Foreign nationals who are applying for a visa to visit, work in, or live in the United States should have at least a basic understanding of U.S. tax law. Their decisions regarding both their activities inside the U.S. and how much time they spend inside the U.S. can have a significant impact on their tax bill.
The Internal Revenue Service (IRS) is the U.S. government agency that is responsible for collecting taxes and administering tax laws in the United States. The IRS characterizes those inside the United States who are not U.S. citizens as either “nonresident aliens” or “resident aliens.” Remember that the IRS uses these as tax terms, and not as immigration terms. In other words, a person the IRS has characterized as a “resident alien” has nothing to do with whether that person has a green card or is a permanent resident of the United States.
The tax consequences of being characterized as a resident alien instead of as a nonresident alien can be significant. In summary, the IRS usually taxes nonresident aliens only on income they receive from sources within the United States or from trade or business conducted in the United States. Resident aliens, in contrast, are usually taxed the same way that U.S. citizens are taxed – on their worldwide income. This includes, among other things, any wages, compensation, interest, dividends, or rental income they receive anywhere in the world. Resident aliens are also subject to the graduated tax rates that apply to U.S. citizens.
In a separate post, we will take a closer look at how resident and nonresident aliens are taxed in the U.S., including what counts as U.S. source income. In this post, we will focus on the two tests that the IRS uses to determine whether a foreign national is a resident or nonresident alien for U.S. tax purposes: the green card test and the substantial presence test.
The IRS’s two tests for distinguishing between resident and nonresident aliens: the Green Card Test and the Substantial Presence Test
There are two tests that the IRS will usually apply when determining whether a foreign national is a nonresident alien or resident alien: 1) the green card test and 2) the substantial presence test. The green card test focuses on whether the foreign national is a lawful permanent resident of the United States. The substantial presence test focuses on how much time the foreign national is physically present in the United States within a three-year period that includes the present tax year.
Importantly, you are a resident alien for tax purposes if you meet either the green card or the substantial presence test. This means that those visiting the United States do not need a green card in order to be taxed on their worldwide income as a “resident alien.”
Let’s take a look at each test, starting with the green card test.
Test 1: The Green Card Test
The green card test is fairly straightforward: a foreign national is considered to be a resident alien for tax purposes if they are a lawful permanent resident of the United States at any point during the tax year.
If you have been issued a green card, you are a likely a resident alien for purposes of U.S. tax law. You continue to be a permanent resident until the status is either taken away from you or deemed to be abandoned – a final administrative or judicial determination or order signifies that permanent resident status has been taken away or abandoned. For more information on abandoning permanent resident status, see our earlier post here.
Even if you are not a permanent resident, you may still be characterized as a resident alien for tax purposes if you meet the second test: the substantial presence test.
Test 2: The Substantial Presence Test
The IRS considers a foreign national to be a “resident alien” for tax purposes if they meet the “substantial presence test” for the tax year. This test simply looks at the number of days that the foreign national was physically present in the United States – it does not matter whether the foreign national has a green card or not.
A foreign national meets the substantial presence test if they were physically present in the U.S. on at least:
- 31 days during the tax year, and
- 183 days during the three-year period in which the tax year is the most recent year. The IRS counts days toward this 183-day limit as follows:
- All of the days that the foreign national was physically present in the tax year are counted in full.
- One-third of the days that the foreign national was physically present in the year preceding the tax year are counted.
- One-sixth of the days that the foreign national was physically present in the year two years prior to the tax year are counted.
It is helpful to apply this formula to an example. George, who is not a U.S. citizen or a permanent resident, was physically present in the United States 120 days in 2021, 120 days in 2020, and 120 days in 2019. To determine whether George meets the substantial presence test, he would add all of the days he is present in 2021 (120 days), one-third of the days he was present in 2020 (40 days), and one-sixth of the days he was present in 2019 (20 days). The sum of 120 + 40 + 20 is 180 days. Since 180 days is less than the 183-day limit, George would not be considered to be a resident alien under the substantial presence test.
As you can see from the above example, a foreign national who is physically present in the U.S. for 120 days each year would not meet the substantial presence test. For this reason, it can be helpful for foreign nationals to keep the 120-day limit in mind – by limiting their physical presence in the U.S. each year to 120 days, they would avoid characterization as a resident alien under the substantial presence test.
What counts as a “day of physical presence in the United States” under the substantial presence test?
For purposes of the substantial presence test, a “day of physical presence in the United States” includes any day in which the foreign national was physically present in the U.S. at any time during that day.
However, there are a few exceptions. We will discuss several of the most common exceptions below.
The exception regarding days in transit
One notable exception is that days a foreign national is in the U.S. for less than 24 hours when they are transiting between two places outside the U.S. would not count toward the 183-day limit. For example, if you are flying from Colombia to London and change planes in New York City, you would not count the period that you are in the U.S. to change planes (as long as it is less than 24 hours). If you left the airport and attended a business meeting while in New York City, you would be required to count that day toward the 183-day limit since you are not “in transit” while attending the business meeting.
The exception for regular commuters from Canada or Mexico
Also, those who live in Mexico or Canada and regularly commute to work in the U.S. would not count days that they commute to work in the U.S. from their residence in Mexico or Canada. The IRS considers someone to “commute regularly” when they commute to work in the U.S. on more than 75% of workdays during the working period. A “commute” is defined by the IRS as traveling to work and back to the residence within a 24-hour period.
For example, Margaret is a national of Canada who lives in Canada and works for a consulting firm in Canada. Her firm is hired to advise a company located in the United States, and Margaret is assigned to consult for the U.S. company from February 1 to June 1. For the 69 workdays between February 1 and June 1, Margaret drives from her home in Canada to the client in the U.S., then returns home each evening. She would not count days she commuted to work in the U.S. since those days were more than 75% of the workdays during the working period (February 1 to June 1).
This is a good place to raise an important point: many Canadians confuse the 183-day substantial presence test and the 180-day validity of stay that is typically granted to Canadians. These are two different tests that apply to Canadians, and each test serves a unique purpose: the 183-day substantial presence test determines whether a Canadian is considered a resident alien for tax purposes. The 180-day rule is an immigration rule that requires that noncontrolled Canadians (Canadian nationals who enter the U.S. as visa-exempt visitors) not remain in the U.S. for more than 180 days without departing – should they remain more than 180 days, they would begin to accrue unlawful presence in the United States. We have more information on the 180-day immigration rule that applies to noncontrolled Canadians here.
The exception for exempt individuals
Finally, a foreign national would not count toward the substantial presence test’s 183-day limit those days during which the foreign national was in the U.S. as an “exempt individual.” Certain categories of foreign nationals are considered exempt for purposes of counting days toward the substantial presence test. These include those who are present in the U.S. on behalf of a foreign government, teachers or trainees in the U.S. on a J or Q visa, professional athletes temporarily in the U.S. to compete in a charitable sports event, and students who are in the U.S. on an F, J, M, or Q visa. Those who are visiting the U.S. in one of these categories would not count toward the substantial presence test days in which they are in the United States in one of these categories.
I meet the substantial presence test. Is there any way I can avoid being characterized as a resident alien?
The general recommendation is to limit one’s presence in the U.S. to 120 days or less each year in order to avoid meeting the substantial presence test. However, even those foreign nationals that meet the substantial presence test might not be characterized as resident aliens if they can demonstrate to the IRS that they have a “closer connection” during the year to another foreign country in which they have a tax home. This is called the “closer connection” rule. Importantly, the closer connection rule is only available to those who are physically present in the U.S. for less than 183 days during the tax year – as soon as their physical presence in the U.S. exceeds 183 days, they would not be able to take advantage of the closer connection rule.
Finally, foreign nationals will want to consult any tax treaty that the United States has with their home country. Tax treaties are treaties that the United States has entered into with a foreign country that offers tax benefits to nationals of that foreign country who are present in the United States as either resident or nonresident aliens. The terms of each treaty are unique, so it is important to familiarize yourself with the tax treaty that exists between the United States and your home country. A list of tax treaties can be found here, and the text of most tax treaties can be found here. Resident aliens generally do not benefit from tax treaties since the U.S. is allowed to treat them as if the treaty had never come into effect through something called the “saving clause.” However, there are sometimes exceptions to this clause that would allow the resident alien to receive certain tax benefits. For this reason, both resident and nonresident aliens should check any tax treaty that exists between the United States and their home country.
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