When speaking about U.S. taxation many different terms are mentioned when speaking about the taxpayer. U.S. citizen, nonresident alien, and resident alien are a few of the terms you might see in your research. Often people assume that even if they are U.S. citizens, if they are not living in the U.S. (if they expatriate), then they don’t have a U.S. filing requirement. Let’s discuss the basics that would cause a person to have a U.S. filing requirement.
U.S. Person – An Explanation
The U.S. Taxes Based on Citizenship
If you are a U.S. citizen, you must report your worldwide income on your U.S. tax return. This is regardless of where you are physically located, and whether or not the income was derived from a U.S. or a foreign source. Depending on your situation you may be interested in renouncing your U.S. citizenship. Often times taxpayers will go this route when they haven’t lived in the U.S. for decades and have no intention on returning. Currently the fee for renouncing is $2,350 (before any lawyer or tax preparation fees), and the individual renouncing must be in compliance with their tax returns (the most recent 5 years).
Green Card Holders are Taxed the Same as U.S. Citizens
What individuals often don’t realize when they move to the U.S. and pursue permanent residency through the Green Card program is that the green card subjects them to the same tax reporting requirements as a U.S. Citizen. Green card holders are considered to be “U.S. persons” for tax filing purposes by the IRS. Unless the green card is abandoned the taxpayer will be required to report their world wide income on their annual U.S. tax return regardless of where they are physically located during the year or where the income is derived.
Snowbirds and Other Frequent U.S. travellers can be U.S. Persons?
A “snowbird” is the term used to describe people from northern latitudes that travel south during the colder months to warmer climates. This is often used to describe Canadians that travel to the U.S. during the winter months. What these people (and other non-U.S. individuals) find is that if they stay in the U.S. too long, they may be considered a U.S. person for tax filing purposes and subject to the same reporting requirements as a U.S. citizen or green card holder. So how does this work?
The Substantial Presence Test
The IRS has a numerical formula that determines if frequent visitors to the U.S. are subject to U.S. tax reporting requirements. An individual meets this test if they are 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.
If you have substantial presence you then have a U.S. reporting requirement. Often times foreign individuals can file form 8840 to claim a “closer connection” to their home country. This alleviates the taxpayer from most U.S. reporting requirements (unless income was earned in the U.S.). Another avenue is to appeal to the tax treaty between the U.S. and the foreign individual’s home country (if there is one), to elect to be treated as a non-resident for U.S. tax filing purposes. Please note if you are applying for or have a green card, making this election via the treaty could jeopardize your application or permanent residency status. Some individuals are exempt from counting their days in the U.S.
So do I have a U.S. Tax Reporting Requirement?
What it boils down to is that if you are considered to be a “U.S. Person” for tax purposes by the IRS, you are subject to the filing requirements the same as any U.S. citizen. People that are considered to be U.S. persons by the IRS are:
- U.S. Citizens
- Holders of a U.S. green card
- Individuals that meet the substantial presence test
Please note that entities, including but not limited to, corporations, partnerships, or limited liability companies, created or organized in the United States or under the laws of the United States; and trusts or estates formed under the laws of the United States are also considered to be U.S. persons.
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At Horizon Expat Tax we are happy to provide the following quality services:
- U.S. taxes for taxpayers worldwide
- U.S. Tax services for individuals immigrating to the U.S.
- Tax preparation and advisory for U.S. non-residents with U.S. reporting requirements (temporary U.S. work, U.S. rental property, etc)
- Small business tax compliance, advisory, and bookkeeping services
Any tax advice herein is based on the facts provided to us and on our interpretation of tax legislation as it reads at the time the advice is provided. Tax law is subject to continual change, at times on a retroactive basis and may result in incremental taxes, interest or penalties. We are not responsible for updating our advice for changes in law or interpretation after the date the advice is provided. Every tax situation is different. We are not responsible for the tax implications to any individual or entity that may act on this advice.