Figuring out your US tax residency as someone from a foreign country can be quite confusing. However, it’s important to get it right in order to meet your tax obligations.
In this article, you will learn how to determine your US tax residency status as a non-U.S citizen, which is very important when filing your federal and state income taxes during tax time.
Why knowing your tax residency status is important?
As a non-U.S citizen, such as an international student on an F-1 or J-1 visa or a working professional on an H-1B or L1 visa, knowing your tax residency status would ensure that you file your US taxes properly.
Furthermore, understanding the implications of the different types of tax residency statuses will give you a better insight into the US taxation system, allowing you to navigate it properly.
What are the types of tax residency status for Non-U.S Citizens?
For the purposes of federal taxation, the Internal Revenue Service (IRS), defines non-US citizen taxpayers into two categories based on the internal revenue code. These are:
- Resident aliens for tax purposes
- Nonresident aliens for tax purposes.
Note that this classification is not the same as the definition of a resident and a nonresident alien that is used in US immigration law.
A resident alien in US immigration law refers to a non-US citizen with an immigrant status or lawful permanent resident status, also called a permanent resident or green card holder.
While a resident alien for tax purposes could be a non-US citizen with a nonimmigrant status.
The key difference between both categories is that the income of a resident for tax purposes is generally taxed in the same way as a US citizen, while that of a nonresident alien for tax purposes is not.
Thus, someone who is a resident for tax purposes files the same tax form as US citizens, called the Form 1040, while a nonresident alien for tax purposes files a different tax form, called the Form 1040NR.
How to determine your tax residency status using IRS rules
In simple terms, If you are not a U.S. citizen, you are considered a nonresident alien for tax purposes.
Unless you meet one of two tests during the calendar year (January 1 – December 31), in which case you would be considered a resident alien for tax purposes.
- The first test is called the Green Card Test, which is applicable when you are admitted to the United States as a lawful permanent resident, or you change your status to a Lawful Permanent Resident while in the US.
- And, the second test is the Substantial Presence Test, which is a numerical formula that measures your days of physical presence in the United States. To pass the substantial presence test, you must meet ALL of the following:
- You must be present in the US for 31 days during the year for which you are filing a tax return
- You must be present in the US for a period of 183 days calculated by adding ALL the days of physical presence in the tax year + ⅓ of the total days in the last year before the tax year + ⅙ of the total days you were present in the last 2 years before the tax year.
When determining your tax residency using the Substantial Presence Test, it is important to have a record of your travel into and out of the United States as a US nonimmigrant visa holder.
Generally, any day you set foot on any part of the United States territory counts as 1 whole day of physical presence.
Substantial Presence Test Calculation Example
Example 1: Mr. Patel entered the US for the first time on an H1B visa on October 3rd of 2019, and remained in the US through December 31, 2020.
Since he is not a green card holder, he must use the Substantial Presence Test to determine his tax residency status for the tax year of 2020.
For the year 2020, Mr. Patel was physically present in the US for 365 days in 2020. Therefore, he easily meets the first and second requirements of the Substantial Presence Test.
Therefore, he is considered a resident alien for tax purposes starting from his first day of presence in 2020, which was January 1, 2020.
So, he will be considered a resident for tax purposes for the entire tax year of 2020.
Example 2: Ms. Kim entered the US for the first time on an L1B visa on September 26, 2018, and remained in the US through May 20, 2019. She then returned to the US on October 1, 2020, and remained in the US for the rest of the 2020 calendar year.
Again, since she entered the US on a nonimmigrant visa, she must use the Substantial Presence Test to determine her tax residency status for the year 2020.
Ms. Kim clearly meets the first requirement of the Substantial Presence Test as she was present in the US for 92 days in 2020.
But does she meet the second requirement of the Substantial Presence Test as well?
To find out, Ms. Kim must add the number of days of her physical presence in the US during the calendar years 2020 (92 days), 2019 (140 days), and 2018 (97 days) using the formula:
92 days in 2020 + ⅓ (140 days in 2019) + ⅙ (97 days in 2018) = 154 days
Since the resulting calculation is less than the 183-day requirement of the Substantial Presence Test, Ms. Kim does not meet the test.
Therefore, she is considered a nonresident alien for tax purposes for the entire year of 2020.
Dual Status Aliens
As a result of the math behind the substantial presence test, a non-US citizen could simultaneously be a non-resident alien for tax purposes and a resident alien for tax purposes in the same tax year.
This is called a Dual Status Alien taxpayer.
To give an example of how such a tax scenario occurs, let’s take a look at the case of Mr. Li.
Mr. Li entered the US for the first time on an H1B visa on June 1, 2020, and remained until the end of 2020.
For the year 2020, he would meet both conditions of the Substantial Presence Test and would be considered a resident alien for tax purposes starting on June 1, 2020, through December 31, 2020.
However, from January 1, 2020, through May 31, 2020, he was outside the US.
Therefore, for this portion of the year 2020, he would be considered a nonresident alien for tax purposes.
This would mean that Mr. Li needs to file taxes as a resident for tax purposes for the portion of his 2020 income from June 1, 2020, to December 31, 2020. The appropriate form for this would be the Form 1040.
He would also have to file a Form 1040NR for the portion of his 2020 income from January 1, 2020, through May 31, 2020, that came from US sources.
Tax Residency Status for International Students
As you might expect with IRS rules, there’s always an exception.
One of these exceptions is the case for international students and their dependents on F, J, M, and Q visas.
Generally, international students who have been in the US for a period of less than 5 calendar years on an F, J, M, and Q visas, are considered exempt individuals and are considered nonresident aliens for tax purposes.
And after being present in the US for a period of more than 5 calendar years, an international student on these visa classes will be considered a resident alien for tax purposes.
Now don’t mistake the term “exempt individual” as an individual exempt from paying US taxes.
It simply means that you are exempt from applying the substantial presence test to determine your tax residency for the duration of 5 calendar years of your presence in the US.
You should also note as an exempt individual, the IRS requires you to submit a form called the Form 8843 every tax year, even if you earned no US income and do not need to file a tax return.
This Form 8843 must be filed by the tax deadline of every calendar year, which is usually on April 15th.
Differences between resident alien and a nonresident alien for tax purposes
So, you might be wondering what the main differences are between a non-US citizen who is considered a resident for tax purposes and one who is a nonresident for tax purposes.
Here are some important differences between the two in terms of their tax implications:
Taxes on Foreign Sourced Income
By far the biggest difference is the taxation of foreign income. Nonresident aliens for tax purposes only pay income taxes from US sources.
Whereas resident aliens for tax purposes are required to declare their worldwide income and pay taxes on them.
Social security and Medicare Taxes for International Students
International students on F1, J1, M1, and Q1 visas who are considered nonresident aliens for tax purposes are exempt from paying social security and Medicare taxes on income earned from authorized employment.
While an international student who is considered a resident for tax purposes must pay the social security and Medicare taxes.
This is also known as FICA and is taxed at 7.65% of your gross income from authorized employment.
Tax Deductions and Credits
As a non-US citizen taxpayer considered a nonresident alien for tax purposes, unless you are from a country with a tax treaty agreement with the US, you do not get as much of the tax deductions and tax credits that US resident aliens and US citizens enjoy during tax time.
Receipt of Government Benefits
Nonresident aliens are generally not eligible to receive government benefits from the IRS. As we saw in 2020 with the disbursement of stimulus checks.
However, taxpayers considered resident aliens for tax purposes are eligible to receive these benefits.
How to determine your tax residency status on the state level
For the purposes of state taxation, the state residency criteria for tax purposes depends on the state where you resided and thus varies from state to state.
However, as a non-US citizen, the criteria used to determine your state tax residency are not the same as that described by the IRS.
Generally, non-US citizens who have lived in a US state for a pre-defined length of time, are considered residents of the state.
Nevertheless, the taxation rules used at the state level are similar to those at the federal level, in that a resident of a state is taxed on statewide and worldwide income, while a nonresident of a state is only taxed on income sourced from the state.
State Tax Residency Rules for International Students
Some states have tax residency rules that treat international students on F, J, M, and Q visas as nonresidents for tax purposes regardless of how long they have resided in the state.
While some other states have tax residency rules where international students could be considered residents for tax purposes after residing in the state for a certain period of time.
So, in one sense, as an international student, you could be considered a resident alien for tax purposes by the IRS and simultaneously be considered a non-resident for tax purposes in the state where you reside.
FAQs About Tax Residency in the USA
Does a non-resident have to pay tax?
Yes. If you’re considered a non-resident alien for tax purposes, the IRS requires you to pay U.S income taxes on all income earned from US sources.
What is my tax residency?
For federal tax purposes, your tax residency status could fall into one of two categories: resident alien for tax purposes or non-resident alien for tax purposes. To be considered a resident alien for tax purposes, you must pass either the green card test or the substantial presence test.
If you’re from a foreign country, it is understandable to be confused by US tax law. But don’t let this confusion dissuade you from filing an income tax return and possibly getting money from the IRS or your state tax agency in the form of a tax refund.
If you still find the tax filing status complex, you could let the tax experts at Sprintax guide you in the process of determining your tax residency and preparing your federal and state income tax return.
With Sprintax, you can rest assured that you will be taking advantage of any income tax treaties or foreign tax credits available to citizens from your foreign country. This way you can guarantee that you are receiving the biggest tax refund check. Get Started with Sprintax!
Disclaimer: The content in this blog post should not be considered as tax or financial advice, given the complexities of the US tax codes, I highly recommend you seek a licensed tax specialist for personalized tax advice.