United States Expatriate Tax Site: Introduction and Residence

Introduction And Residence
Generally speaking, the US is not an attractive location for resident expatriate executives seeking to limit taxation.

Taxation Of Resident Alien
Tax-resident foreign nationals in the US are taxed just about on the same basis as a US national.

Taxation Of Non-Resident Aliens
The US tax position of a non-resident alien is reasonably favourable.

Tax Treaties
A resident or nonresident alien from a country with which the United States has an income tax treaty may qualify for certain benefits.

Services For Foreign Employer
If a non-resident alien is paid by a foreign employer, his or her US source income may be exempt from US tax.

Social Security And Medicare Taxes
The liability of aliens for US social security taxes.

Totalization Agreements
The US has agreements with some foreign countries to avoid double payment of social security taxes.

Information provided on this site is for general guidance only and is often simplified. Actual IRS procedures are complex, and taxpayers should obtain professional assistance or use IRS sources for complete information.

Introduction And Residence

Generally speaking, the US is not an attractive location for resident expatriate executives seeking to limit taxation. There are however some particular features of the US tax system which are attractive for certain individuals in certain situations.

For tax purposes, an alien is an individual who is not a US citizen. Aliens are classified as non-resident aliens and resident aliens. Resident aliens generally are taxed on their worldwide income, in the same way as US citizens. Non-resident aliens are subject to different tax laws than those that apply to US citizens; for example, many non-resident aliens working temporarily in the US can claim treaty benefits. In general, non-resident aliens are taxed only on their income from sources within the US and on certain income connected with the conduct of a trade or business in the US.

An individual is considered a nonresident alien for any period that he or she is neither a US citizen nor a US resident alien. He or she is considered a resident alien if meeting one of two tests for the calendar year.

The first test is the green card test. If at any time during the calendar year an individual was a lawful permanent resident of the US, according to the immigration laws, and this status has not been rescinded, or administratively or judicially determined to have been abandoned, he or she is considered to have met the green card test.

The second test is the substantial presence test. To meet this test, an individual must have been physically present in the US 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. To satisfy the 183 days requirement, an individual must count all of the days he or she was present in the current year, and one-third of the days he or she was present in the first year before the current year, and one-sixth of the days he or she was present in the second year before the current year. An individual need not count any day he or she was present in the US as an exempt individual.

An exempt individual may be anyone in the following categories:

A foreign government-related individual;
A teacher or trainee with a J or Q visa who substantially complies with the requirements of the visa;
A student, with an F, J, M, or Q visa who substantially complies with the requirements of the visa;or
A professional athlete temporarily present to compete in a charitable sports event. (NB- The IRS recently turned its beady eye on this group, explaining that it had "recently launched an Issue Management Team focused on improving US income reporting and tax payment compliance by foreign athletes and entertainers who work in the United States. The initial focus is on those engaged in tennis, golf and music. These individuals and those associated with arranging their appearances in the U.S. and managing their financial affairs are typically high income individuals. Because of this, it is important to ensure proper tax reporting and payment.")

Also, any day where an individual is present in the US because of a medical condition need not be counted.

Even if a person meets the substantial presence test, he or she can be treated as a nonresident alien if he or she is present in the US for fewer than 183 days during the current calendar year, and maintains a tax home in a foreign country during the year, and has a closer connection to that country than to the US. This does not apply if a person has applied for status as a lawful permanent resident of the US, or has an application pending for adjustment of status.

Sometimes, a tax treaty between the United States and another country will provide special rules for determining residency. An alien whose status changes during the year from resident to nonresident, or vice versa, generally has a dual status for that year, and is taxed on the income for the two periods under the provisions of the law that apply to each period.

In September 2006, the IRS announced that it would begin charging user fees for processing applications for United States Residency Certifications.

The IRS said that it had implemented the new fee as a result of an Office of Management and Budget directive instructing federal agencies to charge fees reflecting the full cost of goods or services that “convey special benefits to recipients beyond those accruing to the general public”