As an immigrant living or planning to spend time in the United States, whether for personal or business purposes, income tax liability is a very real concern. If the Internal Revenue Service (IRS) deems you a “tax resident” of the United States, you must report all of your worldwide income to the IRS. This does not necessarily mean that you will have to pay US tax on all of your worldwide income, but the reporting requirement alone is enough for many people to proactively take steps to avoid “tax resident” status.
The first step in avoiding US tax resident status is to understand the factors that the IRS considers when deciding to apply this label to foreign nationals. Once you know if you are at risk, then you can execute a plan to avoid US income reporting requirements and potential US income tax liability.
Understanding Your Current US “Tax Resident” Status If You…
1. Have a Green Card
If you have a green card (are a lawful permanent resident of the United States), you are automatically deemed a tax resident of the US. In fact, your status as a tax resident dates back to the year in which you became a lawful permanent resident. This means that if you have not filed a tax return previously, unless you are eligible for an exception, you may be behind on your US income tax reporting obligations.
2. Surrendered Your Green Card
If you surrendered your green card, you could still quality as a tax resident of the US. The IRS generally continues to classify green card holders as tax residents unless and until they notify the Department of Homeland Security (DHS) and provide the other necessary documentation.
3. Are in the US on a Nonimmigrant Visa
If you are in the United States on a nonimmigrant visa, then your tax resident status is determined based upon whether you have established a “substantial presence” in the US. Under the current IRS rules, you will be deemed to have established a “substantial presence” if:
- You were (or will be) in the United States for at least 31 days during the current year; and,
- You will end up spending at least 183 days in the United States over the most-recent three-year period.
Note, however, that this 183-day limit does not actually count all of the dates that you were in the US. It only counts one-third of the days you were present in the first year before the current year, and one-sixth of the days you were present in the second year before the current year. It also excludes:
- Days you commute to work in the US from Canada or Mexico (if you regularly commute across the border)
- Days you stop in the US while traveling between two other countries
- Days you are unable to leave due to a medical condition developed while in the United States
Ways to Avoid Becoming a Tax Resident of the United States
Now that you know whether you are at risk for being classified as a tax resident of the United States, you can decide whether you should take steps to avoid tax resident classification. If so, the following are the four primary methods that are available:
1. Use a Tax Treaty to Establish Residence in a Foreign Country
The first way to avoid being labeled as a US tax resident is to establish residence in your country of origin under a tax treaty. The United States has tax treaties with more than 60 countries around the world, and depending on the country where you are a citizen, you may be able to take steps to avoid being classified as a tax resident in the US.
2. Limit Your Time in the US (if You Have a Nonimmigrant Visa)
If you have a nonimmigrant visa, your next option is to limit the time you spend in the United States. If you plan your time in the US so as to avoid establishing a “substantial presence,” then you can avoid being classified as a US tax resident.
3. Maintain Your Foreign Connections and Property (if You Have a Nonimmigrant Visa)
If you have a visa and cannot avoid establishing a “substantial presence” based upon the amount of time you spend in the United States, you can still prevent yourself from being labeled as a US tax resident by qualifying for what is known as the Closer Connection Exemption.
In order to qualify for the Closer Connection Exemption, you must:
- Spend no more than 182 days in the United States during the year;
- Maintain a “tax home” in a foreign country throughout the year; and,
- Maintain a “closer connection” during the year to the foreign country where you established your “tax home” than you maintain to the United States.
What constitutes a “closer connection”? Unfortunately, there is no easy answer. However, the IRS has stated that it will generally consider the following types of factors:
- Which country you designate as your “country of residence” on official forms and documents
- The types of official forms you file (whether you file as a US resident or a foreign resident)
- Your social, political, cultural, and religious affiliations
- Where you maintain your driver’s license
- Where you vote
- Where your family lives
- Where you maintain your permanent home and personal belongings
- Where you conduct business activities
Importantly, once you apply for a green card or adjustment of status (or take steps toward applying), you will not be eligible to claim the Closer Connection Exemption unless and until your application is withdrawn or denied.
4. Qualify as an “Exempt Individual”
Finally, you can also avoid tax resident status if you qualify as an “exempt individual.” Exempt individuals include:
- Anyone present in the United States as a foreign government-related individual under an A visa or G visa (excluding A-3 and G-5 visas)
- Teachers and trainees present in the United States under a J or Q visa
- Students present in the United States under an F, J, M, or Q visa
- Professional athletes present in the United States for competition in a charitable sports event
What Happens if I Fail to Report Income as a US “Tax Resident”?
So, what happens if you improperly misclassify yourself as a non-US tax resident? If the IRS determines that you were intentionally trying to hide foreign income, you could face criminal charges. This, of course, is in addition to facing liability for any back taxes, penalties, and interest you owe as a result of failing to report your worldwide income to the IRS. If you are found guilty of tax evasion, you could lose your immigration status and even face removal (deportation) from the US.
Get Help Understanding Your US Tax Resident Status – Contact Jiah Kim & Associates Today
At Jiah Kim & Associates, we represent foreign nationals in all matters relating to visiting and doing business in the United States. If you have questions about your current US tax resident status or would like help avoiding classification as a US tax resident (including filing the Form 8840 Closer Connection Exemption Statement for Aliens), we encourage you to get in touch. To speak with an attorney about your situation, call us at (646) 389-5065 or contact us online today.
This blog post is written for educational and general information purposes only, and does not constitute specific legal advice. You understand that there is no attorney-client relationship between you and the blog publisher. This blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.