any foreign nationals working in the United States may have a problem: They inadvertently could become resident aliens. This change in status can have serious tax ramifications—a resident alien might be taxed on his or her worldwide income and be subject to U.S. estate and gift taxes. In addition, becoming a resident alien for tax purposes may differ from becoming a legal resident alien, and significant reporting requirements may exist for those with interests in certain foreign corporations, partnerships or trusts.
RESIDENT ALIEN STATUS
The Internal Revenue Code treats an individual as a resident alien if he or she meets one of three tests.
Green card test. A resident alien is a person who is a legally permanent resident alien at any time during the calendar year. Such an individual by law can reside permanently in the United States as an immigrant. This residency status continues unless it is rescinded or administratively or judicially ruled abandoned.
Substantial presence test. An individual may establish a substantial presence in the United States for any calendar year if he or she has been present in this country for at least 183 days during a three-calendar-year period and 31 days during the current calendar year. The 183-day period is determined based on the sum of the days the individual is present in the current year, plus one-third of the days present in the first preceding year plus one-sixth of the days present in the second preceding year.
Under this test, an individual is deemed a resident on the first day during the calendar year on which he or she is present in the United States.
Certain individuals are exempt from this test: foreign government-related individuals, teachers and trainees, students, and professional athletes temporarily in the United States to compete in a charitable sports event.
Days regular commuters from Canada or Mexico spend traveling are not days present in this country. Also, a person traveling between two foreign points is not present in the United States if here for less than 24 hours.
First-year election test. An individual may elect to be treated as a resident alien under certain conditions. He or she must not hold a green card for the current, preceding or following year. He or she must be present in the United States for at least 31 days during the election year and for at least 75% of the days in a testing period, which begins on the first day of the 31-day period and ends on the last day of the election year.
INCOME TAX TREATIES
U.S. income tax treaties with other countries may override provisions of the IRC, treating individuals that otherwise would be considered resident aliens as nonresident aliens. Treaties often contain tiebreaker provisions that list the factors designed to settle residency.
The most important factor is the individual’s permanent home. That person is deemed to be a resident of the country in which he or she has a permanent home. If the permanent home is in both countries, he or she is deemed a resident of the country in which his or her personal or economic relations are closer. If this relationship cannot be determined, the country where the individual is present most often (the habitual abode) determines. If he or she has a habitual abode in both countries (or neither), he or she is a resident of the country in which he or she is a national.
For a discussion of issues relating to resident aliens, see “Tax Issues for Recent U.S. Residents,” by Michael Moore, in the October 2001 issue of The Tax Adviser.
—Nicholas Fiore, editor
The Tax Adviser