US Resident for Tax Purposes - Frequently Asked Questions

Index:

1. Who is considered a U.S. person for tax purposes?

For U.S. income tax purposes, a “U.S. person” includes individuals and entities who are obligated to comply with U.S. tax laws, which involve reporting global income. Here’s the breakdown:

Individuals:

• U.S. Citizens: Includes those born in the U.S., individuals born abroad to at least one U.S. citizen parent, and naturalized citizens.
• Green Card Holders: Individuals with lawful permanent residency in the U.S., irrespective of their physical location. Related: Filing Requirements for Green Card Holders
• Tax Residents: Includes those who meet the Substantial Presence Test:
  • Present in the U.S. for more than 30 days in the current year.
  • Present for a cumulative total of 183 days over the current and preceding two years, with specific weight applied to previous years.

Entities:

• Corporations and Partnerships: Entities established under U.S. laws.
• Trusts and Estates: Includes trusts formed under U.S. jurisdiction or estates managed by U.S.-based executors with domestic assets.

U.S. persons must file annual IRS tax returns, reporting all worldwide income. This system of citizenship-based taxation creates unique complexities, especially for individuals residing abroad or with foreign income sources.

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2. What is the difference between a U.S. citizen and a U.S. person?

The primary difference between a U.S. citizen and a U.S. person lies in scope and legal classification under U.S. tax law. A U.S. citizen is an individual who has either acquired citizenship by birth within the U.S. or abroad to at least one U.S. citizen parent, or through naturalization. U.S. citizens, whether living abroad or in the U.S., are required to report their worldwide income and file annual income tax returns, fulfilling their tax obligations under the Internal Revenue Code.

In contrast, the term U.S. person for tax purposes encompasses a broader group, which includes:

1. U.S. citizens (all citizens fall under this category).

2. Lawful permanent residents (green card holders), regardless of whether they are living in the U.S. or abroad.

3. Tax residents, determined by the substantial presence test, which evaluates physical presence in the U.S. over a three-year period.

While both U.S. citizens and U.S. persons must adhere to tax and reporting obligations, including reporting foreign financial accounts and global income, not all U.S. persons are citizens. For example, a lawful permanent resident living in a foreign country or a foreign national meeting the substantial presence test is classified as a U.S. person for tax purposes but not as a U.S. citizen.

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3. Who is a Resident Alien in the U.S.?

A resident alien in the U.S. is a foreign person who is not a U.S. citizen but meets specific residency criteria under U.S. tax law, making them a person for tax purposes. This classification is determined by one of two key tests:

Criteria for Resident Alien Status:

1. Green Card Test: A lawful permanent resident (green card holder) qualifies as a resident alien. This applies to individuals who hold or have held a valid green card at any point during the calendar year, granting them the right to reside in the U.S.

2. Substantial Presence Test: Foreign nationals may also be classified as resident aliens if they meet the substantial presence test, which evaluates their physical presence in the U.S. over a three-year period.

Tax Implications:

Resident aliens are taxed on their worldwide income in the same manner as U.S. citizens. This includes filing an annual income tax return and reporting income from domestic entities, passive investments, and foreign corporations. Unlike non-permanent residents or non-resident aliens, who are only taxed on U.S.-sourced income, resident aliens have tax responsibilities tied to their global earnings.

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4. Who is a Nonresident Alien for tax purposes?

A nonresident alien for tax purposes is a foreign national who does not meet the residency criteria outlined in U.S. tax law. This means they are not classified as a lawful permanent resident (green card holder) and fail the substantial presence test.

Nonresident aliens are taxed only on U.S.-sourced income and income connected to a trade or business conducted within the U.S. Unlike U.S. persons for tax purposes, they are not required to report worldwide income or foreign financial accounts. To meet their tax and reporting obligations, nonresident aliens typically file their income tax returns using IRS Form 1040NR or 1040NR-EZ, which is specifically designed to report domestic income.

Certain non U.S. citizens, such as individuals on F-1 or J-1 visas, may qualify for tax exemptions or reduced rates under an income tax treaty between their home country and the U.S.

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5. What is the difference between U.S. citizenship and U.S. residency for tax purposes?

The key difference between U.S. citizenship and U.S. residency for tax purposes lies in classification and rights, though both require compliance with U.S. tax and reporting obligations.

A U.S. citizen is someone born in the U.S., naturalized, or born abroad to U.S. citizen parents. Importantly, U.S. citizens are always considered U.S. tax residents, even if they live in a foreign country or claim residency elsewhere. They are subject to citizenship-based taxation, meaning they must report and pay taxes on their worldwide income until they formally renounce their citizenship. This includes filing expat tax returns and reporting foreign assets and income, regardless of where they live.

A U.S. resident for tax purposes includes lawful permanent residents (green card holders) or individuals who meet the substantial presence test. Resident aliens must also report worldwide income and file income tax returns, but their tax residency depends on maintaining their immigration or physical presence status.

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6. What is a U.S. resident entity?

A U.S. resident entity is a business or organization classified as a U.S. tax resident under U.S. tax law. This designation determines its tax and reporting purposes and aligns its obligations with those of individuals classified as U.S. persons for tax purposes.

Definition:

A U.S. resident entity includes:

• Corporations: Incorporated within the United States, these entities are considered U.S. tax residents.
• Partnerships: Entities with a principal place of business in the U.S. fall under this category.
• Trusts and Estates: Trusts are deemed U.S. residents if they are established under U.S. law or managed by trustees who are primarily U.S. persons.

Tax Implications:

• Global Taxation: Similar to U.S. citizens and resident aliens, U.S. resident entities are taxed on their worldwide income, including income generated abroad or from foreign countries.
• Filing Requirements: These entities must file tax returns annually and report worldwide assets and income to the IRS. Depending on their structure, they may also be subject to corporate income tax.
• IRS Compliance: Resident entities must remain tax compliant, adhering to U.S. offshore disclosure rules and other IRS mandates.

Comparison to Nonresident Entities:

Nonresident entities, unlike resident entities, are taxed only on their U.S.-sourced income. They do not face obligations to report global income or foreign financial accounts, which differentiates their tax responsibilities.

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