Dual Status Aliens – Part I: Residency

For U.S. taxpayers arriving or departing the country, your tax status can have a significant impact on your year-end tax bill.

The U.S. is notorious for being one of the only countries in the world that taxes its citizens and permanent residents on their worldwide income. If you are a resident of the U.S. for only part of a year (e.g., the year you arrive or the year you leave), you are what is called a “Dual Status Alien” and you have a special tax status.

Why is the determination of residency important?

For the part of the year that you are a nonresident alien, only income effectively connected with a trade or business in the United States is taxable here. For the part of the year that you are a resident alien, your U.S. and worldwide income is taxable.

When does residency begin?

You are considered a U.S. resident for tax purposes if you pass the IRS substantial presence test and/or the green card test for that year:

  • Substantial Presence Test. You are considered a permanent resident for tax purposes under the substantial presence test if you were present in the U.S. for at least 31 consecutive days of the tax year at issue AND for a total of 183 or more days during the previous two years, which must include 1/3rd of the number of days of last year and 1/6th of the number of days of the previous year. Under this test, residency begins the first day you are present in the U.S. See 26 CFR § 301.7701(b)-1(c).
  • 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. See 26 CFR § 301.7701(b)-1(b).

If you meet both the substantial presence test and green card test, your U.S. residency for tax purposes will commence on the first day that you qualify under either of the tests.

Are there any exceptions to the residency tests?

If you meet the conditions of the substantial presence tests, you may still avoid residency status under the “Closer Connection Exception” if you have not been physically present in the U.S. for more than 183 days; your “tax home” for the current year (you 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 and social activities, etc.) than to the U.S.. See IRC §7701(b)(3)(B) and (C) and Treas. Reg. § 301.7701(b)-2.

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.

Note that tax treaties usually have provisions relating to residency for tax purposes, and one might apply to you that differs from the IRS rules noted above.

What if I want to become a U.S. resident alien this year but won’t qualify until next year?

If you will become a resident alien under the substantial presence test next year, you can opt to be treated as a U.S. resident for this year even if you don’t otherwise qualify. To make this dual status “First-Year Choice” you must be present in the U.S. for at least 31 consecutive days AND for a total of 75% days during the current tax year beginning with the first day of that 31-consecutive day period and ending on December 31st. See Publication 519, U.S. Tax Guide for Aliens.

When does residency end?

Your residency for tax purposes generally ends on December 31st of the year you depart the country, making 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 if after you left the U.S., your tax home was in a foreign country and you had a closer connection to that foreign country than to the U.S.:

1. If your residency was initially based on the Substantial Presence Test, your residency ends on the last day of the tax year that you are physically present in the U.S.

2. If your residency was based on the Green Card Test, your residency ends on the date (1) you renounced your green card status, in writing, to the U.S. Citizenship and Immigration Services (USCIS); (2) the USCIS terminated your green card; or (3) a U.S. federal court terminated your immigrant status.

If you initially met both the Substantial Presence Test and the Green Card Test, your residency ends on the later of (1) or (2).

What if my residency status under the tax rules do not coincide with my immigration status?

Note that your residency status 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 tax purposes.

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 collection issue that involves a dispute about your residency status, contact our office for a consultation. Our San Francisco-based tax law firm represents U.S. taxpayers from California and throughout the globe.

To learn more about deductions, exemptions and tax credits available to Dual Status Aliens, see part two.