You will be considered a U.S. resident for tax purposes if you meet the substantial presence test for the calendar year. To meet this test, you must be physically present in the United States on at least:
- 31 days during the current year, and
- 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:
- All the days you were present in the current year, and
- 1/3 of the days you were present in the first year before the current year, and
- 1/6 of the days you were present in the second year before the current year.
Example:
You were physically present in the United States on 120 days in each of the years 2007, 2008, and 2009. To determine if you meet the substantial presence test for 2009, count the full 120 days of presence in 2009, 40 days in 2008 (1/3 of 120), and 20 days in 2007 (1/6 of 120). Since the total for the 3-year period is 180 days, you are not considered a resident under the substantial presence test for 2009.
Days of Presence in the United States
You are treated as present in the United States on any day you are physically present in the country, at any time during the day. However, there are exceptions to this rule. Do not count the following as days of presence in the United States for the substantial presence test.
- Days you commute to work in the United States from a residence in Canada or Mexico, if you regularly commute from Canada or Mexico.
- Days you are in the United States for less than 24 hours, when you are in transit between two places outside the United States.
- Days you are in the United States as a crew member of a foreign vessel.
- Days you are unable to leave the United States because of a medical condition that develops while you are in the United States.
- Days you are an exempt individual.
For details on days excluded from the substantial presence test for other than exempt individuals, refer to Publication 519, U.S. Tax Guide for Aliens,.
Exempt Individual
Do not count days for which you are an exempt individual. The term “exempt individual ” does not refer to someone exempt from U.S. tax, but to anyone in the following categories who is exempt from counting days of presence in the U.S.:
- An individual temporarily present in the United States as a foreign government-related individual
- A teacher or trainee temporarily present in the United States under a “J ” or “Q ” visa, who substantially complies with the requirements of the visa
- A student temporarily present in the United States under an “F, ” “J, ” “M, ” or “Q ” visa, who substantially complies with the requirements of the visa
- A professional athlete temporarily in the United States to compete in a charitable sports event
If you exclude days of presence in the United States because you fall into a special category, you must file a fully-completed Form 8843, Statement for Exempt Individuals and Individuals with a Medical Condition (PDF).
Closer Connection Exception to the Substantial Presence Test
Even if you passed the substantial presence test you can still be treated as a nonresident alien if you qualify for one of the following exceptions;
- The closer connection exception available to all aliens. Please refer to Conditions for a Closer Connection to a Foreign Country.
- The closer connection exception available only to students. Please refer to The Closer Connection Exception to the Substantial Presence Test for Foreign Students and Sample Letter.
Taxation of Dual-Status Aliens
You are a dual status alien when you have been both a resident alien and a nonresident alien in the same tax year. Dual status does not refer to your citizenship, only to your resident status for tax purposes in the United States. In determining your U.S. income tax liability for a dual-status tax year, different rules apply for the part of the year you are a resident of the United States and the part of the year you are a nonresident. The most common dual-status tax years are the years of arrival and departure.
For The Part of the Year You are a Resident Alien
For the part of the year you are a resident alien, you are taxed on income from all sources. Income from sources outside the United States is taxable if you receive it while you are a resident alien. The income is taxable even if you earned it while you were a nonresident alien or if you became a nonresident alien after receiving it and before the end of the year.
For The Part of The Year You are a Nonresident Alien
For the part of the year you are a nonresident alien, you are taxed on income from U.S. sources only.
Not Effectively Connected Income
Income from sources outside the United States that is not effectively connected with a trade or business in the United States is not taxable if you receive it while you are a nonresident alien. The income is not taxable even if you earned it while you were a resident alien or if you became a resident alien or a U.S. citizen after receiving it and before the end of the year.
Income From U.S. Sources
Income from U.S. sources is taxable whether you receive it while a nonresident alien or a resident alien unless specifically exempt under the Internal Revenue Code or a tax treaty provision. Generally, tax treaty provisions apply only to the part of the year you were a nonresident. However, an exception to this rule exists. Refer to “Students, Apprentices, Trainees, Teachers, Professors, and Researchers Who Became Resident Aliens” found in Chapter 9 of Publication 519.
When determining what income is taxed in the United States, you must consider exemptions under U.S. tax law as well as the reduced tax rates and exemptions provided by tax treaties between the United States and certain foreign countries.
Restrictions for Filing Dual-Status Tax Returns
The following restrictions apply if you are filing a tax return for a dual-status tax year:
- You cannot use the standard deduction allowed on Form 1040 (PDF). However, you can itemize certain allowable deductions.
- Special rules apply for exemptions for the part of the tax year a dual status taxpayer is a nonresident alien if the taxpayer is a resident of Canada, Mexico, The Republic of Korea (South Korea), a U.S. national, or a student or business apprentice from India. Refer to Aliens – How Many Exemptions Can Be Claimed.
- Subject to the general rules for qualification, you are allowed exemptions for your spouse and dependents in figuring taxable income for the part of the year you were a resident alien. The amount you can claim for these exemptions is limited to your taxable income (determined without regard to exemptions) for the part of the year you were a resident alien.
- Your total deduction for the exemptions for your spouse and allowable dependents cannot be more than your taxable income (figured without deducting personal exemptions) for the period you are a resident alien.
- You cannot use the head of household Tax Table column or Tax Rate Schedule.
- You cannot file a joint return (However, a dual status alien who is married to a U.S. citizen or a resident alien may elect to file a joint return with his or her spouse. Refer to Nonresident Spouse Treated as a Resident for more information).
- If you are married and a nonresident of the United States for all or part of the tax year and you do not choose to file jointly with your U.S. citizen or resident alien spouse, you must use the Tax Table column, or Tax Rate Schedule for married filing separately to figure your tax on income effectively connected with a U.S. trade or business. You cannot use the Tax Table column or Tax Rate Schedules for married filing jointly or single.
- You may not take the earned income credit, the credit for the elderly or disabled, or an education credit unless you elect to be taxed as a resident alien as the spouse of a U.S. citizen or resident alien in lieu of these dual-status taxpayer rules.
Different Rules
When you figure your U.S. tax for a dual-status year, you are subject to different rules for the part of the year you are a resident and the part of the year you are a nonresident.
Effectively and Not Effectively Connected Income
All income for your period of residence and all income that is effectively connected with a trade or business in the United States for your period of nonresidence, after allowable deductions, is combined and taxed at the rates that apply to U.S. citizens and residents. Income that is not connected with a trade or business in the United States for your period of nonresidence is subject to the flat 30% rate or lower treaty rate. You cannot take any deductions against this not effectively connected income. Refer to Taxation of Nonresident Aliens for more information.
Resident Alien vs. Nonresident Alien
The U.S. income tax return you must file as a dual-status alien depends on whether you are a resident alien or a nonresident alien at the end of the tax year.
Resident Alien at End of Year
You must file Form 1040, U.S. Individual Income Tax Return if you are a dual-status taxpayer who becomes a resident during the year and who is a U.S. resident on the last day of the tax year. Write “Dual-Status Return” across the top of the return. Attach a statement to your return to show the income for the part of the year you are a nonresident. You can use Form 1040NR, U.S. Nonresident Alien Income Tax Return (PDF) or Form 1040NR-EZ, U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents (PDF) as the statement, but be sure to mark “Dual-Status Statement” across the top.
Nonresident at End of Year
You must file Form 1040NR, U.S. Nonresident Alien Income Tax Return or Form 1040NR-EZ, U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents if you are a dual-status taxpayer who gives up residence in the United States during the year and who is not a U.S. resident on the last day of the tax year. Write “Dual-Status Return” across the top of the return. Attach a statement to your return to show the income for the part of the year you are a resident. You can use Form 1040, U.S. Individual Income Tax Return as the statement, but be sure to mark “Dual-Status Statement” across the top.
Statement
Any statement must have your name, address, and taxpayer identification number on it. You do not need to sign a separate statement or schedule accompanying your return, since your signature on the return also applies to the supporting statements and schedules.
When and Where To File
If you are a resident alien on the last day of your tax year and report your income on a calendar year basis, you must file no later than April 15 of the year following the close of your tax year. If you report your income on other than a calendar year basis, file your return no later than the 15th day of the 4th month following the close of your tax year. In either case, file your return with the Internal Revenue Service indicated in the Form 1040 Instructions.
If you are a nonresident alien on the last day of your tax year and you report your income on a calendar year basis, you must file no later than April 15 of the year following the close of your tax year if you receive wages subject to withholding. If you report your income on other than a calendar year basis, file your return no later than the 15th day of the 4th month following the close of your tax year. If you did not receive wages subject to withholding and you report your income on a calendar year basis, you must file no later than June 15 of the year following the close of your tax year. If you report your income on other than a calendar year basis, file your return no later than the 15th day of the 6th month following the close of your tax year. In any case, file your return with the Internal Revenue Service indicated in the Form 1040NR Instructions.
Comparison of Form 8938 and FBAR Requirements
The new Form 8938 filing requirement does not replace or otherwise affect a taxpayer’s obligation to file FinCEN Form 114 (Report of Foreign Bank and Financial Accounts). Individuals must file each form for which they meet the relevant reporting threshold.
| Form 8938, Statement of Specified Foreign Financial Assets | FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR) |
|
| Who Must File? | Specified individuals, which include U.S citizens, resident aliens, and certain non-resident aliens that have an interest in specified foreign financial assets and meet the reporting threshold |
U.S. persons, which include U.S. citizens, resident aliens, trusts, estates, and domestic entities that have an interest in foreign financial accounts and meet the reporting threshold |
| Does the United States include U.S. territories? | No | Yes, resident aliens of U.S territories and U.S. territory entities are subject to FBAR reporting |
| Reporting Threshold (Total Value of Assets) | $50,000 on the last day of the tax year or $75,000 at any time during the tax year (higher threshold amounts apply to married individuals filing jointly and individuals living abroad) |
$10,000 at any time during the calendar year |
| When do you have an interest in an account or asset? | If any income, gains, losses, deductions, credits, gross proceeds, or distributions from holding or disposing of the account or asset are or would be required to be reported, included, or otherwise reflected on your income tax return |
Financial interest: you are the owner of record or holder of legal title; the owner of record or holder of legal title is your agent or representative; you have a sufficient interest in the entity that is the owner of record or holder of legal title.Signature authority: you have authority to control the disposition of the assets in the account by direct communication with the financial institution maintaining the account.See instructions for further details. |
| What is Reported? | Maximum value of specified foreign financial assets, which include financial accounts with foreign financial institutions and certain other foreign non-account investment assets |
Maximum value of financial accounts maintained by a financial institution physically located in a foreign country |
| How are maximum account or asset values determined and reported? |
Fair market value in U.S. dollars in accord with the Form 8938 instructions for each account and asset reportedConvert to U.S. dollars using the end of the taxable year exchange rate and report in U.S. dollars. |
Use periodic account statements to determine the maximum value in the currency of the account.Convert to U.S. dollars using the end of the calendar year exchange rate and report in U.S. dollars. |
| When Due? | By due date, including extension, if any, for income tax return | Received by June 30 (no extensions of time granted) |
| Where to File? | File with income tax return pursuant to instructions for filing the return |
File electronically through FinCENs BSA E-Filing System. The FBAR is not filed with a federal tax return. |
| Penalties | Up to $10,000 for failure to disclose and an additional $10,000 for each 30 days of non-filing after IRS notice of a failure to disclose, for a potential maximum penalty of $60,000; criminal penalties may also apply |
If non-willful, up to $10,000; if willful, up to the greater of $100,000 or 50 percent of account balances; criminal penalties may also apply |
| Types of Foreign Assets and Whether They are Reportable |
||
| Financial (deposit and custodial) accounts held at foreign financial institutions |
Yes | Yes |
| Financial account held at a foreign branch of a U.S. financial institution |
No | Yes |
| Financial account held at a U.S. branch of a foreign financial institution |
No | No |
| Foreign financial account for which you have signature authority |
No, unless you otherwise have an interest in the account as described above |
Yes, subject to exceptions |
| Foreign stock or securities held in a financial account at a foreign financial institution |
The account itself is subject to reporting, but the contents of the account do not have to be separately reported |
The account itself is subject to reporting, but the contents of the account do not have to be separately reported |
| Foreign stock or securities not held in a financial account | Yes | No |
| Foreign partnership interests | Yes | No |
| Indirect interests in foreign financial assets through an entity |
No | Yes, if sufficient ownership or beneficial interest (i.e., a greater than 50 percent interest) in the entity. See instructions for further detail. |
| Foreign mutual funds | Yes | Yes |
| Domestic mutual fund investing in foreign stocks and securities |
No | No |
| Foreign accounts and foreign non-account investment assets held by foreign or domestic grantor trust for which you are the grantor |
Yes, as to both foreign accounts and foreign non-account investment assets |
Yes, as to foreign accounts |
| Foreign-issued life insurance or annuity contract with a cash-value |
Yes | Yes |
| Foreign hedge funds and foreign private equity funds | Yes | No |
| Foreign real estate held directly | No | No |
| Foreign real estate held through a foreign entity | No, but the foreign entity itself is a specified foreign financial asset and its maximum value includes the value of the real estate |
No |
| Foreign currency held directly | No | No |
| Precious Metals held directly | No | No |
| Personal property, held directly, such as art, antiques, jewelry, cars and other collectibles |
No | No |
| ‘Social Security’- type program benefits provided by a foreign government |
No | No |
Taxation of Nonresident Aliens
An alien is any individual who is not a U.S. citizen or U.S. national. A nonresident alien is an alien who has not passed the green card test or the substantial presence test.
Who Must File
If you are any of the following, you must file a return:
- A nonresident alien individual engaged or considered to be engaged in a trade or business in the United States during the year. You must file even if:
- Your income did not come from a trade or business conducted in the United States,
- You have no income from U.S. sources, or
- Your income is exempt from income tax.
- However, if your only U.S. source income is wages in an amount less than the personal exemption amount (see Publication 501), you are not required to file.
- A nonresident alien individual not engaged in a trade or business in the United States with U.S. income on which the tax liability was not satisfied by the withholding of tax at the source.
- A representative or agent responsible for filing the return of an individual described in (1) or (2),
- A fiduciary for a nonresident alien estate or trust, or
- A resident or domestic fiduciary, or other person, charged with the care of the person or property of a nonresident individual may be required to file an income tax return for that individual and pay the tax (Refer to Treas. Reg. 1.6012-3(b)).
NOTE: If you were a nonresident alien student, teacher, or trainee who was temporarily present in the United States on an “F,””J,””M,” or “Q” visa, you are considered engaged in a trade or business in the United States. You must file Form 1040NR (or Form 1040NR-EZ) only if you have income that is subject to tax, such as wages, tips, scholarship and fellowship grants, dividends, etc. Refer to Foreign Students and Scholars for more information.
Claiming a Refund or Benefit
You must also file an income tax return if you want to:
- Claim a refund of overwithheld or overpaid tax, or
- Claim the benefit of any deductions or credits. For example, if you have no U.S. business activities but have income from real property that you choose to treat as effectively connected income, you must timely file a true and accurate return to take any allowable deductions against that income.
Which Income to Report
A nonresident alien’s income that is subject to U.S. income tax must generally be divided into two categories:
- Income that is Effectively Connected with a trade or business in the United States
- S. source income that is Fixed, Determinable, Annual, or Periodical (FDAP)
Effectively Connected Income, after allowable deductions, is taxed at graduated rates. These are the same rates that apply to U.S. citizens and residents. FDAP income generally consists of passive investment income; however, in theory, it could consist of almost any sort of income. FDAP income is taxed at a flat 30 percent (or lower treaty rate) and no deductions are allowed against such income. Effectively Connected Income should be reported on page one of Form 1040NR. FDAP income should be reported on page four of Form 1040NR.
Which Form to File
Nonresident aliens who are required to file an income tax return must use:
- Form 1040NR (PDF) or,
- Form 1040NR-EZ (PDF) if qualified. Refer to the Instructions for Form 1040NR-EZ to determine if you qualify.
Find more information at Which Form to File.
When and Where To File
If you are an employee or self-employed person and you receive wages or non-employee compensation subject to U.S. income tax withholding, or you have an office or place of business in the United States, you must generally file by the 15th day of the 4th month after your tax year ends. For a person filing using a calendar year this is generally April 15.
If you are not an employee or self-employed person who receives wages or non-employee compensation subject to U.S. income tax withholding, or if you do not have an office or place of business in the United States, you must file by the 15th day of the 6th month after your tax year ends. For a person filing using a calendar year this is generally June 15.
File Form 1040NR-EZ and Form 1040NR at the address shown in the instructions for Form 1040NR-EZ and 1040NR.
Extension of time to file
If you cannot file your return by the due date, you should file Form 4868 (PDF) to request an automatic extension of time to file. You must file Form 4868 by the regular due date of the return.
You Could Lose Your Deductions and Credits
To get the benefit of any allowable deductions or credits, you must timely file a true and accurate income tax return. For this purpose, a return is timely if it is filed within 16 months of the due date just discussed. The Internal Revenue Service has the right to deny deductions and credits on tax returns filed more than 16 months after the due dates of the returns. Refer to When To File in Chapter 7 of Publication 519, U.S. Tax Guide for Aliens (PDF) for additional details.
Departing Alien
Before leaving the United States, all aliens (with certain exceptions) must obtain a certificate of compliance. This document, also popularly known as the sailing permit or departure permit, must be secured from the IRS before leaving the U.S. You will receive a sailing or departure permit after filing a Form 1040-C (PDF) or Form 2063 (PDF).
Even if you have left the United States and filed a Form 1040-C, U.S. Departing Alien Income Tax Return (PDF), on departure, you still must file an annual U.S. income tax return. If you are married and both you and your spouse are required to file, you must each file a separate return, unless one of the spouses is a U.S. citizen or a resident alien, in which case the departing alien could file a joint return with his or her spouse (Refer to Nonresident Spouse Treated as a Resident).
International corporate tax is extremely tricky and I only know enough to give my clients general guidance and for some we are able to file their taxes and if needed we refer them firms specialized in international corporate taxes.
These links could be useful:
http://www.irs.gov/Individuals/International-Taxpayers/Substantial-Presence-Test
http://www.irs.gov/Individuals/International-Taxpayers/Taxation-of-Dual-Status-Aliens
http://www.irs.gov/Businesses/Comparison-of-Form-8938-and-FBAR-Requirements
http://www.irs.gov/Individuals/International-Taxpayers/Taxation-of-Nonresident-Aliens
