(25).png)
January 16, 2025
Having residential status is very helpful
in handling year-to-year tax matters and other legal issues while staying in a
particular country. Country requirements vary, and most of the time, such
requirements base their decisions on nationality, possession of a green card,
or number of days spent in that country within a calendar or tax year. A change
in regulations may affect your tax obligations, benefits, or rights as a
resident. For example, the change in residential status may either change your
tax rate or determine your eligibility to public service. Now know all these
provisions so that you will not commit any breaches against the laws of your
locality. Knowingly understanding these residential statuses could finally
enable one to overcome the intricacies in international living with more
confidence and ease.
Am I a non-resident alien or a resident
alien? I am a resident alien, and my spouse is a nonresident alien. Are there
special rules for us? Is all my income subject to U.S. tax? I pay income taxes
to my home country. Can I get credit for these taxes on my U.S. tax return? Can
I be a non-resident alien and a resident alien in the same year?
Resident Alien
All persons born or naturalized in the United States, and subject to its jurisdiction, are citizens of the United States and of the state wherein they reside. However, that is not all. There are instances where a person who is not a U.S. citizen is still treated as a resident. To become a resident of the United States, one must meet either the Green Card test or the Substantial Presence test.
What is the Green Card Test?
You are a lawful permanent resident of the United States if you have been granted the privilege to reside permanently as an immigrant, typically indicated by a Form I-551, or green card issued by USCIS. Otherwise, this status remains in effect unless formally revoked or otherwise declared abandoned. If you are required to file as a resident but you fail to do so, your permanent resident status could be in jeopardy.
What is the Substantial Presence Test?
To meet the Substantial Presence Test for
the calendar year 2024, you must be present in the United States for at least:
(a)
31 days during 2024; and
(b)
183 days during the 3-year
period that includes 2024, 2023, and 2022, based on the following calculation:
All the days you were present in 2024,
i.
One-third of the days you were
present in 2023, and
ii. One-sixth of the days you were present in 2022.
For example, Let’s say John wishes to determine if he is under the Substantial Presence Test for 2024, so he examines the days that he spent within the U.S. during the previous three years. In 2024, John spent 120 days within the U.S., thereby satisfying the first criterion of having been in the country for at least 31 days during that year. Then John computes the total number of days he spent in the United States over those 3 years, namely 2024, 2023, and 2022. In 2023 John was here for 180 days, and in 2022 he was here for 90 days. To fulfil the second condition of 183 days, John will sum up the days as follows: all the 120 days from 2024, one third of the 180 days from 2023, which is 60 days, and one-sixth of the 90 days from 2022, which totals 15 days. Thus, John has 195 days in total: 120 + 60 + 15. For 195 days exceeds the 183-day requirement, John passes the Substantial Presence Test and will be treated as a resident of the United States for tax purposes in 2024.
What falls in the definition of the term
United States?
All 50 states and the District of Columbia,
U.S. territorial waters, the seabed and subsoil of submarine areas adjacent to
U.S. territorial waters, where the U.S. has exclusive rights under
international law to explore and exploit natural resources.
Note: The term does not include U.S. territories or U.S. airspace.
How are Resident aliens taxed in the US?
The earnings of a resident alien are taxed almost the same way as that of a citizen residing in the United States. Any kind of income earned by you will be taxed, including interest, dividends, wages, rental income, royalties, and all other gains made by you. You will be required to report this income whether its source is domestic or foreign as it will enable the IRS to understand your overall situation. At tax time, you will use the equivalent of Form 1040, just like an American citizen would. You use this to declare your income and take advantage of all the deductions and credits you may be due, so you fulfill the requirements to be taxed appropriately.
Non-Resident Alien
You are viewed as a non-resident alien because you are an alien and not a U.S. citizen; unless, that is, you pass one or both of two key tests. If, like many aliens, you don't make it under the Green Card test or the Substantial Presence Test, you're a non-resident alien. And how this status shapes your tax obligation and ineligibility for various benefits in the United States has made life so much more complicated.
How will Non-resident aliens be taxed in
US?
Generally, you are subject to tax on U.S. income only. Most of your income will be categorized as FDAP (Fixed, determinable, annual, or periodical) income. There are, however, certain categories of FDAP income that may be effectively connected with a U.S. trade or business, and these are taxed differently. Some foreign source income may also be subject to U.S. tax under certain circumstances. Knowing these differences makes your awareness of the U.S. tax implications of how your income is taxed much more valuable. Nonresident aliens file Form 1040-NR.
Did you know that in the same tax year
you can hold both resident and non-resident alien status?
You are a dual-status individual when you
have been both a U.S. resident and a nonresident in the
same tax year. Suppose, if you weren't a green card test or a substantial presence
test, for the year 2023 and for the prior years (2022), nor did you elect to be
treated as a U.S. resident for part of 2022, but you meet with substantial presence
test in 2024, then you can elect to be treated as a U.S. resident for part of
the year 2023. In this situation, you'd be a dual-status individual for the
year 2023.
Dual-status Taxability
It is taxable if you have money from U.S.
sources, whether you are a non-resident or a resident, except if you come under
one of several exemptions in the Internal Revenue Code or a tax treaty. As a
resident, you are taxed on your worldwide income. As a non-resident, you will
only be taxed upon income, which is connected, in fact, with any trade or
business in the U.S. during that period. A dual-status taxpayer file for a
joint income tax return with your spouse. For the period you were a U.S.
resident, all income, including foreign, is taxed. For the period that you were
a nonresident, only the income from the United States is taxed.
Residential Status of Corporations
A domestic corporation is one formed under
the laws of the United States, whether federal or state. Such a corporation
continues to be treated as a resident even though it may not carry on business
or own any property in the United States. PE typically means a fixed place of
business which can give rise to tax exposure.
A non-resident company, on the other hand, is one that has its place of
incorporation in one jurisdiction but operation primary in another. These
companies are supposed to comply with the tax policies of the country where
they are incorporated and the country where they incur most of their
operations. A foreign company is one that is registered outside the country
where it operates. While it is obligated to conform to the tax rules of the
operating country, it does not conform to the country of incorporation tax laws
generally.
A resident company, while following the tax laws of the country in which it was
incorporated, will face the laws of the countries in which its activities are
being conducted by non-resident or foreign companies.
A new bill introduced to Congress has made waves: a proposed major shift for American expats living abroad. This new legislation proposes moving the United States from the current citizen-based taxation system (CBT) to a resident-based taxation model (RBT). In effect, U.S. citizens overseas would pay taxes only on their income generated in the United States and not on worldwide income. This will indeed lighten the double tax burden on expats and make their compliance easy too. There are a couple of conditions: You must stick with the RBT system for four years minimum; high net-worth individuals face departure tax, while green card holders do not qualify. Is this finally a relief for the ex-patriate? Well, let's peek!
Determining residential status can
sometimes be straightforward, although it typically encompasses many
complexities. Questions like how to ascertain the presence of details regarding
the job, or special case exemption make it tricky. For individual clarification
on conditions that you should not miss, consult our professionals at Water &
Shark.
