Resident Alien vs. Legal Permanent Resident
A person is a resident, for tax purposes, if the person is a Lawful Permanent Resident of the United States at any time during the calendar year. This is known as the "green card" test. A person is a Lawful Permanent Resident of the United States, at any time, if the person has been given the privilege, according to the immigration laws, of residing permanently in the United States as an immigrant. This status is generally given if the U.S. Citizenship and Immigration Service (USCIS) has issued an alien registration card, also known as a "green card." A person continues to have resident status, under this test, unless it is voluntarily renounced and abandoned in writing to the USCIS, or the immigrant status is administratively terminated by the USCIS, or the immigrant status is judicially terminated by a U.S. federal court. If a person meets the green card test at anytime during the calendar year, but does not meet the substantial presence test for that year, the residency starting date is the first day on which the person is present in the United States as a Lawful Permanent Resident. However, an alien who has been present in the United States at any time during a calendar year as a Lawful Permanent Resident may choose to be treated as a resident alien for the entire calendar year.
Resident Alien For Tax Purposes
The IRS wants a person to be treated as an RA for tax purposes from their first day of presence in the year that they will pass the Substantial Presence Test (SPT.) The SPT determines when an NRA becomes an RA for tax purposes. Resident aliens can use the same filing statuses available to U.S. citizens. An RA can claim the same deductions allowed to U.S. citizens if they are a resident alien for the entire tax year.
Legal Permanent Resident
The individual does not become an LPR until the application for LPR status is approved following the interview. The LPR status is then stamped in the individual's passport and the "green card" is issued some months later. The mere act of filing a petition for LPR status, or the act of filing for an adjustment of status to that of an LPR, is not legally tantamount to acquiring the status of an LPR. An LPR cannot become a resident alien for tax purposes until he actually enters the United States for at least one day. An alien who has filed a petition with CIS to change his status in the United States should not be granted the closer connection exception to the substantial presence test because his act of filing the petition to change status with CIS is prima facie evidence that the alien's true intention is to remain in the United States for a substantial period of time in the future. Because most treaty articles require that the individual be "temporarily" in the US, most administrations take the position that the I-485 application to adjust status following an approved petition terminates eligibility for treaty benefits.
The W-9 form tells the withholding agent he is a U.S. person (citizen, resident alien, etc.). The form serves a dual role of providing an SSN and of establishing the fact that the filer is a U.S. person.
Period of validity:
- A Form W-9 which is submitted for the purpose of reporting a TIN (Taxpayer Identification Number) to the withholding agent has an indefinite validity period until the filer changes his TIN (e.g., from an ITIN to an SSN).
- A Form W-9 which is submitted for the purpose of establishing that the filer is a U.S. individual has an indefinite validity period until such time as the filer becomes a foreign individual, at which point he would file one of the W-8 forms or Form 8233 with the withholding agent to establish that he is a foreign individual.
- A Form W-9 which is submitted for the purpose of a tax treaty claim by a U.S. individual has an indefinite validity period until such time as the tax treaty benefit expires under the terms of the tax treaty or until the filer no longer qualifies for the tax treaty benefit for some other reason. In other words, annual refiling of form W-9 to claim a tax treaty benefit is not necessary as long as the filer still qualifies for the tax treaty benefit.
An RA for tax purposes and an LPR are both taxed like a U.S. citizen and can use the same wage withholding rules as a U.S. citizen. U.S. residents for tax purposes need to keep in mind that the income sourcing issue is moot. U.S. residents are taxed on worldwide income. FICA should be deducted as anyone with a green card pending can no longer be considered temporarily present in the U.S. If the individual stays less than 183 days and is a nonresident the FICA/Medicare can be refunded. A pending adjustee is not automatically a resident for tax purposes. An SPT needs to be run.
An LPR has unrestricted permanent work authorization and may be self-employed, including performing an activity for which an honorarium is ordinarily paid. A RA for tax purposes may be self-employed, including performing an activity for which an honorarium is ordinarily paid.
- Copy of Social Security card
- Copy of the "green card"
- Employee-Independent Contractor Form
- Check Request
- Note: The Compliance Statement form and FNIF are not required
Taxation of the Honorarium
AP does not tax the honorarium. A Form 1099 is generated and mailed to the individual at year end. The individual is responsible for reporting and paying appropriate taxes. Filing Fees for a green card may be paid by the employer sponsoring the individual if the fees are considered ordinary and necessary business expenses.The reasons would be:
- Institution needs the services of the individual beyond the nonimmigrant period
- Export control laws allow only US citizens and LPRs access to technology
- US government contract restricts workers to US citizens and LPRs
Some countries may still allow an LRP or RA to receive a tax treaty (China, for example). The IRS takes the position that someone who has applied for U.S. lawful permanent residence is no longer here temporarily. They may disallow tax treaty exemptions based on temporary presence if they are aware that the individual has applied for LPR status. The IRS may not allow an individual who has taken steps to become an LPR to keep a treaty benefit if language of the treaty article under which the individual is claiming the benefit says the individual must be "temporarily" in the U.S. The saving clause exception for student/trainee and teacher/researcher articles of most treaties allow an individual who has become a resident under the substantial presence test to keep the treaty benefit. A Form W-9 with a statement including the saving clause exception article is used to allow a resident to claim exemption from withholding.
Change of Status
The nonresident alien is responsible for informing OIT of any steps taken towards a change in status. An F-1 who has applied to become an LPR remains an F-1 until:
- Their F-1 status expires
- They adjust to LPR status
- They violate their F-1 status. (They would violate their F-1 status if they work for more than 20 hours while school is in session under an EAD issued based on their application to become an LPR.
Pending PAA (i.e. filing the initial paperwork) doesn't make a person a resident. They still need to retain their status as an exempt F-1 individual, which keeps them in NRA status.
However, if they are beyond the expiration date of their nonimmigrant status, they are considered pending adjustment applicants and must count their US days. If their US days equal or exceed 183 based on the formula, they are RAs and need to complete their W-4 in the same manner as a US citizen -- with one caveat. If they have children who are living back in their home country (in college, etc.), they do not qualify for personal exemptions if they are not a resident or citizen of the US. (There are exceptions for dependents who are citizens of Canada or Mexico or are US nationals.) An adjustee is eligible for and EAD, which gives the individual unrestricted work authorization until the EAD expires. Must have the EAD in hand.
Change of Status & Employment
An alien who is in the process of permanent residence needs adjustment of status from nonimmigrant to immigrant (temporary to permanent). During this period he can apply for an EAD based on adjustment. Prior to obtaining that EAD, the only authorization that alien may have to work is the unexpired nonimmigrant status. If the nonimmigrant status expires or does not permit employment the alien cant work. Loss of Status -- If LPR status lost, it needs to be re-applied for from abroad.
Foreign Spouse of a U.S. Citizen
First given conditional resident status -- initial period of permanent residence is two years instead of ten so that immigration authorities can interview the couple after two years to determine if the marriage was and continues to be bona fide. During the two-year period, the person is considered to be lawful permanent residents no different than any other permanent resident. For I-9 purposes, their status does not require reverification. Once an alien is a permanent resident he is imputed to remain so.
An alien may become a resident alien (RA) by passing either the green card test or the substantial presence test (SPT).
- Green Card Test:
- Are you an "immigrant" or Lawful Permanent Resident of the United States under the immigration laws of the United States?
- Aliens who are Immigrants are Resident Aliens of the United States for tax purposes, under the condition that they spend at least one day in the United States.
- If you answered yes to this question, you do not need to proceed to the questions for the SPT.
- Substantial Presence Test:
- You must pass both the 31-day and 183-day tests.
- 31 day test: Were you present in United States 31 days during current year?
- 183 day test:
- Current year days in United States x 1 =_____days
- First preceding year days in United States x/3 =_____days
- Second preceding year days in United States x 1/6 =_____days
- Total Days in United States =_____days (add lines A, B, and C)
- If line D equals or exceeds 183 days, you have passed the183-day test.
- Do not count days of presence in the U.S. during which:
- you are a commuter from a residence in Canada or Mexico
- you are in the U.S. less than 24 hours in transit
- you are unable to leave the U.S. due to a medical condition that developed in the U.S.
- you are an exempt individual
- you are a regular member of the crew of a foreign vessel traveling between the U.S. and a foreign country or a possession of the U.S. (unless you are otherwise engaged in conducting a trade or business in the U.S.)
- Definition of Exempt Individual:
- Foreign Government Related Individual, Employee of Foreign Government, Employee of International Organization, Usually on A or G visa
- Teacher, Professor, Trainee, Researcher on J or Q visa. Does NOT include students on J or Q visas. Does include any alien on a J or Q visa who is not a student (physicians, au pairs, summer camp workers, etc.) Must wait 2 years before counting 183 days; however if the J or Q alien has been present in the U.S. during any part of 2 of the prior 6 calendar years in F, J, M, or Q status, then he is not an exempt individual for the current year, and he must count days in the current year toward the substantial presence test.
- Quality of being an Exempt Individual applies also to spouse and child on J-2 or Q-3 visa
- Student on F, J, M or Q visa must wait 5 calendar years before counting 183 days the 5 calendar years need not be consecutive; and once a cumulative total of 5 calendar years is reached during the students lifetime after 1984 he may never be an exempt individual as a student ever again during his lifetime
- Quality of being an Exempt Individual applies also to spouse and child on F-2, J-2, M-2, or Q-3 visa
- Professional athlete temporarily present in United States to compete in a CHARITABLE sports event
- Do not count days of presence in the U.S. during which:
- Closer Connection Exception for Foreign Students only:
- Do you intend to reside permanently in the United States?
- Have you taken any steps to change your U.S. immigration status toward permanent residency?
- Have you substantially complied with the United States immigration laws for your student nonimmigrant status during your stay in the United States?
- During your stay in the United States, have you maintained a closer connection with a foreign country than with the United States?
- If you answered "NO" to the first two questions above, and "YES" to the last two questions above, then you have a basis for claiming you are still a nonresident alien, even though you have passed the substantial presence test.
- To claim the exception for students on an income tax return, a student should attach Form 8843, Statement for Exempt Individuals and Individuals with a Medical Condition to his form 1040NR or 1040NR-EZ along with an attachment that establishes that he meets the four conditions mentioned above.
- In order to take advantage of the closer connection exception for students for withholding tax purposes, the student must address a letter to the IRS Field Assistance Area Director for the IRS area in which he resides and ask for a letter confirming that he meets the closer connection exception for students to the substantial presence test and that he may continue to be treated as a nonresident alien for withholding tax purposes.
- In the absence of a letter from the IRS, the withholding agent should continue to treat the student as a resident alien if he has passed the substantial presence test.
- Were you present in the U.S. fewer than 183 days in the current year?
- Is your Tax Home in a Foreign Country? (See Revenue Ruling 93-86)
- Do you maintain a closer connection to that country than to the United States? (See Treas. Reg. 301.7701(b)-2(d)).
- During your current year in the United States, have you taken any steps to change your United States immigration status to permanent residency, or have you taken any steps to adjust your immigration status in the United States?
- If you answered "YES" to the first three questions above, and "NO" to the last question above, then you have a basis for claiming that you are still a Nonresident Alien, even though you have passed the Substantial Presence Test.
- Attach Form 8840, Closer Connection Exception Statement for Aliens to your individual income tax return to claim this exception.
- If you are not required to file a tax return, file Form 8840 by itself with the Philadelphia Service Center.
- To be treated as a nonresident alien for withholding tax purposes, you should address a letter to the IRS Field Assistance Area
Residency Starting Date:
- Under the Green Card Test:
- If you meet the green card test at any time during a calendar year, but do not meet the substantial presence test for that year, your residency starting date is the first day in the calendar year on which you are present in the United States as a lawful permanent resident (the date on which USCIS has officially approved your petition to become an Immigrant).
- If you receive your green card abroad, then the residency starting date is your first day of physical presence in the United States after you receive your green card. Section 7701(b)(1)(A)(i) of the Internal Revenue Code allows you to be treated as a resident alien for the entire calendar year if you were a Lawful Permanent Resident of the United States at any time during the calendar year if you have been present in the United States for at least one day during the calendar year.
- Under the Substantial Presence Test:
- If you meet the substantial presence test for a calendar year, your residency starting date is generally the first day you are present in the United States during that calendar year.
- Under the terms of a Tax Treaty:
- In general, your residency starting date under the terms of a Tax Treaty is the date on which you first satisfy the definition of a resident under the terms of the Tax Treaty.
- As a general rule, each treaty looks first to the domestic tax law of each country to define residency for that country. If dual residency in two countries results, then most treaties contain "tie-breaker" rules to determine to which country residency pertains.
Residency Ending Date:
- Under The Green Card Test:
- Your last day of presence in the United States on which you are considered to be a lawful permanent resident of the United States is the residency ending date under the immigration laws of the United States.
- However, green-card holders who reside outside the United States are still considered to be resident aliens of the United States for tax purposes unless such persons: (1) voluntarily turn in their green cards to USCIS and renounce their U.S. immigrant status; (2) have their immigrant status administratively revoked by USCIS; or (3) have their immigrant status judicially revoked by a United States federal court.
- Under The Substantial Presence Test:
- Your last day of presence in the United States followed by a period during which:
- You are not present in the United States,
- You have a closer connection to a foreign country than to the United States,
- You are not a resident of the United States during the calendar year following that of your last day of presence in the US
- Under the general rule, the residency ending date is December 31 of the calendar year in which you left the United States.
- However, an exception is allowed for a residency ending date earlier in the alien's last calendar year in the United States as follows: the alien's residency ending date shall be the last day during the calendar year that the individual is physically present in the United States if, for the remainder of the calendar year
- The individual's tax home is in a foreign country (cf. Rev. Rul. 93-86)
- He or she maintains a closer connection to that foreign country than to the United States (cf. Treas. Reg. § 301.7701(b)-2(d)).
- Note that when applying these rules an "exempt individual" is not considered to be "present in the United States." This rule may result in situations in which a person who was once a resident under the substantial presence test, and who later becomes an "exempt individual," can subsequently become a nonresident once more without ever having left the United States.
Citizens of CFA Countries:
- Compact of Free Association:
- CFA/FSM -- Federated States of Micronesia
- CFA/MIS -- Republic of Marshall Islands
- CFA/PAL -- Republic of Palau
- Each country is a sovereign nation and the citizens of the CFA countries are considered to be aliens by USCIS. May enter the US freely without a visa, may stay in the US as long as they like, and may be employed without restriction.
- Tax Implications:
- Citizens of the CFA are not immigrants (lawful permanent residents) and do not have green cards.
- Because they are not LPRs of the US, they do not pass the green card test for purposes of tax residency.
- Must pass the SPT to determine their tax residency
- Usually a dual status alien or a NRA (if arrives after July 2) in the first year and a resident alien every year thereafter until he leaves the United States
- I-94 card bears entry date and country, but no expiration date is shown. The individual will have a passport for the issuing CFA country.
- For SSN purposes, a citizen of a CFA country is treated as an alien lawfully admitted for permanent residence.
Devon Slough, International Taxation Officer
Maryland Hall, Room G-13
Monday–Friday, 8 a.m.–2 p.m.