“U.S. Resident for Tax Purposes”: What Does it Mean?
Posted by Frank Gogol
Updated on May 9, 2022
In many countries, foreign citizens who live and work in the country are also required to pay certain taxes. These kinds of people are called tax residents. Read on to understand what it means to be a U.S. resident for tax purposes and if you are one or not.
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What Does it Mean to Be a U.S. Resident for Tax Purposes”?
If you are a tax resident of the U.S., you are required to file an annual federal tax return with the Internal Revenue Service (IRS). This includes students on an F visa. Take a look here for more information on how to do F1 visa taxes.
There are two main ways that the government determines whether you are a tax resident of the U.S.; the Green Card Test and the Substantial Presence Test. Each of these is explained below.
The Green Card Test
If you have been issued a lawful permanent resident card (a green card), you are considered by the government to be a U.S. resident for tax purposes.
The Substantial Presence Test
Even if you do not have a green card, you may still be considered a tax resident of the U.S. if you spend a lot of time in the country. This is called having a substantial presence in the U.S.
The conditions that indicate a substantial presence are listed below. You must have bee physically in the U.S. for at least:
- 31 days during the current year; and
- 183 days in the last 3 years (including the current year)
Of those 183 days over the last 3 years:
- 1/3 of them were last year, and
- 1/6 of them were in the year before last
If you meet these requirements, then you have a substantial presence in the U.S. and therefore you are a U.S. resident for tax purposes.
If you are an H1B visa holder who meets the substantial presence test, for example, then you will have to pay taxes while on H1B.
Difference Between a U.S. Resident and a U.S. Citizen
In general, a resident is different than a citizen. The nature of each and the differences between the two are outlined below.
What is a U.S. Resident?
In simplest terms, a U.S. resident is someone who is not a citizen of the United States, but who is allowed to spend a long time in the U.S. Foreign citizens can apply to become U.S. residents, without having to surrender their original citizenship or become U.S. citizens.
What is a U.S. Citizen?
There are only a few ways that you can be a U.S. citizen.
You are a U.S. citizen if:
- You were born within the borders of the United States or a U.S. territory
- You have at least one parent who is a U.S. citizen
- You have been granted naturalized U.S. citizenship by the United States Citizenship and Immigration Service (USCIS).
What’s the Difference?
There are only a few ways to be a citizen of the U.S., but there are many different ways to become a resident of the United States. There are also different types of U.S. residents (e.g. temporary, conditional, permanent, etc). There is only one kind of U.S. citizenship.
Another difference between a U.S. citizen and a U.S. resident is that citizenship is something you have for life. This includes naturalized citizenship (unless it is revoked). By contrast, residency expires.
Residency generally needs to be renewed regularly (e.g. every 10 years). Even a lawful permanent resident card (green card) must be renewed every 10 years. However, there is no limit to how many times you can renew your green card and continue to live and work in the U.S.
What is Residency for Tax Purposes?
Your tax residency status in a country determines whether you are required to pay taxes to that country’s government or not. Being a U.S. resident for tax purposes means you must file federal income tax returns.
There are different kinds of tax residents. Non-U.S. citizens who are tax residents fall into one of two categories:
- resident alien for tax purposes
- non-resident alien for tax purposes.
U.S. tax law requires that resident aliens pay taxes on their worldwide income. As a resident alien, if you earn money in a different country, you are required to declare it to the IRS and pay taxes on it.
If you are a tax resident but a non-resident alien, you are only required to pay taxes on the income you earn in the U.S.
Types of Residency and Related Taxes
Tax residency can be a difficult concept to understand. The three categories of tax residency are outlined below.
Resident for Tax Purposes
You can only be considered a U.S. resident for tax purposes as a non-U.S. citizen if:
- you have a valid green card, or
- you pass the Substantial Presence Test.
If you do not meet these conditions, you are not a U.S. tax resident.
Non Resident for Tax Purposes
If you are not a U.S. citizen, you do not have a green card, and you do not have a Substantial Presence in the U.S., then you are a non-resident in the U.S. for tax purposes.
It is possible to spend several months in the country but still not have a ‘substantial presence’ and therefore be non-resident for tax purposes.
Tax residency is calculated based on calendar years. It is possible to have a transition within a year from being a non-resident to being a resident or the other way around. This is called dual residency.
Who Has to Pay What Taxes in the U.S.?
It can be challenging to understand whether you are a tax resident and what type of resident you are. Several different kinds of residency and citizenship in the United States are outlined below to help you understand which category you fall into.
All U.S. citizens are tax residents of the U.S. If you are a U.S. citizen (whether by birth or naturalized) you must declare and pay U.S. taxes on all your income from anywhere in the world.
Green Card Holder
If you have a green card, you are a U.S. resident and a resident alien for tax purposes. That means your tax obligations are the same as a U.S. citizen. All your income from anywhere in the world is subject to U.S. federal income tax.
You are only free of the obligation to pay U.S. income tax if you formally surrender your green card.
If you have a green card or pass the Substantial Presence Test, you are a tax resident and resident alien for tax purposes. Your tax obligations are essentially the same as a U.S. citizen.
Under some circumstances, you may be able to apply for exemptions that allow you to reduce your tax liability.
If you are in the U.S. but you are not a U.S. citizen or resident alien, you are a non-resident alien for tax purposes. Generally, you are not required to pay U.S. taxes.
You may still need to file a tax return to obtain a certificate of compliance before you leave the country. Contact the IRS for more details.
Being a dual citizen of the U.S. and another country does not reduce your U.S. tax liability. You must still pay U.S. income tax on all your income from anywhere in the world, even if you no longer live in the U.S.
U.S. citizenship is automatically passed down to anyone who:
- has at least one parent who is a U.S. citizen, or
- was born within the borders of the U.S. or a U.S. territory.
If the above conditions apply to you, you could be liable for all of the taxes on your previously earned income, as well as penalties charged by the IRS. This could be a substantial amount of money. The IRS allows for people in this situation to have their penalties waived under streamlined procedures.
It can be difficult to understand what it means to be a U.S. resident for tax purposes. A tax resident is required to pay taxes to the IRS. All U.S. citizens are U.S. tax residents whether they live in the country or not. If you are not a U.S. citizen but you have a green card, or you have a “substantial presence” in the country, you are a tax resident. Otherwise, you are not a tax resident of the U.S.
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