Taxation of foreign nationals depends upon if he or she is considered a U.S resident. For an alien to be considered as a U.S resident he or she must meet either the green card test or the substantial presence test.
Green Card Test
An alien is treated as a U.S resident for a calendar year if, at any time during the calendar year, the alien is a lawful permanent resident of the United States.
Green card holders are treated as residents for the tax purposes even if they are not physically present in the United States.
Green card holders who have not moved to the United States are still required to pay U.S taxes on their worldwide income.
Substantial Presence
If an alien does not have a green card but stays in the U.S for 183 days or more is considered a resident for tax purposes.
Commuters from Mexico or Canada, travelers between two foreign points, individuals from medical conditions, and certain exempt individuals like qualifying students, teachers, trainees, and foreign government related individuals are not considered for U.S presence test.
Example:
If a person stayed in the united States for 90 days in year 1, 150 days in year 2 and 120 days in year 3, his residency can be determined by carry over rule as under:
120 days + (1/3 of 150 days) + (1/6 of 90 days) = 185 days
To determine if a taxpayer has a closer connection with a foreign country requires all facts and circumstances such as location of individual’s family, permanent residence, personal belongings, individual’s social, political, cultural and religious relationships.
First Year Residency
The U.S residency start date depends if the alien establishes residency under the green card test or the substantial presence test.
Under the substantial presence test the residency starting date is the first day the alien is physically present in the United States.
Under the green card test the residency start date of an alien is the first day the alien is physically present in the United States with a green card.
Some qualifying aliens can have an election for special first year residency. Under this, the first year in which an alien satisfies either the green card test or the substantial presence test, he or she can be taxed as a U.S resident for a portion of the preceding year, if any, in which he or she was present in the United States. This election allows taxpayer to itemize his or her deductions and claim foreign tax credit.
Last year of residency
Under the physical presence test an alien’s U.S residency termination date is the last day of the year on which he was physically present in the United States.
Under the green card test an alien’s U.S residency terminates on the last day he had the green card.
Taxpayer must establish closer connection to and have a tax home in a foreign country for balance of the year.
Under the exception a taxpayer is taxed as U.S resident from Jan 01 to the residency termination date and as a nonresident for the remainder of the year.
If one or both spouses are a nonresident during a year they cannot file a joint return.
Disclaimer:
This information is for educational purposes only. It does not constitute any legal advice or opinion. Please do not use any of its contents without seeking a professional advice.
References:
US Taxation of International transactions 9th Edition
Robert J. Misey Jr.
Michael S. Schadewald
Publishers: Wolter Kluwer, CCH Incorporated.