Residency: The Tax Complexities of Dual Status Aliens
During your U.S. arrival and departure years, you may be considered both a resident and nonresident for purposes of U.S. taxation – if this is the case, you are what is called a “Dual Status Alien” and you have a special tax status. Note that your residency for tax purposes is a separate issue from your immigration status – it is entirely possible to be considered a nonimmigrant alien for immigration purposes and a resident for U.S. tax purposes. Furthermore, it is important to note that State tax residency issues are a complete and separate analysis.
When tax does residency begin?
You are considered a U.S. resident for tax purposes in a particular year if you pass the substantial presence test or the green card test for that year:
- Substantial Presence Test. You pass the substantial presence test if you are present for 31 days during the current tax year and 183 days during the previous three years, counting all the days of the current year, 1/3 of the days of the last year and 1/6 of the days of the year before. In this case, residency begins on the first day you are present in the U.S. during the year you pass this test.
- Green Card Test. If you do not meet the substantial presence test but are a lawful permanent resident of the U.S. by virtue of having been issued a green card, residency begins on the first day you are lawfully present in the U.S. with your green card.
Exceptions to the Substantial Presence Test
Under IRC §7701(b)(3)(B) and (C) and Treas. Reg. § 301.7701(b)-2, you are not considered a U.S. resident if you meet the requirements of the Closer Connection Exception, meaning:
- you have not been physically present in the U.S. for more than 183 days,
- your “tax home” for the current year (the general locale of your main place of business or employment, regardless of where your family home is located) is in a foreign country, and
- you have a closer connection to that foreign country (e.g., through family connections, personal belongings, business, financial and social activities, etc.) than to the U.S.
Holders of A, F, G, J, M or Q visas, as well as professional athletes temporarily in the U.S. to compete in a charitable sports event, are also exempt from residency status.
When does residency end?
Your U.S. residency for tax purposes generally ends on December 31st of the year you depart the country, which would make you a U.S. resident for the entire calendar year. You can, however, use the last day you were physically present in the U.S. as your residency termination date in certain circumstances.
Why is the determination of residency so important?
For the part of the year that you are a nonresident alien, only your U.S. income is taxable. For the part of the year you that are a resident alien, your U.S. and worldwide income is taxable.
Top quality legal representation for U.S. taxpayers from throughout the globe
The tax law attorneys at Moskowitz, LLP deliver top quality legal representation for all your tax matters. If you have a tax dispute involving your residency status or would like to discuss tax planning involving residency status and tax treaties, contact our office for a consultation. Our San Francisco-based tax law firm represents U.S. taxpayers from California and throughout the globe.
Example of a taxpayer capitalizing on U.S. Tax Residency manipulation:
A taxpayer is a resident alien and will become a nonresident alien, and then again a resident alien. The taxpayer’s unused net operating losses that were generated while he was taxed as a U.S. resident, and that would have been allocated and apportioned to the gross income of the U.S. business had he been taxed on such income as a nonresident alien for such years, may be used to the extent provided in to offset gross income effectively connected with the conduct of the U.S. business while he is a nonresident alien.
A taxpayer may carry over any unused net operating losses from the U.S. business allocated and apportioned to income effectively connected with the conduct of the U.S. business while he is taxed as a nonresident alien, and may apply such losses against gross income from the U.S. business after he reacquires U.S. resident status. A taxpayer may carry over any unused net operating losses from the U.S. business generated while he was taxed as a U.S. resident, if still available, against his gross income after he reacquires U.S. resident status.