U.S. tax law requires all permanent residents green card holders) and those who are on nonimmigrant visas but are present in the U.S. for a certain period of time during the year, to file U.S. tax returns and pay U.S. taxes.
That includes taxes on their worldwide income – citizens and residents are taxed on everything they earn, everywhere. (They can claim a credit against their U.S. taxes for any income which is also being taxed in another country, however.) Those who are nonresidents are taxed only on their U.S.income, not worldwide.
Foreigners present in the U.S. are generally considered nonresidents of the U.S., and rather are considered residents of their home countries. If you are a foreigner (alien), you will be considered a nonresident unless you fulfill one of two tests:
What Is the Substantial Presence Test?
You will be considered a U.S. resident for tax purposes if you have been physically present in the U.S. for a substantial period of time during the calendar year. Calculation of whether you meet this test is a bit complex.
To have a Substantial Presence, you must be 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. To calculate this, add together:
- All the days you were present in the current year, and
- 1/3 of the days you were present in the previous year, and
- 1/6 of the days you were present in the second year before the current year.
Example: You were present in the United States for 60 days in each of the years 2019, 2020, and 2021. You meet the first prong of the test: you were present for more than 31 days during the current year (2021). To determine if you meet the second prong of the test for 2021, count the full 60 days of presence in 2021, 20 days in 2020 (1/3 of 60), and 10 days in 2019 (1/6 of 60). Since the total for the 3-year period is 90 days (less than 183 days), you are not considered a resident under the Substantial Presence Test for 2021.
Even if you meet the substantial presence test, you can still be treated as a nonresident alien if you:
- Were present in the United States less than 183 days during the year, and
- Had a closer connection during the year to one foreign country in which you have a tax home than you were to the United States, and
- Maintained a tax home in that foreign country during the entire year, and
- Have not taken steps toward, and do not have an application pending for, lawful permanent resident status (green card).
Who Is Considered an Exempt Individual?
When counting the number of days of presence in the U.S., exclude days for which you are an “exempt individual”. “Exempt” does not mean that you are exempt from paying U.S. taxes. What “exempt individual” refers to is anyone in the following visa categories.
They do not count their days of presence in the U.S:
- Someone temporarily in the United States as a representative of a foreign government;
- A teacher or trainee temporarily present in the United States under a “J ” or “Q ” visa,
- A student who is temporarily present in the country while holding an “F, ” “J, ” “M, ” or “Q” visa; and
- Special additional categories.
What Is the Green Card Test?
The second test for determining whether you have to pay taxes on your worldwide income is the “Green Card” test. You satisfy the Green Card test if you are a permanent resident of the United States at any time during the calendar year. You generally have this status if the immigration authorities have issued you an alien registration card, also known as a “green card.”
You continue to have U.S. resident status, under this test, unless:
- You voluntarily renounce and abandon your permanent residence in writing to the U.S. immigration authorities, or
- Your immigrant status is administratively terminated by the immigration authorities, or
- Your immigrant status is judicially terminated by a U.S. federal court.
If you meet the green card test at any time during the calendar year, but do not meet the substantial presence test for that year, your residency starting date is the first day on which you are physically present in the United States as a permanent resident.
However, a permanent resident who has been present in the United States at any time during a calendar year may choose to be treated as a resident alien for the entire calendar year.
Can I Choose to Pay Taxes as a Resident?
Aliens can sometimes choose to be treated as U.S. resident aliens. For example, if, at the end of the tax year, you are a resident alien and your spouse is a nonresident, the two of you can choose to treat your spouse as a U.S. resident and file Form 1040 using the filing status married filing jointly.
The reason you would choose to do this is because by filing as “married filing jointly,” you are subject to a better tax rate than you would be if you filed individually. It’s important to run the numbers both ways, as individual filers and as joint filers, to see which option is better for your situation.
Is it Possible to Be Both a Nonresident and a Resident for Tax Purposes?
Yes, it is possible to be taxed as a “dual status” alien if you were a nonresident alien during part of the calendar year and a resident alien during another part of the year.
For the part of the year you are a U.S. resident alien, you are taxed on income from all sources worldwide. For the part of the year you are a nonresident alien, you are taxed on income from U.S. sources only.
The following restrictions apply if you are filing a tax return for a dual-status tax year:
- You cannot use the standard deduction allowed on Form 1040, U.S. Individual Income Tax Return. However, you can itemize certain allowable deductions.
- You cannot claim a personal exemption for yourself, your spouse, or your dependents.
- You cannot use the Head of Household tax table column or the Head of Household tax rate schedule.
- If you are a nonresident alien and married to a U.S. citizen or resident alien for all or part of the tax year, and you do not choose to file jointly with your spouse, you must use the “married filing separately” tax table or the married filing separately tax rate schedule for You cannot use the tax table column or tax rate schedules for married filing jointly or married filing single.
- If you are a nonresident alien and married to a U.S. citizen or resident alien, you may not take the credit for the elderly or disabled, the earned income credit, or an education credit.
Should I Hire a Lawyer?
International tax is a complex and technical area of the law, especially when coupled with immigration issues. A tax attorney can help you understand how tax laws apply to your unique situation.
It is important to get this right the first time. It’s possible to lose your status as a U.S. permanent resident based on how you file (or do not file) taxes. It also affects your ability to become a U.S. citizen.