Resident and Non-Resident Alien

Posted by Sanket Shah | International Tax | Tuesday 18 October 2011 2:00 pm

Very often we are asked, why a person who is residing in U.S and is on an H1 or L1 visa, required to disclose his world wide income in his U.S Tax return.

Our first suggestion, please do not confuse your Immigration status with your Tax status. They are two independent bodies and have different set of rules. Having said that, let us brief you the U.S Tax requirement.

A resident alien’s income is generally subject to tax in the same manner as a U.S citizen. If you are a resident alien, you must report all interest, dividends, wages or other compensation for services, income from rental property or royalties and other types of income on your U.S tax return. You must report these amounts whether from sources within or outside  the United States.

Since resident and non-resident aliens are taxed differently, it is important for you to determine your status.

You are considered a non-resident alien for any period that you are neither:

  1. A United States citizen nor
  2. A United States resident alien

You are considered a resident alien if you met one of the following two tests for the calendar year:

  1. Green Card Test” – If at any time during the calendar year you were a lawful permanent resident of the United States according to the immigration laws, and this status was not rescinded or administratively or judicially determined to have been abandoned.
  2. Substantial Presence Test” – To meet the substantial presence test, you must have been physically present in the United States on atleast
    1. 31 days during the current year and
    2. 183 days during the 3 year period that includes the current year and 2 years immediately before. To satisfy the 183 days requirement,
      1. Count all of the days you were present in the current year and
      2. One-third of the days you were present in the first year before the current year and
      3. One-sixth of the days you were present in the second year before the current year.

Example:

You were physically present in the United States on 120 days in each of the years 2009, 2010 and 2011. To determine if you meet the substantial presence test for 2011, count the full 120 days of presence in 2011, 40 days in 2010 (1/3 of 120) and 20 days in 2009 (1/6 of 120). Since the total for the 3-year period is 180 days, you are not considered a resident under the substantial presence test for 2011.

Even though you meet the substantial presence test, you can be treated as a non-resident alien if:

  1. You are present in the United States for fewer than 183 days during the current calendar year
  2. You maintain a tax home in a foreign country during the year and
  3. You have a closer connection to that country than to the United States. This does not apply if you have applied for status as a lawful permanent resident of the United States or you have an application pending for adjustment of status.
Hence, a person who is on an H1 or L1 and whose company has initiated the Green Card process cannot be treated as a Non-Resident Alien.
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