Tax Residency Issues for Non-Us Persons

Citizens of other countries who travel or visit the United States should be aware that the US tax laws may cause unintended tax effects for them. The manner in which a non-US person is taxed by the US generally will depend upon whether that person is considered a “resident alien” or a “nonresident alien.” Due to the different tax treatment for resident aliens and nonresident aliens, it is important for a non-US person to know the difference.

Resident aliens are generally taxed in the same manner as US citizens, which means that their worldwide income is subject to US taxation and must be reported to the US tax authorities. Nonresident aliens are generally taxed only on their income which has a US source. The tax rate will depend upon whether or not the income is effectively connected with a US trade or business. In general, income which is effectively connected with a US trade or business is taxed at rates which increase as the amount of income increases. Other income is taxed at the rate of 30%, unless there is an applicable tax treaty which provides for a lower tax rate.

Any non-US person who spends a significant amount of time in the US should understand how the US determines whether a person is a resident alien or a nonresident alien. There are two methods for a non-US citizen to become a resident alien for US income tax purposes. The first method is known as the “green card” test.  Essentially, this refers to any person who has been given the privilege, according to US immigration law, to reside permanently in the US. This method does not cause any unintentional problems, since the person will be aware of whether he has a green card.

The other method is known as the “substantial presence” test, and is much more likely to cause problems.  A non-US citizen will be considered a resident alien for US income tax purposes for a particular calendar year if he or she is physically present in the US on at least 31 days during the current year, and for at least 183 days during the three year period that includes the current year and the preceding two years. However, the computation of the 183 days is based upon a formula, which counts all of the days of US presence of the current year, one-third of the days of the first preceding year and one-sixth of the days of the second preceding year. As a general rule, a non-US citizen can avoid being treated as a resident alien under the substantial presence test by not being present in the US for more than 121 days during any year. This general rule is based upon the mathematical effect of the formula, and should be used only as a rough guide. An example of the use of the formula is shown at the end of this article.

Even if a person would otherwise be treated as a resident alien because of the substantial presence test, he or she is not a resident alien if he or she meets what is known as the “closer connection” test. That test is met if  the person (1) is present in the US less than 183 days in the current year, (2) has a tax home in another country, and a closer connection to that other country than to the US and (3) complies with certain reporting requirements. A person’s “tax home” is generally considered to be located at that person’s regular or principal place of business. Whether a person will be able to establish a closer connection to another country will depend upon whether he or she can establish more significant contacts with another country than with the US.  In order to claim the benefit of the closer connection exception, a statement must be filed with the US tax authorities.

There are special rules for determining whether a person is present in the US and for the method of counting the days of presence.  For example, under certain circumstances, a person prevented from leaving the US due to medical problems suffered while in the US will not be treated as present in the US for those days. It is important to retain documents to prove the amount of time spent in the US  While visa and passport documents will provide some information about US entries and exits, they generally are not sufficient to prove the number of days present in the US, since departures are not always stamped in the passport.

The above explanation describes some of the general rules for determining residency in the US. However, bilateral tax treaties, such as the US- Mexico Income Tax Treaty, provide additional, and sometimes conflicting, obligations, since each country applies its own standards with regard to residency and tax jurisdiction. This makes it possible for a person to be treated as a resident of both countries. Fortunately, the bilateral treaties will usually provide rules to choose between the two countries, referred to as “tie-breaker” rules. In most cases, the country of residence will be determined based upon rules similar to those for the closer connection exception described above.

The tax laws of the US are very complicated, and can sometimes cause unintended results.  The purpose of this short article is to simply alert non-US persons to the possibility that they may be inadvertently subjected to US taxation on their worldwide income unless they are aware of the issues discussed in this article.   Although the US has entered into bilateral tax treaties with many countries, the treaties are not all the same.  Anyone who frequently travels to the US, or who spends several months a year in the US, should consult with a US lawyer who is knowledgeable regarding these important and quite complicated tax matters.

Example: If the number of days of presence under the weighted average formula equals 183 days or more, the person will be a resident alien for the computation year, unless an exception applies.  In this example, assume the person is in the US for 120 days in 2005, 90 days in 2004 and 180 days in 2003.  The computation to determine whether the person is a resident alien for 2005 would be as follows:

 

2003

2004

2005

Total

Days in US

180

90

120

 

Portion Counted

1/6

1/3

all

 

Days Counted

30

30

120

180

Since the weighted average number of days is less than 183 days, the person would not be a resident alien for 2005.

 

 

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Who we are
Robert R. HendryRobert R. Hendry received both a Bachelor of Arts degree and a Juris Doctor degree from the University of Florida. Although he began his career in Pensacola, Florida, Mr. Hendry has practiced law in Orlando for more than thirty years.
Richard D. StonerRichard D. Stoner received a Bachelor of Arts degree from New York University and a Juris Doctor degree from Stetson University College of Law. He has practiced law in Orlando, Florida for more than twenty-five years.
G. Steven BrownG. Steven Brown is a 1975 graduate of the University of Central Florida, where he received a Bachelor of Science in Business Administration degree with a major in Accountancy.
Law for FloridaHendry, Stoner & Brown, P.A. traces its roots back to 1970, when Robert Hendry and Richard Stoner were principals together in a predecessor law firm. Our attorneys are committed to giving clients the legal edge they need to succeed and prosper.