Nonresident alien or Resident alien for 2019 US income tax purposes (Part 1 of a series)

Nonresident alien or Resident alien for 2019 US income tax purposes (Part 1 of a series)

An intimidating question for those with little or no experience with US tax rules.  Even if they don’t completely understand the rules, they do understand that their resident/nonresident status may have a big impact on them.

Caveat:  There are multiple additional implications beyond US federal income tax (e.g., immigration status, disclosure requirements, state/local taxation, gift/estate taxation, etc.) that are beyond the scope of this writing.  Be sure to check back soon, as I plan to discuss these areas in more detail in the future.

KEY POINTS

• Talk to an experienced tax professional about these and related rules and how best to approach them.  For example, aliens can be both nonresident and resident in their first/last resident year (“dual-status”) so determining residency start/end dates can be very important.
  
• Rules are mostly mechanical, but can be complicated. 
• Only applies to US noncitizens.  US citizens are not “aliens,” so resident/nonresident status is moot.
• Internal Revenue Code section 871 imposes income tax on nonresident alien individuals.
• Treas. Reg. section 1.871-1(a) provides that resident alien individuals are generally taxable the same as US citizens.
• Section 7701(b)(30) provides the definitions of “resident alien” and “nonresident alien.”
• In general
• A resident alien an individual that meets any of the following requirements:
• US lawful permanent resident at any time during such calendar year.  Also known as the “green card” test.
• Meets the “substantial presence test” of section 7701(b)(3).
• Makes specific election to be treated as a resident alien.
• A nonresident alien is an individual that is not a resident alien.

DISCUSSION

Section 871 imposes income tax on nonresident alien individuals.  Income subject to US tax is generally limited to income from US sources (e.g., covered by section 861 – services performed in the US, interest/dividends from US payors, etc.).  Tax rate is generally 30% for income not connected with US business and the regular graduated tax rate for income that is connected with a US business.

Treas. Reg. section 1.871-1(a) provides

• “Resident alien individuals are, in general, taxable the same as citizens of the United States; that is, a resident alien is taxable on income derived from all sources, including sources without the United States.”

Note:  A nonresident alien may also be subject to a 30% tax rate on capital gains if they are (1) not effectively connected with a US business, and (2) the nonresident alien is present in the US for 183 or more days during the tax year.  If the nonresident alien satisfies the 183-day test, all US-source capital gains and losses for the year are considered, even if they occurred while the individual was not present in the US.

Resident Alien status requirement #1 – Lawful Permanent Resident / Green Card

• Section 7701(b)(1) and (2)
• See also IRS Publication 519 (US Tax Guide for Aliens)

This test is straightforward. 

You are a lawful permanent resident of the US at any time if you have been given the privilege, according to the immigration laws, of residing permanently in the US as an immigrant. You generally have this status if the US Citizenship and Immigration Services (“USCIS”) (or its predecessor organization, “INS”) issued you an alien registration card, also known as a “green card.” You continue to have resident status under this test unless the status is taken away from you or is administratively or judicially determined to have been abandoned.

Resident Alien status requirement #2 – Substantial Presence Test

• Section 7701(b)(3)
• See also IRS Publication 519

This test is more detailed, but still mostly mechanical with relatively little left to interpretation.

For purposes of this test:

• “US” generally includes all 50 US states, DC, and a few other geographies, but not US possessions/territories or US airspace.
• When counting days of presence in the US, you are treated as present in the US on any day you are physically present in the country at any time during the day, with certain exceptions. Do not count the following as days of presence in the US for the substantial presence test.
• Days you commute to work in the US from a residence in Canada or Mexico if you regularly commute from Canada or Mexico.
• Days you are in the US for less than 24 hours when you are in transit between two places outside the US.
• Days you are in the US as a foreign vessel’s crewmember, under a NATO visa, or are otherwise exempt as set forth in IRS Publication 519.
• Maintaining a “closer connection” to a foreign country in which you have a tax home may allow you to be an NRA even if you do meet the substantial presence test.

You will be considered a US resident for tax purposes (for 2019) if you meet the substantial presence test for calendar year 2019. To meet this test, you must be physically present in the US on at least:

• 31 days during 2019, and
• 183 days during the 3-year period that includes 2019, 2018, and 2017, counting:
• All the days you were present in 2019, and
• ¹/₃ of the days you were present in 2018, and
• ¹/₆ of the days you were present in 2017.

Closer Connection – Even if you meet the substantial presence test, you can be treated as a nonresident alien if you meet all of the following criteria and file Form 8840 (subject to certain limitations):

• Are present in the US for less than 183 days during the year,
• Maintain a tax home in a foreign country during the year, and
• Have a closer connection during the year to one or more foreign countries in which you have a tax home than to the US.

Resident Alien status requirement #3 – Affirmative Election

• Section 7701(b)(4)

An individual may also make a “first year election” to be treated as a resident alien for the portion of their first year of US presence in the following circumstances.

• Not a US resident under the green card test or the substantial presence test for the election year,
• Wasn't a US resident under either test for the calendar year immediately before the election year,
• Is a US resident under the substantial presence test for the calendar year immediately after the election year,
• Is present in the US for at least 31 consecutive days in the election year (“31-day period”), and
• Is present in the US for at least 75% of the days during the period beginning on the first day of the 31-day period and ending on the last day of the election year.

Key Takeaways

• Determining Nonresident alien vs. Resident alien status is very fact-dependent and can be very complicated.
• Only applies to US noncitizens.  US citizens are taxed on their worldwide income.
• Individuals sometimes can choose their status.
• Mistakes in this area can be very costly, be sure to discuss with an experienced international tax professional.