Determining Residency for Income Tax Purposes

Introduction

For the purpose of income taxes, an Alien is anyone who is not a United States citizen. For income tax purposes, an alien is classified as either a resident alien or a non-resident alien. To be considered a resident alien the taxpayer must meet either the Green Card Test or the Substantial Presence Test for the tax year he or she want to file an income tax return.

Green Card Test

The taxpayer is considered a resident alien if he or she was or became a lawful permanent resident of the Unites States at any time during the tax year. The taxpayer is considered a lawful permanent resident if he or she was issued an alien registration card (which is also known as “Green Card”) by the United States Citizenship and Immigration Services (USCIS) or its predecessor the Immigration and Naturalization Service (INS).

The taxpayer will continue to be considered as a resident alien unless his or her resident status was revoked or abandoned.

The resident status is considered revoked if the United States government issued a final order of exclusion or removal (deportation). A final order (administrative or judicial) is an order that can no longer be appealed.

The resident status is considered abandoned if a final judicial or administrative order of abandonment was issued by the USCIS or a United States Consular office, or if the taxpayer submits an application or letter for abandonment to the USCIS or a United States Consular office.

Note: Under the United States immigration law, a taxpayer who is a lawful permanent resident that fails to file a tax return that was required (filing requirements), may be considered as having abandoned status and may lose his or her permanent resident status.

Substantial Presence Test

The taxpayer is also considered a United States resident for tax purposes, if he or she meet the substantial presence test for the tax year. The substantial presence test is based on the number of days the taxpayer was physically present in the United States during the tax year and the 2 preceding tax years.

The taxpayer would be considered a resident if he or she was:

1. Physically present in the United States for at least 31 days during the tax year, and
2. Physically present in the United States for at least 183 days during the tax year and the 2 preceding tax years (3-year period), in accordance with the following criteria for counting the days the taxpayer was physically present in the United States:
   1. Count all the days the taxpayer was physically present during the tax year (1^st year), and
   2. Count one-third (1/3) of the days the taxpayer was physically present during the preceding tax year (2^nd year), and
   3. Count one-sixth (1/6) of the days the taxpayer was physically present during the next preceding year (3^rd year).

For illustration purposes, a taxpayer that was physically present for 90 days during each of the last 3 tax years, is not considered a resident although he was present for a total of 270 days. In order to determine the taxpayer residency using the substantial presence test, we count the 90 days for the first year, 30 days for the second year (1/3 of 90), and 15 days for the third year (1/6 of 90) for a total of 135 days with is less that the 183 days minimum needed.

Present Days

For the substantial presence test, the taxpayer is considered present in the United States on any given day, if he or she was present in the United States at any time during that day, with the following exceptions that do not count towards the substantial presence test:

1. If the taxpayer resides in Canada or Mexico and regularly commutes to work in the United States, the commuting days do not count.
2. If the taxpayer was in the United States for less than 24 hours during transit between places outside of the United States.
3. If the taxpayer was in the United States as a crew member of a foreign vessel (ship, airplane, etc.).
4. If the taxpayer was in the United States and was unable to leave due to a new medical condition.
5. If the taxpayer was considered exempt (was in the United States under certain types of Visas).

Closer Connection to a Foreign Country

The taxpayer can be considered a nonresident alien even if he or she meet the substantial presence test, in the case:

1. The taxpayer is present in the United States for less than 183 days during the tax year, and
2. The taxpayer has a tax home in a foreign country during the tax year, and
3. The taxpayer has a closer connection to that foreign country than that he or she has to the United States during the tax year.

Tax Home

The taxpayer’s tax home is generally defined as the main place of business or employment on non-temporary basis (the place where the taxpayer generates his or her earned income on permanent or indefinite basis). The taxpayer’s tax home would be the place where he or she regularly reside, if the taxpayer does not have a steady or main place of business or employment due of the nature of his or her work. The taxpayer’s tax home is not tied to where his or her family home is.

Establishing a Closer Connection

A closer connection to a foreign country is established if the taxpayer has maintained more significant contacts with the foreign country than those with the United States. To determine whether the taxpayer has maintained more significant contacts with the foreign country than with the United States, the IRS takes into consideration different situations and criteria, some of which are:

1. The taxpayer’s country of residence that he or she indicates on forms and documents.
2. The types of official forms and documents the taxpayer files or reports.
3. The taxpayer’s:
   1. Location of permanent home,
   2. Location of family,
   3. Location of the majority of personal belongings, such as cars, furniture, clothing, and jewelry,
   4. Current social, political, cultural, or religious affiliations,
   5. Place of business activities,
   6. Place in which the taxpayer holds a driver’s license,
   7. Place of voting, and
   8. Charitable Organizations to which he or she contributes to.

Conditions whereby the taxpayer cannot have a Closer Connection to a Foreign Country

The taxpayer does not have a claim for a closer connection to a foreign country if he or she:

1. Have applied, or taken steps, to become or change his or her status to that of a permanent resident during the tax year, or
2. Have a pending application for adjustment of status during the year.

Summary

The residency rules are quite complex, some of which are beyond the scope of this course. More comprehensive information is available within IRS Publication 519.

In general, a non-U.S. citizen taxpayer, is considered a resident alien for tax purposes if he or she is a current permanent resident, has a pending application for, or has applied to become a permanent resident.

Additionally, if the taxpayer is not a U.S. Citizen or a permanent resident, he or she could still be considered a resident alien for tax purposes if the substantial presence test requirements are met. In most cases where the taxpayer was present in the United States for more than half the year (183 days) during the tax year, he or she is considered a resident alien. If the taxpayer was present less than 183 days during the tax year, he or she need to follow the substantial presence test, rules, and exclusions to figure out if he or she meet the requirements for being a resident alien.