It’s crucial to figure out your tax residency status because it determines how much tax you’ll have to pay while in the United States.
The most common blunder made by nonresidents is filing their taxes as if they were a resident. If a nonresident files as a resident, they may be able to receive benefits and refunds that they are not entitled to. Incorrect filing violates a nonresident visa’s terms and conditions, which can result in fines and penalties as well as jeopardize future visa or green card applications.
In this article, we’ll go over everything you need to know about residency and how to check your residency status.
What is residency for tax purposes?
Residency status how it will have adverse affects on tax in US.
A resident alien is typically taxed on their worldwide income in the same way that a US citizen is. Resident aliens must report all types of income and the amounts earned inside and outside the US.
Nonresident aliens are required to pay federal tax on income earned in the United States and/or income related to US trade or business.
Nonresident aliens are also required by law to file a tax return for each year they earned income in the United States.
Even if you did not earn any income while in the United States as a nonresident, you must still file Form 8843 by the tax deadline.
Types of residency
Resident for tax purposes-
To be considered a resident for tax purposes you must be a US citizen or national or you have to meet the substantial presence test or green card test for the calendar year.
Nonresident for tax purposes-
You are considered a nonresident for tax purposes if you have not passed the green card or substantial test and are not a US citizen or national.
A dual status alien is any individual who is treated as nonresident for part of the year and resident for the remainder of the year. It usually arises in the first or last years of residency.
How to determine the residential status?
To be a resident alien for tax purposes you must either meet the substantial presence test or the green card test for the calendar year.
The Green Card Test –
You will be regarded a lawful resident of the United States if you have been granted the permission of residing permanently in the United States as an immigrant. The US Citizenship and Immigration Services (USCIS) will issue you an alien registration card, sometimes known as a green card, in order to get this status.
The Substantial Presence Test-
An alien individual will meet the substantial presence test if the individual is physically present in the United States for at least:
⦁ 31 days during the current year, and
⦁ 183 days during the 3 year period that includes the current year and the 2 years immediately before that, including:
⦁ All the days you were present in the current year, and
⦁ 1/3 of the days you were present in the first year before the current year, and
⦁ 1/6 of the days you were present in the second year before the current year
An individual is generally treated as physically present in the United States on any day that he or she is physically present in the country at any moment throughout the day. There are several exceptions, such as when specific days of physical presence do not count toward the test. To learn more about the specific exceptions, go here.
First Year Choice Election-
Under the substantial presence test, an alien who is classified as a nonresident of the United States for the entire calendar year immediately preceding his or her first calendar year as a U.S. resident may elect to be treated as a U.S. resident for a portion of that calendar year by making a special election. For more details on the First-Year Choice election’s precise qualifications, ref IRS Publication 519.
Some green card holders and other resident aliens may also be citizens of a country with which the US has an income tax treaty. If such “dual residents” would be residents of the other nation under the treaty’s tie-breaker criterion, they may calculate their US tax liability for all or part of a tax year as if they were nonresident aliens as long as they notify the US tax authority. If they fail to notify the US tax office, they will be classified as US residents for the purposes of calculating their tax liability in the US.
Under a number of US tax treaties, citizens are not automatically treated as treaty residents. The treaties impose additional criteria on anyone who wish to claim benefits as citizens of the United States from another country. U.S. citizens and other U.S. resident aliens can apply for a letter from the Internal Revenue Service (IRS) certifying that they are a U.S. resident by filling out IRS Form 8802, Application for United States Residency Certification. The certification of residency is almost solely utilized by U.S. taxpayers to show that they are entitled for tax treaty benefits in another jurisdiction, and thus takes into consideration specific treaty provisions that may affect whether a person is a resident of the United States for those purposes.