Introduction to Residency Under U.S. Tax Law

 

The taxation of aliens by the United States is significantly affected by the residency status of such aliens.

Although the immigration laws of the United States refer to aliens as immigrants, nonimmigrants, and undocumented (illegal) aliens, the tax laws of the United States refer only to RESIDENT and NONRESIDENT ALIENS.

In general, the controlling principle is that resident aliens are taxed in the same manner as U.S. citizens on their worldwide income, and nonresident aliens are taxed according to special rules contained in certain parts of the Internal Revenue Code (hereinafter referred to as I.R.C. or the Code). A major distinguishing feature of this special tax regime concerns the source of income: a nonresident alien (with certain narrowly defined exceptions) is subject to federal income tax only on income which is derived from sources within the United States and/or income that is effectively connected with a U.S. trade or business.

The residency rules for tax purposes are found in I.R.C. § 7701(b). Although the tax residency rules are based on the immigration laws concerning immigrants and nonimmigrants, the rules define residency for tax purposes in a way that is very different from the immigration laws. If you are an alien (not a U.S. citizen), you are considered a nonresident alien, unless you meet one of two tests for the calendar year (January 1 – December 31).

  1. You are admitted to the United States as, or change your status to, a Lawful Permanent Resident under the immigration laws (the Green Card Test), or
  2. You meet the Substantial Presence Test (which is a numerical formula which measures days of presence in the United States).

Note. Even an undocumented alien who meets the Substantial Presence Test will be treated for tax purposes as a resident alien.

In some cases, aliens may choose to override the result of the Green Card Test and/or the Substantial Presence Test by:

  1. Making the "First-Year Choice" to be treated as a resident alien for at least part of the year of arrival;
  2. Choosing with their resident alien or U.S. citizen spouse to be treated as a resident;
  3. Claiming a closer connection to a foreign country; or
  4. Qualifying as a resident of a foreign country under its laws and being eligible to be treated, and claiming treatment, as a resident of the foreign country under the residency tie-breaker rules of an income tax treaty between that country and the United States.

References/Related Topics

Note: This page contains one or more references to the Internal Revenue Code (IRC), Treasury Regulations, court cases, or other official tax guidance. References to these legal authorities are included for the convenience of those who would like to read the technical reference material. To access the applicable IRC sections, Treasury Regulations, or other official tax guidance, visit the Tax Code, Regulations, and Official Guidance page. To access any Tax Court case opinions issued after September 24, 1995, visit the Opinions Search page of the United States Tax Court.