Legal Resident vs. Tax Resident

The debate over whether Congress should reform the nation’s immigration policies presents a timely opportunity to discuss the difference between immigration residency and tax residence.  To many Americans, there is likely no delineation between the two, but in reality, it is completely possible to be in the United States illegally, for the purposes of immigration law, yet be a resident for tax purposes, requiring you to file a tax return while you are here.  Although the analysis determining your tax residency status is complex and any potential issues regarding tax liability while in the United States should be directed toward an experienced tax attorney, we have summarized some of the key tests that are used by the IRS.

It is important to understand that there is a very large difference between a legal resident or citizen of the United States for immigration purposes and a resident for tax purposes. There are several avenues for individuals in foreign countries to become either permanent legal residents or temporary legal residents in the U.S. through the issuance of green cards, work and school visas, as well as other types of granted documentation that allows for legal residency. But United States tax law is not particularly concerned with the definition of resident or citizen in the context of immigration, for the U.S. Tax Code and Regulations have their own definition for a resident and it may surprise you.

For purposes of U.S. taxation, there are two primary tests that are used to determine whether an individual is a resident of the United States: the green card test and the substantial presence test.

  • The green card test looks to whether the individual has been granted lawful permanent residence in the United States at any point during the calendar year. As we will discuss below, temporary scholastic and other certain visas are not considered to be a grant of permanent residence. The IRS will take into account actions of both rescission by the government and abandonment by the taxpayer when determining the correct residency status for tax purposes. Under the green card test, the amount of time spent in the U.S. is inconsequential.
  • On the other hand, the substantial presence test is only focused on the amount of time that an individual was physically present in the United States. An individual is a resident for tax purposes if he or she spent at least (1) 31 days of the current year that residency is being tested for, and (2) 183 days over the three year period that includes the current year and the two prior years. For the purposes of determining the amount of days present in the U.S. under the 183-day test, the days are calculated by counting the full amount of the days in the current (tested) year, 1/3 of the days present in the year prior to the current year and 1/6 of the days present during the year that was two years prior to the current year. For the purposes of the substantial presence test, an individual is present in the United States if they were present at any time during a day, even if that time is fleeting.

Although the IRS is relatively strict when determining the amount of days present in the United States, the tax law provides for exceptions for certain presence that would otherwise be counted toward the 183-day residency test. For instance, an individual that spends no more than 24 hours while traveling from two points that are outside of the United States does not have such layover counted toward for purposes of the substantial presence test. Likewise, the number of days that an individual spends commuting from either Canada or Mexico to a workplace in the United States is not counted if a substantial amount (75% or more) of the workdays in the year requires such the commute. Further, when an individual would otherwise not be present in the United States but for an unforeseen medical condition that came about during their stay in the United States that does not allow them to leave due to hospitalization.

Lawmakers have also identified several types of physical presence in the United States that do not warrant having such time counted toward being substantially present in the United States. These exceptions are various but include students or teachers involved in qualifying educational programs or an athlete taking part in a charitable sporting event.

What This Means For a Taxpayer Who Is Substantially Present In the United States

For those people who are not legal residents of the United States but are present on American soil for a substantial amount of time (according to the substantial presence test described above), you will be treated similarly to those who are permanent legal residents of the United States. Tax residents are required to file a tax return and are subject to taxation on not only the income that they have made in the U.S., but they are also taxed on the income earned on a worldwide basis. And although some relief against double taxation may be available (such as the Foreign Tax Credit), there are several complex limitations placed on their use. In the end, being deemed a tax resident of the United States could be extremely detrimental to an individual and their family.

Contact an Experienced Tax Attorney Today

Whether you are a U.S. citizen contemplating a move out of the States or a foreign subject that will be residing domestically, it is in your best interest to consult an experienced tax attorney and allow him to work closely with your immigration attorney. Although attorneys that specialize in acquiring visas and other immigration documentation, they do not specialize in tax and may not understand the intricacies of the above residency analysis or the other complex issues that can arise when an individual immigrates or emigrates. The tax and accounting professionals at the Tax Law Offices of David W. Klasing have extensive experience in representing taxpayers in a plethora of situations including tax planning, audit, investigation, and even full-blown litigation. When you are making an important life decision that has the potential to have a huge impact on your financial future, it is in your best interest to seek the advice of an experienced tax attorney who can help guide you on your path. Contact the Tax Law Offices of David W. Klasing today for a reduced-rate consultation.