Determination of U.S. Residency

Because residents and nonresident aliens are taxed differently, it’s important for you to determine your tax status.

• Under the U.S. Tax Law, a taxpayer can be considered one of the following during the taxation year.
  • Resident 
  • Resident Alien
  • Non-Resident Alien
  • Dual Status Alien

Resident

A taxpayer who is a citizen of the U.S. is considered resident for tax purposes even if he or she is not actually residing in the United States. A resident is taxed on his or her worldwide income. 

Non-Resident Alien

If you are an alien (not a U.S. citizen), you are considered a non-resident alien unless you meet one of the two tests described next under Resident Aliens and considered to be a Resident Alien.

Resident Alien

There are two ways a person can be considered a Resident Alien for tax purposes:

1. If an individual is a green card holder he or she is considered to be a Resident Alien regardless of whether he or she is not actually residing in the United States. 
2. If an individual meets the substantial presence test then he or she is considered to be a Resident Alien

Substantial Presence Test

This test counts number of days an individual is physically present in the United States.

In order to meet the substantial presence test, the following is required

A taxpayer should be physically present in the United States for at least:

1. 31 days during the current taxation year; and
2. 183 days during the 3-year period that includes current taxation and two previous taxation years.
   • It is the sum of All days present in the current taxation year; plus
   • 1/3 of the days present in immediate previous taxation year; plus
   • 1/6 of the days present in second prior year.

Example:

You were physically present in the U.S. on 120 days in each of the years 2015, 2016, and 2017. To determine if you meet the substantial presence test for 2017, count the full 120 days of presence in 2017, 40 days in 2016 (1/3 of 120), and 20 days in 2015 (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 2017.

Days that do not count towards substantial presence test

1. Regular commuters travelling to work in the U.S. from a home in Canada or Mexico.
2. Days you are in the U.S. for less than 24 hours, when you are in transit between two places outside the United States.
3. Days you are unable to leave the U.S. because of a medical condition that develops while you are in the United States.
4. A teacher or trainee temporarily present in the U.S. 
5. A student temporarily present in the U.S.
6. A professional athlete temporarily in the U.S. to compete in a charitable sports event.

In certain situations, you are required to file Form 8843 to justify the days that do not count towards substantial presence test. 

Substantial Presence Test Exception – Closer Connection Exception

Even if you meet the substantial presence test, you can still be treated as a nonresident alien if you:

1. Are present in the United States for less than 183 days during the year;
2. Maintain a tax home in a foreign country during the year; and
3. Have a closer connection during the year to one foreign country in which you have a tax home than to the United States; or

   • For determining whether you have a closer connection to a foreign country, your tax home must also be in existence for the entire current year, and must be located in the same foreign country for which you are claiming to have a closer connection

4. If you have closer relationship with two foreign countries.

You must file form 8840 to claim a closer connection exception. The form is due by June 15 of the following year. 

Election to treat yourself a Resident Alien

A non-resident alien may elect to be treated as a Resident alien if meets all the following conditions (i.e. called first year choice):

• Taxpayer was a not a resident alien in the previous year (immediate);
• Taxpayer is present in the United States for at least 31 consecutive days in the current year;
• Taxpayer will meet the substantial presence test in the following taxation year; and
• Be present in the United States for at least 75% of the number of days beginning with the first day of the 31-day period and ending with the last day of 2017. For purposes of this 75% requirement, you can treat up to 5 days of absence from the United States as days of presence in the United States.

It is important to note that for first year choice residency start date will be the first day of the 31-day period. As such, in the year, you will be considered a dual-status.

Or, a non-resident alien married to a U.S. Resident Alien or Resident may also elect to be treated as a resident to file Married filing jointly tax return. For that, the criteria above are not relevant. Once made, the choice to be treated as a U.S. resident alien for federal income tax and withholding purposes applies to all later years unless suspended (certain criteria needs to be met)

Tie-breaker rule – US Income Tax Treaty

A dual-resident taxpayer is one who is a resident of both the United States and another country under each country’s tax laws. The income tax treaty between the two countries must contain a provision that provides for resolution of conflicting claims of residence (tie-breaker rule). This provision exists in the Canada-US Income Tax Treaty.

The tie-breaker rule will allow the taxpayer to stay a resident of one country as opposed to two. It is important to note that if a taxpayer is a U.S. citizen then they must be a resident in the U.S. and as such the treaty rules will need to look to determine if they can cease residency of another country in question.

Under the tax treaty, where an individual is a resident of both Contracting States, then his status shall be determined as follows:

• he shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him; if he has a permanent home available to him in both States or in neither State, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closer (centre of vital interests);
• if the Contracting State in which he has his centre of vital interests cannot be determined, he shall be deemed to be a resident of the Contracting State in which he has an habitual abode (a place where he or she sleeps regularly);
• if he has an habitual abode in both States or in neither State, he shall be deemed to be a resident of the Contracting State of which he is a citizen; and
• if he is a citizen of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.

To claim the tie-breaker rule, you need to attach a statement to the tax return. 

Dual-Status Alien

A taxpayer can be both a nonresident alien and a resident alien during the same tax year. This usually occurs in the year you arrive in or depart from the United States.

If you meet the substantial presence test for a calendar year (first time), your residency starting date is generally the first day you are present in the United States during that calendar year. As such in that first year, you will be considered a dual-status alien.