than to the U.S. for all of 2014. For instance, if you and your family had moved back to your home country at the end of 2013, and, for all of 2014, your main employment was in your home country, your children attended school there, and you participated in social, religious, or cultural activities in your home country, etc., you may be able to demonstrate a closer connection to your home country than to the United States during 2014 even though you continued to come to the U.S. for a short time (75 days in the example) for business trips or vacations. If you can demonstrate the closer connection to your home country, you will be treated as a nonresident of the United States for 2014. Bear in mind that you will need to pay U.S. tax for 2014 following the rules of taxation for nonresidents (discussed later) and you will need to file Form 8840, listing all your facts and circumstances to show the IRS that you have a closer connection to your home country than to the United States.

If you spend a significant amount of time in the United States each year, you should carefully monitor the days to keep them below the 183-day threshold during the 3-year period considered under the substantial presence test to eliminate the requirement to file a statement of claiming a closer connection to another country. This generally means that you may be present in the United States for up to 121 days each year without triggering U.S. residence under the substantial presence test.

Election to Be Treated as a Resident

The tax law contains a rule that allows an alien to elect to be treated as a resident of the United States for tax purposes (a “first year election”), even though he or she does not meet the green card or substantial presence test. The first year election allows an alien with significant U.S. presence toward the end of year 1 and who meets the substantial presence test in year 2 to elect to be treated as a U.S. resident alien in year 1. The alien can only make this first year election after he or she has met the substantial presence test in year 2. This may require filing an extension for the year 1 tax return. This election will be advantageous to some aliens, such as those who incur significant expenses when they first arrive in the United States (such as mortgage interest, deductible mortgage points, and real estate taxes related to a purchased home in the United States), which would only be deductible for a resident. In addition, this election could also benefit married aliens who would otherwise be required to file using the married filing separate rates that apply to nonresidents. As U.S. residents under this election, they would be permitted to make a further election to be treated as residents for the entire year, thus permitting the filing of a joint return and the use of the more favorable joint return rates. An alien who meets the following criteria may make the election (see the following example):

Doesn’t meet the green card or substantial presence tests for the current year,
Was not a resident alien in the prior year,
Meets the substantial presence test in the following year,
Is present in the United States for at least 31 consecutive days in the current year, and
Spends at least 75% of the days between the first of the 31 consecutive days and year-end in the United States. (Note: Up to 5 non-U.S. days will be counted as U.S. days for the purposes of this test.)

An alien who makes the election to be treated as a resident may also make a similar election on his or her tax return on behalf of dependent children if the children are not required to file tax returns on their own, assuming, of course, that the children also meet the requirements of the election. The filing of the election will enable an alien to take dependent exemptions for the children.

Example. Assume that an alien is present in the United States for the following periods:

7/4–8/15	43 days
9/16–11/25	71 days
12/16–12/31	16 days

During the testing period of July 4 through December 31, the individual is in the United States 130 days out of 181 days total. Including the 5 additional non-U.S. days that can be counted as U.S. days, the individual is present in the United States on less than 75% of the days and cannot make the election for this period.

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