Tax - Residence Status of Foreigners for Tax Purposes

A person is considered an alien if he or she is not a citizen of USA. And you have to pay taxes if you have income.

In this era of double taxation avoidance treaties, if you have foreign income, you generally pay the difference in taxes between the two countries to your home country or your principal country of residence.

But that is over-simplification of facts. It all depends on whether you stayed in USA and how long.

Thus, how much you have to pay on what all incomes depends on your residence status too.

A US resident alien pays the same taxes like a US citizen. So, all his or her WORLDWIDE income is subject to US taxes.

A nonresident alien pay US taxes on US income only and not on his or her foreign income.

How do you determine whether you are a resident alien or a nonresident alien?

The residence status is determined using one of the two tests:

1. GREEN CARD TEST

This is the status of being a "Lawful Permanent Resident of the United States" granted to eligible foreigners who apply for immigration to U.S. Citizenship and Immigration Service (USCIS). They are issued an alien registration card officially called Form I-551 but popularly known as the "Green Card".

Once this immigrant status is acquired, the tax status is that of a resident alien until you become naturalized as a citizen of USA or you renounce that status in writing.

The only authorities who can revoke a permanent resident status are the U.S. Citizenship and Immigration Service (USCIS) and a US Federal Court of Law.

Tax liabilities are the same as that of a citizen and extend to your US and WORLDWIDE income.

2. SUBSTANTIAL PRESENCE TEST

Even if you don't have an immigrant status, you can be liable to pay the same taxes as that of a US citizen, if you overstay certain number of days during the tax year as well as during the two years prior to that year. There are two steps for this test:

FIRST: Did you stay more than 31 days in the US during the tax year?
If the answer is "Yes", then you will have to look back over the two years prior to that.

SECOND: Did you stay more than 183 days in the US during the last three years (including the tax year and the previous two years) when counted according to the following formula?

All the days you stayed in USA during the last year (the tax year)
+ 1/3 of the days you stayed in the first year prior to that tax year (the immediate previous year to the tax year)
+ 1/6 of the days you stayed in the second year prior to the tax year (the year prior to the immediate previous year)

If the total days during that 3-year period calculated by this formula exceeds 183 days, then you have been a resident alien for tax purposes and are liable to pay US taxes on both your US and WORLDWIDE income.

If you have a US source of income, then you may have some tax liability. Then, if you are foreigner staying in USA and have no intention of paying taxes on your foreign income too, you should not be overstaying the above period limits.

PLEASE NOTE: This is an introductory article on the subject and does not cover all aspects of US taxation of aliens. Please refer to the resources provided by the Internal Revenue Service (IRS) for the latest and definitive information.