When did you become a resident of the US for tax purposes?

Establishing you as a resident or non resident of the US can make a big difference to your US tax liability and the amount of work you and your CPA have to do.

Citizens and residents are taxed on worldwide income and allowed a credit for foreign taxes. Income subject to tax is determined under tax accounting rules, not financial accounting principles, and includes almost all income from whatever source

The US is one of only two countries in the world tax that tax non-resident citizens on their worldwide income.

Let’s deal with the simple issues first

If you are citizen or green card holder of the US, you are subject to US tax on worldwide income and it doesn’t matter if you ever set foot in the US.

If you are undocumented in the US you are still subject to the tax laws that apply to residents with a requirement to report income from all sources worldwide.

Now it starts getting complicated

Substantive Presence Test

You are also a resident of the US if you meet the “substantive presence test”.  You meet this test if you have been resident in the US for 31 days in the current year AND 183 days in the immediate previous two years.  These 183 days are calculating the actual days in the current year, plus 1/3 of the days in the preceding year and 1/6 of the days in the year before that.

OK so far, now lets deal with some exemptions

There are special rules if you are a resident of Canada or Mexico and compute regularly to the US to work.

You do not count days if you are in the US working as an exempt individual such as an employee of a professional government, teacher or a professional athlete. This also applies to immediate family members of these people.

Closer Connection to a Foreign Country

Even if you meet the substantial presence test, you can be treated as a nonresident alien if you:

• Are present in the United States 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 one foreign country in which you have a tax home than to the United

Tax home.  

Your tax home is the general area of your main place of business or employment, regardless of where you maintain your family home. Your tax home is the place where you permanently or indefinitely work as an employee or a self-employed individual.

If you do not have a regular or main place of business because of the nature of your work, then your tax home is the place where you regularly live. If you do not fit either of these categories, you are considered an itinerant and your tax home is wherever you work.

Establishing a closer connection. 

You will be considered to have a closer connection to a foreign country than the United States if you or the IRS establishes that you have maintained more significant contacts with the foreign country than with the United States.

In determining whether you have maintained more significant contacts with the foreign country than with the United States, the facts and circumstances to be considered include, but are not limited to, the following.

1. The country of residence you designate on forms and documents.
2. The types of official forms and documents you file, such as Form W-9, Form W-8BEN, or Form W-8ECI.
3. The location of:
1. Your permanent home,
2. Your family,
3. Your personal belongings, such as cars, furniture, clothing, and jewelry,
4. Your current social, political, cultural, professional, or religious affiliations,
5. Your business activities (other than those that constitute your tax home),
6. The jurisdiction in which you hold a driver's license,
7. The jurisdiction in which you vote, and
8. Charitable organizations to which you contribute.

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 your home be available at all times, continuously, and not solely for short stays.

When you cannot have a closer connection. 

 You cannot claim you have a closer connection to a foreign country if either of the following applies:

• You personally applied, or took other steps during the year, to change your status to that of a permanent resident, or
• You had an application pending for adjustment of status during the current year.
• 
  

Effects of Tax Teaties

The rules given here to determine if you are a U.S. resident do not override tax treaty definitions of residency. If you are a dual-resident taxpayer, you can still claim the benefits under an income tax treaty. 

A dual-resident taxpayer is one who is a resident of both the United States and another country under each country's tax laws. 

The income tax treaty between the two countries must contain a provision that provides for resolution of conflicting claims of residence (tie-breaker rule). 

If you are treated as a resident of a foreign country under a tax treaty, you are treated as a nonresident alien in figuring your U.S. income tax. 

First Year of Residency

If you are a U.S. resident for the calendar year, but you were not a U.S. resident at any time during the preceding calendar year, you are a U.S. resident only for the part of the calendar year that begins on the residency starting date. You are a nonresident alien for the part of the year before that date.

There are also certain rules that apply to specifying the actual date of residency.

Deciding if you are resident or non-resident of the US can make significant changes to the preparation of your tax return.

Contact us at www.mottramcpas.com for help with resident and non-resident tax services.