Implications of US Tax Residency
A non-citizen is considered a resident alien for U.S. income tax purposes if he or she meets one of two objective tests: (1) the “lawful permanent residence” (green card) test or (2) the “substantial presence” test.
Absent a treaty, a resident alien is treated nearly identically to a U.S. citizen for tax purposes. This means being subject to worldwide taxation or taxation on all income no matter where it is sourced. It also means being subject to a complex U.S. tax system that uses anti-deferral regimes to ensure that taxes aren’t deferred via offshore companies or activities.
Fortunately, both U.S. domestic law and treaty law offer a number of exceptions that prevent non-US citizens from being classified as resident aliens.
Consulting for Non-Citizens
In the case of non-citizens, our analysis will center around two main exceptions to tax residency:
- The “closer connection” test – establishing that you have a “closer connection” during the year to a foreign country in which you have a tax home
- Treaty relief – utilizing a relevant treaty’s "tie-breaker rules" to justify nonresident alien status for U.S. tax purposes
In addition, our analysis would take into account both domestic law and treaty provisions that provide exceptions for a number of professions, such as teachers, students, and government workers, among others.
Consulting for Green Card Holders
A U.S. tax treaty, if applicable, may give a green card holder the option to elect non-resident alien status and thereby be released from U.S.-tax-resident status.
The IRS maintains a list of countries with which the United States has a treaty, which can be found here.
This type of position is often very sensitive and can have both tax and immigration implications. As such, it requires a detailed technical analysis by a tax professional.