Defining Residency for Tax vs. Immigration Purposes
By Nancy Faussett, CPA
Publication date: 10/27/2008
When you are determining a person's residency status, the standards differ for federal income tax purposes versus for citizenship and immigration purposes. It is necessary to determine an individual's status so as to know how the income tax rules should be applied and which form, if any, needs to be filed. Resident aliens are not taxed the same as nonresident aliens. While the IRS does tax qualifying individuals as residents, it sometimes treats aliens who are in the U.S. illegally as resident aliens for federal income tax purposes.
Resident versus Nonresident Aliens
The following definitions are clearly important:
- Alien: Anyone who is not a U.S. citizen
- Resident alien: An alien who meets one of two tax law residency tests
- Nonresident alien: An alien who does not meet a tax law residency test
Before aliens can apply for U.S. citizenship, they must first become legal permanent residents with a green card. For immigration purposes, anyone without a green card is always deemed a nonresident. However, possessing a green card is not necessary to be considered a resident for federal income tax purposes.
One's residency status determines which U.S. tax return has to be filed. The IRS taxes U.S. citizens and residents on their worldwide income. Furthermore, U.S. citizens and resident aliens are generally taxed in the same manner although there are a few exceptions.1 However, nonresidents are taxed only on U.S.-source income and are allowed only limited deductions and credits. A nonresident alien is generally taxed at a flat 30% rate on U.S.-source investment income (although there are certain exceptions), whereas income that is effectively connected to a U.S. trade or business is taxable at graduated rates.
Tax Law Residency Tests
To be considered a resident for federal income tax purposes, an individual must meet either of two tests:
- Green card test (i.e., be a permanent lawful resident of the U.S. at any time during the year), or
- Substantial presence test.
The substantial presence test is applied to individuals who either do not have a visa or have a nonimmigrant visa. It consists of a mathematical calculation, based on the number of days the individual is in the U.S. during a three-year period. The individual must be in the U.S. for a minimum of 31 days in the current tax year and at least 183 days in the three-year period. The calculation is complicated by the fact that only 1/3 of the days in the first prior year are counted and only 1/6 of the days in the second prior year are counted.
When determining the number of days in the U.S. for the substantial presence test, certain days are not included even if the individual is in the U.S.:
- Partial days
- Days spent commuting between either Canada or Mexico
- Partial days spent in transit between two places outside of the U.S.
- Days you are in the U.S as a crew member of a foreign vessel
- Days during which the individual cannot leave the U.S. due to a medical condition that arose after being in the U.S., and the intent of the individual was to leave the U.S.
- Days that the individual is in the U.S. on an exempt visa
It is also necessary to define what is meant by the "United States" when calculating the substantial presence test. A definition is provided in IRS Notice 2005-14. For this purpose, the United States includes all 50 states, the District of Columbia, and the territorial waters of the United States. It excludes the possessions and territories of the United States, and the air space over the United States.
Foreign-Born Spouse
A foreign-born spouse must meet one of the same residency tests (see above) as any other alien in the U.S. If the spouse qualifies under either of the residency tests, the couple is treated the same as any other couple. They can either file separately or as married filing jointly. All worldwide income must be reported on their tax return.
However, even if a spouse is a nonresident alien, the married couple may elect to file a joint income tax return. When this is done, both spouses are treated as U.S. residents for income tax purposes and are taxed on their worldwide income. While a joint return must be filed for the year in which the election is made, in subsequent years, the couple can choose to file either joint or separate U.S resident returns.
The election to file the first joint tax return is made by attaching a statement to the return. The statement should include the name, address, and identification number of each spouse and it needs to be signed by both spouses. The election can be made on an amended return if the tax year is still open. Either spouse can revoke the election if done by the due date of the tax return.
When filing the joint return, the nonresident spouse must have either a social security number or an Individual Taxpayer Identification Number (see below for a discussion of the latter).
If the election to treat a nonresident alien spouse as a resident alien is not made, the U.S. citizen (or resident alien) is treated as unmarried for the head of household status. However, all of the head-of-household tests must be met (and the nonresident spouse is not a qualifying person). When the tests are not met, the U.S. citizen (or resident alien) must then file as married filing separately.
Dual-Status Taxpayers
Unless an individual elected to be treated as a resident alien (see the preceding discussion), an individual may hold a dual status for a year. Generally, this occurs when an individual either arrives or departs the U.S. and changes one's status between nonresident and resident alien.
If an individual becomes a U.S. resident, the individual's status stays fixed until they leave the United States. Depending on the circumstances, individuals may become nonresident aliens when they leave the U.S.
Depending on an individual's status as of the last day of the year, file either the Form 1040 or 1040NR as appropriate. Enter "Dual-Status Return" across the top of the return and calculate the individual's income separately as a resident and as a nonresident.
Dual-status taxpayers cannot claim the standard deduction nor can they use the Head of Household Tax table column. If you did not elect to be taxed as a resident alien, you cannot file a joint return. Also, you cannot claim the earned income credit, the credit for the elderly or disabled, or the education credit.
See the instructions with the IRS Form 1040NR for a complete explanation of how to calculate your tax liability.
Individual Taxpayer Identification Number (ITIN)
You cannot obtain a social security number unless you have a green card. Therefore, if you are filing a U.S. income tax return you may need to obtain an Individual Taxpayer Identification Number (ITIN). The Treasury Department started issuing ITINs in 1996 to provide a unique identifier on tax returns. The ITIN is only issued for income tax reporting purposes. Think of it as a tax processing number. It does not entitle the person to be employed in the United States nor does it provide eligibility for Social Security benefits. Both resident and nonresident aliens may apply for an ITIN.
If an individual is eligible to have a Social Security Number, then that is what must be applied for, not an ITIN. Furthermore, one can only apply for an ITIN if there is a legitimate tax purpose.
An ITIN is applied for by using Form W-7. Both proof of identity and foreign status are required. The W-7 application should be attached to the front of the completed tax return. The ITIN will always begin with the number nine and it consists of nine digits.
To learn more about obtaining an ITIN, see the IRS publication 1915. It is published in both an English and Spanish version.
Form 1040NR
An IRS Form 1040NR is the U.S. Nonresident Alien Income Tax Return. You must file a Form 1040NR in the following four scenarios:
- You are engaged in a trade or business (or are an employee) in the U.S., even if there is no U.S. income,
- You have U.S.-source interest, dividends, rental income, pension income, or social security benefits and not enough tax was withheld,
- Your represent a decedent who would have had to file a 1040NR, or
- You represent an estate or trust that must file a 1040NR.
If the following exceptions apply, however, you do not have to file a Form 1040NR:
- Your only trade or business in the U.S. involved the performance of personal services, and
- Your wages were less than the personal exemption amount ($3,500 in 2008).
There are three categories of U.S.-source income for a nonresident alien:
1. Income connected to a U.S. trade or business (taxed at a graduated rate),
2. Income not connected to a U.S. trade or business (generally taxed at a 30% rate), and
3. Income exempt from U.S. tax (either according the IRS Code or a tax treaty).
Conclusion
Clearly the rules determining whether an individual is a U.S. resident are different for income tax reporting than for immigration or citizenship purposes.
There are two tax law residency tests: the green card test and the substantial presence test.
A foreign-born spouse (who is a nonresident alien) of either a U.S. citizen or resident alien holds no special status except for being able to elect to be treated on the tax return as a resident alien. This enables the couple to file a joint tax return.
It is important to point out that an illegal alien is subject to the same income tax rules as a legal alien. The substantial presence test must be applied to determine whether the individual should be taxed as a resident or nonresident alien.
1 For example, a U.S. citizen, but not a resident alien, does not include in income compensation earned as an employee of a foreign government or international organization and that is received for official services rendered.
Defining Residency for Tax vs. Immigration Purposes
By Nancy Faussett, CPA
Publication date: 10/27/2008
When you are determining a person's residency status, the standards differ for federal income tax purposes versus for citizenship and immigration purposes. It is necessary to determine an individual's status so as to know how the income tax rules should be applied and which form, if any, needs to be filed. Resident aliens are not taxed the same as nonresident aliens. While the IRS does tax qualifying individuals as residents, it sometimes treats aliens who are in the U.S. illegally as resident aliens for federal income tax purposes.
Resident versus Nonresident Aliens
The following definitions are clearly important:
- Alien: Anyone who is not a U.S. citizen
- Resident alien: An alien who meets one of two tax law residency tests
- Nonresident alien: An alien who does not meet a tax law residency test
Before aliens can apply for U.S. citizenship, they must first become legal permanent residents with a green card. For immigration purposes, anyone without a green card is always deemed a nonresident. However, possessing a green card is not necessary to be considered a resident for federal income tax purposes.
One's residency status determines which U.S. tax return has to be filed. The IRS taxes U.S. citizens and residents on their worldwide income. Furthermore, U.S. citizens and resident aliens are generally taxed in the same manner although there are a few exceptions.1 However, nonresidents are taxed only on U.S.-source income and are allowed only limited deductions and credits. A nonresident alien is generally taxed at a flat 30% rate on U.S.-source investment income (although there are certain exceptions), whereas income that is effectively connected to a U.S. trade or business is taxable at graduated rates.
Tax Law Residency Tests
To be considered a resident for federal income tax purposes, an individual must meet either of two tests:
- Green card test (i.e., be a permanent lawful resident of the U.S. at any time during the year), or
- Substantial presence test.
The substantial presence test is applied to individuals who either do not have a visa or have a nonimmigrant visa. It consists of a mathematical calculation, based on the number of days the individual is in the U.S. during a three-year period. The individual must be in the U.S. for a minimum of 31 days in the current tax year and at least 183 days in the three-year period. The calculation is complicated by the fact that only 1/3 of the days in the first prior year are counted and only 1/6 of the days in the second prior year are counted.
When determining the number of days in the U.S. for the substantial presence test, certain days are not included even if the individual is in the U.S.:
- Partial days
- Days spent commuting between either Canada or Mexico
- Partial days spent in transit between two places outside of the U.S.
- Days you are in the U.S as a crew member of a foreign vessel
- Days during which the individual cannot leave the U.S. due to a medical condition that arose after being in the U.S., and the intent of the individual was to leave the U.S.
- Days that the individual is in the U.S. on an exempt visa
It is also necessary to define what is meant by the "United States" when calculating the substantial presence test. A definition is provided in IRS Notice 2005-14. For this purpose, the United States includes all 50 states, the District of Columbia, and the territorial waters of the United States. It excludes the possessions and territories of the United States, and the air space over the United States.
Foreign-Born Spouse
A foreign-born spouse must meet one of the same residency tests (see above) as any other alien in the U.S. If the spouse qualifies under either of the residency tests, the couple is treated the same as any other couple. They can either file separately or as married filing jointly. All worldwide income must be reported on their tax return.
However, even if a spouse is a nonresident alien, the married couple may elect to file a joint income tax return. When this is done, both spouses are treated as U.S. residents for income tax purposes and are taxed on their worldwide income. While a joint return must be filed for the year in which the election is made, in subsequent years, the couple can choose to file either joint or separate U.S resident returns.
The election to file the first joint tax return is made by attaching a statement to the return. The statement should include the name, address, and identification number of each spouse and it needs to be signed by both spouses. The election can be made on an amended return if the tax year is still open. Either spouse can revoke the election if done by the due date of the tax return.
When filing the joint return, the nonresident spouse must have either a social security number or an Individual Taxpayer Identification Number (see below for a discussion of the latter).
If the election to treat a nonresident alien spouse as a resident alien is not made, the U.S. citizen (or resident alien) is treated as unmarried for the head of household status. However, all of the head-of-household tests must be met (and the nonresident spouse is not a qualifying person). When the tests are not met, the U.S. citizen (or resident alien) must then file as married filing separately.
Dual-Status Taxpayers
Unless an individual elected to be treated as a resident alien (see the preceding discussion), an individual may hold a dual status for a year. Generally, this occurs when an individual either arrives or departs the U.S. and changes one's status between nonresident and resident alien.
If an individual becomes a U.S. resident, the individual's status stays fixed until they leave the United States. Depending on the circumstances, individuals may become nonresident aliens when they leave the U.S.
Depending on an individual's status as of the last day of the year, file either the Form 1040 or 1040NR as appropriate. Enter "Dual-Status Return" across the top of the return and calculate the individual's income separately as a resident and as a nonresident.
Dual-status taxpayers cannot claim the standard deduction nor can they use the Head of Household Tax table column. If you did not elect to be taxed as a resident alien, you cannot file a joint return. Also, you cannot claim the earned income credit, the credit for the elderly or disabled, or the education credit.
See the instructions with the IRS Form 1040NR for a complete explanation of how to calculate your tax liability.
Individual Taxpayer Identification Number (ITIN)
You cannot obtain a social security number unless you have a green card. Therefore, if you are filing a U.S. income tax return you may need to obtain an Individual Taxpayer Identification Number (ITIN). The Treasury Department started issuing ITINs in 1996 to provide a unique identifier on tax returns. The ITIN is only issued for income tax reporting purposes. Think of it as a tax processing number. It does not entitle the person to be employed in the United States nor does it provide eligibility for Social Security benefits. Both resident and nonresident aliens may apply for an ITIN.
If an individual is eligible to have a Social Security Number, then that is what must be applied for, not an ITIN. Furthermore, one can only apply for an ITIN if there is a legitimate tax purpose.
An ITIN is applied for by using Form W-7. Both proof of identity and foreign status are required. The W-7 application should be attached to the front of the completed tax return. The ITIN will always begin with the number nine and it consists of nine digits.
To learn more about obtaining an ITIN, see the IRS publication 1915. It is published in both an English and Spanish version.
Form 1040NR
An IRS Form 1040NR is the U.S. Nonresident Alien Income Tax Return. You must file a Form 1040NR in the following four scenarios:
- You are engaged in a trade or business (or are an employee) in the U.S., even if there is no U.S. income,
- You have U.S.-source interest, dividends, rental income, pension income, or social security benefits and not enough tax was withheld,
- Your represent a decedent who would have had to file a 1040NR, or
- You represent an estate or trust that must file a 1040NR.
If the following exceptions apply, however, you do not have to file a Form 1040NR:
- Your only trade or business in the U.S. involved the performance of personal services, and
- Your wages were less than the personal exemption amount ($3,500 in 2008).
There are three categories of U.S.-source income for a nonresident alien:
1. Income connected to a U.S. trade or business (taxed at a graduated rate),
2. Income not connected to a U.S. trade or business (generally taxed at a 30% rate), and
3. Income exempt from U.S. tax (either according the IRS Code or a tax treaty).
Conclusion
Clearly the rules determining whether an individual is a U.S. resident are different for income tax reporting than for immigration or citizenship purposes.
There are two tax law residency tests: the green card test and the substantial presence test.
A foreign-born spouse (who is a nonresident alien) of either a U.S. citizen or resident alien holds no special status except for being able to elect to be treated on the tax return as a resident alien. This enables the couple to file a joint tax return.
It is important to point out that an illegal alien is subject to the same income tax rules as a legal alien. The substantial presence test must be applied to determine whether the individual should be taxed as a resident or nonresident alien.
1 For example, a U.S. citizen, but not a resident alien, does not include in income compensation earned as an employee of a foreign government or international organization and that is received for official services rendered.
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