Taxes

Tax residency in the United States for individuals

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Tax residency in the United States for individuals. How do you acquire U.S. tax residency? What are the tax regimes of subjects not considered “foreign national” residents? The determination of residency status, therefore becomes fundamental for the purpose of understanding the taxation to which a foreign person is subjected. In this article, we will provide an overview of U.S. tax residency legislation.

In the United States, the term foreign national or foreign alien is used to distinguish foreign nationals from American citizens.

From a tax point of view, a foreign national can be subjected to two different taxation systems. Depending on whether it is considered:

-Resident (resident alien), or

-Non resident (nonresident alien).

The determination of residency status, therefore becomes fundamental for the purpose of understanding the taxation to which a foreign person is subjected when he arrives in the United States.

In fact, resident aliens, like American citizens, are subject to taxation on all their income wherever they are produced (the so-called world-wide income principle). The second, however, non-resident aliens are taxed only on U.S. source income.

Historically, up until 1984, the American tax legislation (Internal Revenue Code – IRC) did not clearly distinguish the concepts of resident and nonresident, just as the definition of tax residence remained rather vague.

It was Congress that put an end to this uncertainty by enacting Article 7701. According to which an individual who is not a U.S. citizen acquires tax residence in the United States if he is lawful permanent resident during the tax year or if he meets the substantial presence test.

In this article we are going to provide an overview of U.S. tax residency legislation for individuals.

Tax residence in the United States

Lawful permanent resident or green card test

A lawful permanent resident is a foreign citizen against whom the U.S. Department of Immigration Citizenship and Immigration Services (USCIS) has issued Model I-551, better known as a green card. That is a permanent residence permit.

Once the residence permit has been obtained, a foreigner continues to be considered a resident until the permit is revoked or abandoned by the same.

In the absence of these two events, the resident foreign citizen remains such even if he decides to reside in a foreign country.

This test, better known as the green card test, in fact, has no interaction with the substantial presence test.

In practice, it often happens that foreign citizens in possession of the green card, who have left the United States, mistakenly believe that their status automatically expires when the date shown on the green card expires.

This erroneous presumption, therefore, convinces them that they are no longer subject to any tax obligation towards the United States.

Suppose indeed, the non-renewal of the green card may lead to the denial of entry into the United States by the American customs. In that case, this does not entail the loss of the tax obligations to which this subject continues to be subjected as a resident alien.

Example of tax residency in the United States

A recurring case is that of a foreign citizen (Tizio) in possession of a green card which, after many years spent in the United States, decides to return to his native country.

Tizio transfers his residence to his country of origin and cuts off all ties with the United States. Except his green card which he uses to enter U.S. territory during his leisure travels.

Tizio will turn out to be U.S. resident as long as he is in possession of the green card.

And indeed, the double taxation treaties signed by the United States establish that a green card holder is considered U.S. resident.

As long as, according to the agreements stipulated in the Convention itself, this subject will not begin to be treated as a resident of the foreign country and will communicate this intention to the U.S. Revenue Agency (IRS).

This example is critical to understanding U.S. tax residency.

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