What is Residency Status?
The first thing you must know in order to file your tax return is whether you are a resident or nonresident for U.S. tax purposes. If you find that you are both a resident and nonresident in the same year, you are a dual status alien for which special rules apply. The designation of resident for tax purposes is completely separate from your immigration status. You might qualify as a resident for tax purposes while remaining a nonimmigrant alien for immigration purposes.
A nonresident files Form 1040NR, pays tax only on U.S. source income, is subject to special rates, and may qualify for treaty exemptions. On the other hand, if you are a resident for U.S. tax purposes, you are generally under the same rules and file the same forms as a U.S. citizen (1040 or 1040A). In this case, you must report your worldwide income, not just U.S. source income.
The Substantial Presence Test and Definition of Exempt Individual
To meet the substantial presence test, you must be physically present in the U.S. during a period you do not hold an A, F, G, J, M or Q visa on at least:
- 31 days during the current year, and
- 183 days during the 3-year period that includes the current year and the previous two years, counting:
- all of the days you were present in the current year
- 1/3 of the days you were present in the first preceding year, and
- 1/6 of the days you were present in the second preceding year
An exempt individual is someone whose days in the United States are not counted toward the substantial presence test, not someone who is exempt from tax. If you are an exempt individual, you are a nonresident alien until you are no longer an exempt individual, or until you receive permanent residency status. You are generally in this category if you are:
- An individual temporarily present in the United States as a foreign government related individual (A or G visa holder).
- A teacher or trainee temporarily present in the United States under a J or Q visa, who substantially complies with the requirements of the visa.
- A student temporarily present in the United States under an F, J, M or Q visa, who substantially complies with the requirements of the visa.
- A professional athlete temporarily in the United States to compete in a charitable sports event.
Teacher or trainee
If you are a teacher or trainee temporarily in the United States on a J or Q visa, and you have been present in the United States during NO more than two calendar years out of the last six calendar years, you are an exempt individual. Any day spent in the U.S. during a calendar year counts as a full calendar year. For example, let’s say you entered the U.S. on December 28, 2009 as a trainee on a J visa, and stayed in the U.S. continuously through 2011. Your days in this country are exempt from the substantial presence test for 2009 and 2010, but they all count in 2011 and later years you are present in the U.S. That means you were a nonresident alien in 2009 and 2010. But if you were in the U.S. for at least 183 days in 2011, you are considered a resident for U.S. tax purposes in 2011. You will remain so until you leave the country.
Exception: If all of your compensation during the six year period is from a foreign employer, the two year exemption period is extended to four years.
If you are a student temporarily in the United States on an F, J, M or Q visa, and you have been present in the United States during no more than five calendar years, you are an exempt individual. For example, let’s say you entered the U. S. on June 4, 2006 as an F-1 student visa holder, and have remained here until 2011. You are a nonresident alien for 2006, 2007, 2008, 2009 and 2010. If you are in the U.S. for at least 183 days in 2011, you will be a resident for tax purposes in 2011.
Members of the family
Publication 519 states that if you are an exempt individual, members of your immediate family who are with you in the United States on visas derived from your visa (J-2, F-2, etc.) are also exempt individuals. If you are employed, make sure your employer withholds taxes from your wages based on your nonresident alien status. That usually means taxes should be withheld allowing for no standard deduction. If the employer does not adequately withhold, you will end up with a tax liability when you file your income tax return.
A dual-status alien is both a nonresident alien and a resident alien in the same year. That gets a bit complex and if you find yourself in this situation, you should get professional help. Here are the most common circumstances of dual status:
- When you enter the U.S. and receive permanent residency status (receive a Green Card) during the year of arrival
- When you enter the U.S. and pass the substantial presence test in the year of arrival
- When you enter the U.S. and do not pass the substantial presence test, but qualify for and make the First Year Choice election (see below)
- When you hold a J, F, M, or Q visa the first part of the year and receive permanent residency status during the year
- When you hold a J, F, M or Q visa during part of the year, but later change to an H visa or other status eligible to use the substantial presence test, and pass the test
- When you leave the United States permanently during a year in which you qualify as a tax resident, but only if certain conditions apply. (See Last Year of Residency on page 8 of Publication 519.)
Year of Departure
You might be a dual-status alien if you permanently left the U.S. during the year. If you left the U.S. to re-establish your residence in your home country after you met the substantial presence test, your residency termination date is generally December 31 of the year you leave. You are therefore considered a U.S. resident for the entire calendar year. However, you can claim to be a dual-status alien for the year you leave if you meet the following conditions:
- You are not a U.S. resident during any part of the following year, and
- You establish that, after you left the U.S., your tax home was a foreign country and you had a closer connection to that country.
If you meet these conditions, you have the option to determine your residency termination date as the last day in the calendar year that you were physically present in the United States, which means that you will be a dual-status alien for that year.
When filing as a dual-status alien, different rules apply for the part of the year you were a tax resident of the United States and the part of the year you were a nonresident. A dual-status taxpayer cannot use the standard deduction and, if married, cannot file a joint return. You must file Form 1040NR or Form 1040NR-EZ and write “Dual-Status Return” across the top. Include Form 1040 with your return to show the income and deductions for the part of the year you were a resident. Write “Dual-Status Statement” across the top. For detailed instructions see Chapter 6 of IRS Publication 519, U.S. Tax Guide for Aliens.
Before leaving the United States, aliens are generally required to obtain a certificate of compliance, also known as a sailing permit or departure permit, by filing Form 1040-C with a local IRS office. Visiting students and teachers are not required to get a sailing permit, however, as long as their employment income is authorized by the Immigration and Naturalization Service (INS).
The First Year Choice
If you arrive in the U.S. too late during the year to pass the substantial presence test, or if you were an exempt individual during the first part of the year, then changed visas later in the year, you are classified as a nonresident alien for the entire calendar year unless you make a special election. This generally means that you cannot claim your spouse or children as exemptions. However, there is a special election [IRC Sec. 7701(b)(4)] to be treated as a resident alien from your date of arrival if you satisfy the following tests:
- You are not otherwise a resident alien for the year,
- You were not a resident alien at any time in the immediately preceding year,
- You are a resident alien under the substantial presence test for the immediately following year,
- You are present in the United States during the election year for a period of 31 consecutive days,
- Your days of U.S. presence are 75% or more of the total days between the beginning of the earliest 31 consecutive day period and December 31.
If you make this election, you will be a dual-status alien and you can claim an exemption for your spouse, which is a deduction of $3,950 in 2014. Furthermore, the regulations include an extremely liberal rule that permits an alien who makes this election to make the election as well on behalf of dependent children who themselves satisfy the test [Reg. Sec. 301.7701(b)-4(c)(3)(v)]. You must, however, have ITINs for your spouse and children to claim them. Also, to make the election you must pass the substantial presence test in the year following the election year, which means you will need to file an automatic extension for your 20xx return so you can file after you pass the test.
Combining the First Year Choice with a Joint Return Election
A further election is available, when combined with the First Year Choice election, to file a joint resident return with your spouse and be treated as a U.S. resident for the entire year. Under this election, you can claim the standard deduction and other tax benefits available to U.S. citizens and residents, but you are subject to tax on your worldwide income for the entire calendar year. In order to eliminate double taxation, the foreign tax credit and possibly the foreign earned income exclusion are available to reduce or eliminate double taxation.
Bill arrived in the U.S. for the first time on September 1, 20xx with his wife and son from his home country, Venezuela. Bill and his family are L visa holders. Bill is a nonresident alien for U.S. tax purposes in 20xx. On a nonresident return, Bill can claim only his personal exemption, and cannot claim exemptions for his wife or daughter. However, Bill and his family can choose to make the First Year Choice election to be treated as residents from the date of arrival. This would make Bill a dual status alien, and Bill could claim a spousal and dependency exemption for his wife and son. Additionally, if Bill and his wife choose to make a joint resident return election under IRC Sec. 6013(h), they could file a joint resident return and claim the standard deduction. However, on either a dual status or resident return, Bill would be required to report worldwide income for his (and his wife’s) period of residency.
Nonresident Spouse Treated as a Resident
If you or your spouse is resident for tax purposes at the end of the year, and the other spouse is a nonresident, you can elect to treat both you and your spouse as residents for the entire year. This rule applies even if the spouse who is a resident at the end of the year is a dual-status alien (a nonresident at the beginning of the year). However, if you and your spouse make this election, you are both required to report your worldwide income for the entire year.