2020 Taxpayer Planning: Determining Alien Tax Status
The distinction between a resident alien and a nonresident alien is crucial for your tax liability. Resident aliens are taxed like U.S. citizens, on their worldwide income, while a nonresident alien is generally subject to U.S. taxation only on income that is effectively connected with the conduct of a U.S. trade or business and on specified types of U.S. source income. Your status as a nonresident alien individual affords you many opportunities to take advantage of the U.S. tax laws.
We must verify your status as a nonresident alien as the first step in the tax planning process. This procedure is complicated due to the many compliance issues associated with residency. Sometimes residency is determined under an applicable tax treaty; however, if no treaty exists, you are treated as a resident only if one of the following three conditions is met:
1. You are a “lawful permanent resident” of the U.S. at any time during the calendar year (i.e., you have been issued a “green card”),
2. You meet the “substantial presence test” (i.e., you have been present in the U.S. on at least 183 days during a three-year period that includes the current year), or
3. You elect to be treated as a resident alien.
Lawful permanent residence test. The lawful permanent residence test, often referred to as the “green card test”, is based on an alien's immigration status. If an individual has been granted a green card, he or she is a lawful permanent resident of the United States. As soon as the individual physically enters the United States while holding a green card, he or she is a resident alien.
Substantial presence test. This substantial presence test is based on the number of days the alien is physically present in the United States for at least 183 days during a three-year period. The counted days refers to a yearly sum that is based upon the number of nonexempt days the alien physically spends in the United States during the current tax year and the two preceding tax years.
The presence test is calculated as the days present in the United States totaling:
• the current calendar year (at least 31 days required in the current year), and
• the two preceding years:
o one-third of the number of days of presence in the first preceding year, and
o one-sixth of the number of days in the second preceding year.
If total equals 183 days or more = Resident Alien for Tax Purpose (*note exception below)
If total equals 182 days or less = Nonresident Alien for Tax Purpose
*Exception: An alien individual who meets the “substantial presence test” may still be considered a nonresident alien if a “closer connection” is established with a tax home outside the United States. You may also qualify for dual status residency; if so, your tax year is divided into two separate tax periods. You are then taxed as a resident during one period and as a nonresident during the other.
Exempt days. Exempt days are not counted in the substantial presence test and include the following: • days commuting to work in the United States (if the taxpayer regularly commutes) from Canada or Mexico,
• days in transit in the United States for less than 24 hours,
• days in the United States as a crew member of a foreign vessel,
• days suffering from a medical condition that leaves one unable to travel, and
• days that one is an exempt individual.
Additionally, the IRS has provided individuals and businesses with relief related to travel disruptions arising from the COVID-19 emergency. Under this relief, of U.S. presence that are presumed to arise from travel disruptions caused by the COVID-19 emergency will not be counted for purposes of determining U.S. tax residency and for purposes of determining whether an individual qualifies for tax treaty benefits for income from personal services performed in the United States.
Election to be treated as a resident alien. In general, a joint return cannot be filed if either spouse is a nonresident alien at any time during the tax year. However, if one spouse is a citizen or resident of the United States, both spouses may file an election to treat the nonresident alien spouse as if he or she were a resident of the United States for the entire tax year, thereby permitting them to file a joint return. If you make the election, you and your spouse will be subject to tax on your worldwide income. If you and your spouse decide to make the election, you must attach a statement to your tax return. The election, once made, applies to all subsequent years until terminated by revocation, death, separation or divorce, or termination by the IRS for failure to keep adequate records. Once the election is terminated, it may not be made again by the couple.
There are specific rules for establishing and terminating residency, abandoning residency, and expatriating. In addition, all departing aliens (resident or nonresident) must obtain a certificate from the IRS, known as a sailing or departure permit, stating that they have complied with the U.S. income tax laws.