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• Determination of resident aliens and nonresident aliens

• Resident aliens– Who qualifies– Tax treatment

• Filing status• Tax returns • Practical issues

Agenda for Webinar

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Status for US Tax Purposes

• Relationship of foreign citizen to US defines tax status– Resident alien– Nonresident alien

• Taxation of resident alien (general rules)– Taxed on worldwide income– Entitled to itemized deductions or standard deduction– Entitled to claim personal exemptions– Can file a joint return

• Taxation of nonresident alien (general rules)– Taxed only on US sourced income– Deductions limited– Personal exemptions limited– Can only file as single or married filing separately

• Taxation of part-year resident (general rules)

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§ 7701(b)

• Legislative history– Pre 1984 subjective test– 1984 §7701(b) adopted which provided

objective test of residence– Goals

• If resident in the US, should have the same rights and responsibilities as US citizen, including responsibility of paying US taxes

• If in US for > half a year should be taxed as residents

• State rules may not follow federal

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Resident Alien §7701(b)(1)(A)

Resident alien. An alien individual shall be treated as a resident of the United States with respect to any calendar year if (and only if) such individual meets the requirements of clause (i) , (ii) , or (iii) : (i) Lawfully admitted for permanent residence. Such

individual is a lawful permanent resident of the United States at any time during such calendar year.

(ii) Substantial presence test. Such individual meets the substantial presence test of paragraph (3) .

(iii) First year election. Such individual makes the election provided in paragraph (4) .

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Lawfully Admitted for Permanent Residence

• Coordination with immigration laws• US citizenship • Green card test• §7701(b)(6) – such status has not

been revoked (and has not been administratively or judicially determined to have been abandoned)– Final administrative or judicial order of exclusion or

deportation– Final judicial order can’t be appealed to higher court

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Abandon Resident Status

• Initiated by taxpayer– Application for abandonment (INS Form I-407) or– Letter stating intent to abandon resident status

• Alien Registration Receipt card (INS Form I-151 or Form I-551) must be attached to letter

• Initiated by Immigration Service or US Consular Office– Final administrative order of abandonment– Final judicial order

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Substantial Presence Test

§7701(b)(3)(A) … an individual meets the substantial presence test … with respect to any calendar year … if –

(i) such individual was present in the US on at least 31 days during the calendar year, and

(ii) the sum of the number of days on which such individual was present in the US during the current year and the 2 preceding calendar years (when multiplied by the applicable multiplier determined under the following table) equals or exceeds 183 days:

In the case of days in: The multiplier is:

Current year 1

1st preceding year 1/3

2nd preceding year 1/6

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Practical Considerations

• What is a day? §7701(b)(7)(A)In general. Except as provided in subparagraph (B), (C) , or (D) , an individual shall be treated as present in the United States on any day if such individual is physically present in the United States

at any time during such day. – B: Commuters from Canada or Mexico– C: Transit between 2 foreign points

• Canada to Argentina, spend night in Houston airport

• Even if held meeting at airport– D: Crew members temporarily present

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Exceptions to Substantial Presence Test

• An individual shall not be treated as being present in the US on any day if– Such individual is an exempt individual for such

day (defined in §7701(b)(5)), or• Foreign government-related individual• Teacher or trainee• Student• Professional athlete in US on charitable

sports event– Such individual was unable to leave the US

because of a medical condition which arose while such individual was present in the US

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Exclude Presence in US

• To exclude these days, you must notify IRS– File Form 8843 with tax return, e.g. 1040NR– If no return, send Form 8843 to IRS in Austin,

TX

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Closer Connection to Foreign Country

• §7701(b)(3)(B) Exception where individual is present in the United States during less than one-half of current year and closer connection to foreign country is established. An individual shall not be treated as meeting the substantial presence test of this paragraph with respect to any current year if—

• (i) such individual is present in the United States on fewer than 183 days during the current year, and

• (ii) it is established that for the current year such individual has a tax home (as defined in section 911(d)(3) without regard to the second sentence thereof) in a foreign country and has a closer connection to such foreign country than to the United States.

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Closer Connection Test

• Doesn’t apply to any individual with respect to any current year if at any time during such year – – Such individual had an application for

adjustment of status pending, or– Such individual took other steps to apply for

status as a lawful permanent resident of the US

• Must make election/statement per §7701(b)(3)(B)

– File Form 8840 with tax return– If no return, send Form 8840 to IRS in Austin,

TX

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First Year Election• If you don’t meet SPT in the first

year, you can still elect to be taxed as a resident

§ 7701(b)(4) First-year election.

(A) An alien individual shall be deemed to meet the requirements of this subparagraph if such individual—

i. is not a resident of the United States under {green card test or substantial presence test}

ii. was not a resident of the United States … with respect to the calendar year immediately preceding …

iii. is a resident of the United States under … with respect to the calendar year immediately following the election year, and

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First Year Election

Is both –

(1) present in the United States for a period of at least 31 consecutive days in the election year, and

(II) present in the United States during the period beginning with the first day of such 31-day period and ending with the last day of the election year (hereinafter referred to as the “testing period”) for a number of days equal to or exceeding 75 percent of the number of days in the testing period (provided that an individual shall be treated for purposes of this subclause as present in the United States for a number of days during the testing period not exceeding 5 days in the aggregate, notwithstanding his absence from the United States on such days).

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First Year Election

• Election to be treated as resident • Beginning with first day of earliest

testing period• Election can’t be made before

individual has met substantial presence test in following year

• Election remains in effect for year unless revoked with approval of IRS

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Interaction of Residency and Tax Treaties

• § 7701(b) doesn’t overrule tax treaties

• Dual resident – Tax resident of US and other country– Can claim treaty benefits– Tie-breaker rules determine where you are a

resident– Tax resident of County X – US NRA

• File 1040 NR• Claim treaty benefits• File form 8833 if income > $100,000 (Pub

519)

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Nonresident Alien

§ 7701(b)(1) (B) Nonresident alien. An individual is a nonresident alien if such individual is neither a citizen of the United States nor a resident of the United States (within the meaning of subparagraph (A) ). – Not a resident– Doesn’t hold green card– Doesn’t meet substantial presence test– Hasn’t made election to be treated as a resident

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First and Last Year of Residency

• § 7701(b)(2)(A) First year of residency

• § 7701(b)(2)(C) Nominal presence disregarded– Applies to

• Substantial presence test• Last year of residency

– Requirements• Closer connection to a foreign country• Limited to 10 days

– Attach statement to tax return to exclude 10 days presence

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Last Day of Residency

• Last day physically present• Closer connection to foreign

country and must establish residency in new location

• No lapse rule § 7701(b)(2)(B)(iii) • 10 day de minimis rule

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Other Issues

• Fiscal year taxpayers– §7701(b) presumption is a calendar year– §7701(b)(9)(A) applies if established fiscal tax

year prior to US residency– Can change to calendar without consent of IRS– Practical: always on calendar year basis

• California residency– Use same filing status as federal filing status– Report worldwide income – California tax is prorated to reflect California

source income– Community property rules apply

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Resident Alien – Income

• Gross income from all sources wherever earned throughout the world– Bonus earned before US residency established, pd

after residency established– Sale of house in another country after US residency

established– Exercise of stock option after US residency

established– Rental of non-US residence– Imputed income from certain corporations

• Subpart F – Controlled foreign corporation• Foreign personal holding company• PFIC

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Resident Alien – Deductions

• §911 exclusion – BFR vs. PPT• Itemized deductions• Standard deduction• Personal exemptions ($3,650 2009-10)

– For taxpayer and dependents (same rules as US citizens)

– To qualify as a dependent (child or family member)

• Citizen, resident, or resident of Canada or Mexico

• Member of household

– Need SSN or ITIN for each dependent

– File W-7 to receive ITIN

• Foreign tax credit/deduction

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Residents – Filing Status

• Full year residents– Married filing joint– Married filing separately– Head of household

• Benefits of full year residents– Comparison of tax rates– Elections to be treated as full year resident

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Election for Full Year Resident

• 6013(g)– Spouse NRA– Used when NRA married to a US citizen or resident– Permanent election, unless die or divorced– Nonresident spouse ineligible for treaty benefits

§1.6013-6(a)(2)(v)– Eligible for arrival and departure year– Suspended if neither spouse RA during year

• 6013(h) – Spouse RA – NRA at beginning of year, RA at end of year, elects

to be treated as RA for the year– Applies to only one year– Only eligible for arrival year

• Elections need to be signed

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Sourcing – Resident Alien

• What happens when taxable in US, income is foreign source, and no foreign tax paid?– 1/1/2007 Joe was granted 10,000 shares @ $10 – 1/1/2010 shares vest, FMV $15– 1/1/2011 Joe went on assignment to US– 1/15/2011 Joe exercised 10,000 shares, FMV $17

What are the US tax consequences?

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Key Points

• Resident alien– Substantial presence test– Closer connection to a foreign country– First year elections– First and last year of residency– State impact

• Taxability– Taxed on worldwide income– Entitled to itemized deductions or standard

deduction– Entitled to claim personal exemptions– Can file a joint return