Resident or Nonresident – this is the question!
Determining your tax residency status is important, as it will determine how much tax you must pay while in the US.
The most common mistake nonresidents make is filing their taxes as a resident. If a nonresident files as a resident they can claim benefits and receive refunds that they’re not entitled to. Incorrect filing breaks the terms and conditions of a nonresident visa, this can lead to fines and penalties and you may also jeopardize your future visa or green card applications.
In this article, we will discuss everything you need to know about your residency and how you can determine your residency status.
What is a residency status for tax purposes?
Essentially, your residency status for tax purposes affects how you will be taxed in the US.
Usually, a resident alien is taxed on their worldwide income, the same as a US citizen. Resident aliens must report all types of income and the amounts earned inside and outside the US.
Nonresident aliens must pay federal tax on income earned in the US and/or income connected with US trade or business.
Nonresident aliens are also legally required to file a nonresident tax return to account for each year they earned income in the US.
Even if you did not earn income during your time in the US as a nonresident, you must still file Form 8843 before the tax deadline.
Types of residency
Resident for tax purposes
To be considered a resident for tax purposes you must meet the Substantial Presence Test or Green Card Test for the calendar year.
Nonresident for tax purposes
You are considered a nonresident for tax purposes if you do not meet the criteria for being considered a resident alien. This means that have not passed the Green Card Test or Substantial Presence Test and are not a US citizen or national.
Resident aliens must file Form 1040 for their federal tax returns, while nonresident aliens file Form 1040-NR.
Dual residency
A dual-status alien is any individual who is treated as a nonresident for part of the year and resident for the remainder of the year. It usually arises in the first or last years of residency.
They are taxed on their worldwide income for the period they are a resident and only on U.S.-sourced income for the period they are a nonresident. They use a special filing procedure when filing their US tax returns.
How is residency determined?
In order to be a resident alien for tax purposes you must either meet the substantial presence test or the green card test for the calendar year.
The Green Card Test
If you have been given the privilege of residing permanently in the US as an immigrant, you will be considered a lawful resident of the US. To get this status, the US Citizenship and Immigration Services issue you an alien registration card, Form I-551, known as the green card.
The Substantial Presence Test
The substantial presence test identifies foreign individuals who spend substantial periods of time in the US as resident aliens.
For this test you have to be physically present in the US on at least:
- 31 days during the current year, and
- 183 days during the 3-year period that includes the current year and the 2 years immediately before that, including:
- 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
You can complete the substantial presence test and determine your tax residency status for free using Sprintax!
Tax exceptions
There are some exceptions to the Green Card Test and Substantial Presence Test.
Closer connection exception to the Substantial Presence Test
You may still be treated as a nonresident even if you have passed the Substantial Presence Test if you:
- Were in the US for less than 183 days in the year, and
- Had a closer connection to one foreign country during the year, where you had a tax home other than the US (unless you had a closer connection to two foreign countries), and
- Maintained a tax home in a foreign country throughout the whole year, and didn’t have an application pending for a green card.
You will have a closer connection to a foreign country if you or the IRS establishes that you maintained more significant contacts with the foreign country than the US.
Nonresident Alien Spouse
If you are married at the end of the year and one spouse is a US citizen or a resident and the other is a nonresident, you can pick if you wanted to treat the nonresident as a resident.
If that spouse decides to become a US resident you have to file a joint income tax return for the first year.
Tax Treaties
There are 65 countries that have income tax treaties with the US. Residents of foreign countries may be eligible to be taxed at a lower rate or exempt from US income tax on certain income they get in the US.
If your country of residence has signed a tax treaty with the US, you may be either partially or completely exempt from tax.
However, you still need to file a tax return in order to comply with IRS. Failure to disclose a treaty position on a tax return might result in a penalty.
If you’re not sure if your country of residence has a tax treaty with the US or not, don’t worry – Sprintax Returns can easily determine if you can claim a tax treaty.
We’ll also check if the state you’re in accepts the Federal Treaty.
Exceptions for students and trainees
The IRS applies the substantial presence test differently to nonresident aliens present in the United States under an “F”, “J”, “M” or “Q” visa.
In the case of a “J” or “Q” visa, it depends on whether the individual is a teacher or trainee, or student.
Are international students residents or nonresidents for tax purposes?
Students on F, J, M, or Q visas are usually classed as nonresident aliens for tax purposes for the first 5 years of their stay in the US.
They must start counting days of presence after the 5th year.
Scholars, interns, trainees, teachers, professors, and researchers on J or Q visas are considered nonresidents for tax purposes for the first 2 years in the US. They must start counting days for the SPT in the 3rd year.
If they pass the test their status will change from nonresident to resident for tax purposes.
Other non-immigrant statuses depend on the Substantial Presence Test.
It is important to note that your federal and state tax residency status may not be the same.
Read also:
- My state residency differs from my federal residency
- Nonresident taxes explained – the ultimate guide
How to determine your tax residency status easily online
Are you still confused about your residency status? Don’t panic!
Sprintax can help you figure out your residency status and can also prepare your tax return. Our software will guide you through the entire process from start to finish.
What’s more, our Live Chat team is online 24/7 to answer your tax questions.
Determine your US tax residency status with Sprintax Returns
