There are a number of ways an individual can get caught up in the US tax system. The most obvious of which is that, if you are a resident of the United States, then you will be exposed to US tax.
Did you know that US citizens and Green Card Holder’s are deemed to be residents of the United States for tax purposes even if they are living in a foreign country?
This is true! The Green Card is actually more formally known as a Permanent Resident Card and, as the name implies, the holder will be a resident of the US until this immigration status is “given up” regardless of where they are currently residing. This means that they are required (in most cases) to file a US Federal tax return on an annual basis. If that’s not bad enough, they must report their worldwide income and gains, even if they have no income from any sources within the US.
So, what if you’re not a US citizen or Green Card Holder?
In this case you would refer to the Substantial Presence Test to determine whether you are resident of the US for tax purposes. You will be a US resident under this test if you are physically present in the US for:
- 31 days in the current year (2019); and
- 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:
- All the days present in the US in the current year, and
- One third of the days (present in the US) in the first year before the current year, and
- One sixth of the days (present in the US) in the second year before the current year.
A day of presence in the US is any day where an individual is physically present in the country, at any time during the day. However, do not count days you are an exempt individual as days of presence in the U.S. for the substantial presence test.
This test means that you will need to have significant travel to the US before becoming resident and you wouldn’t meet this just by going on holiday to the US for a few weeks. That is not to say that these holiday days should not be counted when applying the Substantial Presence Test.
Example 1 – Dave is not a US citizen resident or Green Card holder. He was physically present in the US for 36 days in 2016 and 2017. In 2018 he went on an extended trip to the US for 120 days. Dave is not a resident of the US under the substantial presence test for 2018 because he does not reach the total of 183 days required for the second part of the test.
Example 2 – Continuing from the above, if Dave spent 138 days in the US in 2019 he would be a US resident for the 2019 US tax year. This is because he has spent more than 31 days in the US in 2019 and meets the 183 day total for the second part of the test:
All days in 2019 – 138
1/3 of days in 2018 – 40
1/6 of days in 2017 – 6
What happens if you become a US resident?
In most cases you will be deemed to be a resident from the first day you were physically present in the US in the tax year. From this date you will be required to report your worldwide income and gains on a US Federal Tax return.
What if you are also a resident of another country?
It is possible to be a resident of two countries at the same by meeting both of their respective residency tests. If you are not a US citizen or Green Card holder but you meet the substantial presence test, you can still be treated as a non-resident of the US for tax purposes if you meet the following conditions:
- Present in the US for less than 183 days during the year,
- Maintain a tax home in a foreign country during the year, and
- Have a closer connection during the year to the above tax home.
You will be considered to have a closer connection to a foreign country than the US if it can be established that you maintain more significant contacts with the foreign country than with the US. This is all based on facts and circumstances personal to each case, but some deciding factors may include:
- The country of residence designated on forms and documents
location the individuals:
- permanent home,
- personal belongings, such as cars, furniture, clothing, and jewellery,
- current social, political, cultural, or religious affiliations,
- jurisdiction in which they hold a driver’s license,
Note: It does not matter whether your permanent home is a house, an apartment, or a furnished room. It also does not matter whether you rent or own it. It is important, however, that their home be available at all times, continuously, and not solely for short stays.
Example 3 – from the previous examples, if Dave is a resident of the US and the UK, maintains his UK home in 2019 and his wife and kids remain in the UK, then it could be argued that Dave has a closer connection to the UK during his time in the US and may therefore be a non-resident.
As well as the closer connections exception it can also be possible to use the tax treaty (Double Taxation Agreement) between the US and a foreign country to be treated as a non-resident of the US. All tax treaties are different, but most will have a series of clauses that state, if you are resident of more than one country, you will be deemed to be a resident of the country where you have a permanent home. If you have a home in both countries, then you are resident where your personal and economic relations are closer (centre of vital interests). If this is indeterminable then it is where you have a habitual abode. If both, then it will be the country of which you are a national.
If you are a US citizen or Green Card holder and you claim to be a non-resident of the US under a tax treaty, then this will be deemed as an expatriating act. Remember that certain citizens and long-term residents can be subject to an exit tax, so bear this in mind.
If you are still liable to foreign taxes while you are resident in the US, then you will need to use the tax treaty between the US and the foreign country (if they have one) to ensure that your foreign and US sources of income are taxed appropriately. This will certainly be the case for US citizens or Green Card holders who are residing and working in a foreign country. In that situation, their foreign (non-US) employment income will still be reportable on their US return, and they would look to utilise foreign tax credits against their US tax liability.
What if you do not meet the substantial presence test but still receive income from the US?
You will be required to file a non-resident US Federal tax return (1040-NR). Unlike a resident tax return (1040), the IRS will only be interested in certain sources of US income and gains. This is also the case for State taxes. If you have state sourced income (e.g. you work for a significant number of days in a state) but do not meet their residency requirements, then you will be looking to file a non-resident state tax return to report that income only. Other examples include US real estate and US dividends. For example, a rental property in New York would require a US Federal and New York State tax return regardless of whether you live in that state.
This article is only designed to give a general overview of US residency and should not be taken as tax advice. Every individual’s situation is different and some of the points raised above may not be relevant or correct. For more specific advice please contact us directly