How to Know if You Are Tax Resident under US Tax Laws ?

Whether a  person is tax resident of United States of America is the first thing one will have to to find out in order to understand the implication of  various tax provisions on him and whether a particular receipt can be assessed under Code 26 or Internal Revenue Code. As far as foreign citizen is concerned, they are referred as Alien in the US tax laws. The US Code 26 under Chapter 12 defines the term alien to mean “any person not a citizen or national of the United States.”  

So, if you are not a citizen of USA , you can be resident or non-resident in USA . If as a foreigner ,you are resident as per US Tax Code ( Code 26) in USA  , you will be termed as Resident Alien for tax purpose.

Similarly, if you are foreigner and does not satisfy the conditions of a residency as stated in Code 26 , you will be taken Non-Resident Alien.

Who are resident as per tax law in US?

I.R.C. § 7701(b) provides the rule for determining the residency of a tax payer. A foreign citizen or non-US national will be having  RESIDENT status under IRC , and therefore, then regarded as Resident Alien in one of three ways:

  1. If you are admitted as a Lawful Permanent Resident under the immigration laws (the Green Card Test).
  2. By passing the Substantial Presence Test i.e if you were physically present in USA for a fixed number of days or
  3. By making what is called the “First-Year Choice” (a numerical formula under which you as a foreign citizen may pass the Substantial Presence Test one year earlier than under the normal rules).

(i) What is Green Card Test ?

You are a Lawful Permanent Resident of the United States if the U.S. Citizenship and Immigration Services (USCIS) issued you an alien registration card, Form I-551, also known as a “Green Card.” which grants you the status of a U.S. resident  unless:

  • You voluntarily renounce and abandon this status in writing to the USCIS,
  • Your immigrant status is administratively terminated by the USCIS, or
  • Your immigrant status is judicially terminated by a U.S. federal court.

In simple term, if you are a green card holder , you are tax resident of USA whether or not you are in USA.

(ii) What is Substantial Presence Test ?

You will be considered a U.S. resident for tax purposes if you are  physically present in the United States on at least:

  1. 31 days during the current year, and
  2. 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:
    • All the days you were present in the current year, and
    • 1/3 of the days you were present in the first year before the current year, and
    • 1/6 of the days you were present in the second year before the current year.
[infobox style=”alert-success”] Example :

Say , in 2014 , you desire to determine residency by Substantial Presence Test . Say in calendar year of 2014, 2013.2012 you are in USA for 135 ,45,and 25 days respectively . As per the rule of test ,

  • you need to be in USA for minimum 31 days in 2014 ( which you are !) and 183 days in aggregate in 3 years including the year 2014.
  • So , for 2013 , he should be present for minimum 1/3 x 135 = 45 days  
  • Form 2012 ,he  should be 1/6 x 135 days = 22.5 days……..

If we tally with actual , we find that in total days

he was present in USA for 2014,2013,2012 was 205 days ( 135+45+25)., and year wise  .

  • He stayed in year 2014 135 days  whereas minimum was required 31 days – test passed.
  • He stayed in 2013 , 45 days whereas minimum was required 45 days – test passed
  • He stayed in 2012 , 25 days, where as required was 22.5 days , test passed

So , the foreign tax payer will be regarded as Resident by passing the test Substantial Presence Test .[/infobox]

Certain days of presence in USA not counted !

You must take into account that under the US tax code, there are certain circumstances under which the physical presence in USA is disregarded as far as the determination of tax residency is conconcrened. This has been explained in  a separate article Days Not Counted for Determining Tax Residency Under Internal Revenue Code ?

Exception to Passing  Substantial Presence Test

It is not that if you pass the Substantial Presence Test (SPT) , you will be tax residents in all cases. There is rule of closer connection of tax home under which  if you satisfy certain conditions , you may not be regarded as Tax Resident even after passing the SPT. These conditions are

  • You are present in the United States for less than 183 days during the year,
  • You maintain a tax home in a foreign country during the year, and
  • You have a closer connection during the year to one foreign country in which you have a tax home than to the United States (unless you have a closer connection to two foreign countries, discussed next)

A tax home means the place where you permanently or indefinitely work as an employee or a self-employed individual. If you do not have a regular or main place of business because of the nature of your work, then your tax home is the place where you regularly live. you do not fit either of these categories, you are considered an itinerant and your tax home is wherever you work. Read Closer Connection Rule  in detail.

What is Closer connection ?

The term closer connection means that the person was more closure to a foreign country during the year his status of residency is in question. Now you can claim that you are closer to another country , but the final decision rests with the Indian Revenue Service who will allow or disallow your claim of closer connection based on a number of parameters . If your claim is allowed , you can enjoy the non-resident status provided you fulfill other conditions mentioned above. A detailed article on closer connection is provided separately Closer Connection Rule of Tax Residency .

(iii) What is First Choice Year ?

If you are not a Green Card holder or do not pass Substantial Presence Test, you can still be Resident if you chose to opt for First Year Choice . Let me Start with an example , only that can make this concept clear .


What is the starting Date of Tax Residency

If you meet the green card test at anytime 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 present in the United States as a Lawful Permanent Resident.

However, a foreign citizen who has been present in the United States at any time during a calendar year as a Lawful Permanent Resident may choose to be treated as a resident alien for the entire calendar year.

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