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Four Ways Foreign Nationals Can be Taxed in the U.S.

Roger Healy, CFP®, MBA

Director of Financial Education

Last Updated
November 21, 2022
Couple working on financial budget

How U.S. Taxation Can Impact Foreign Nationals

The U.S. doesn’t only tax its citizens and residents; it’s important to understand that U.S. income tax can be levied even on those whose visas don’t allow them to stay in the U.S. permanently.

If you’re a foreign national with interests in the United States wondering whether you’re subject to U.S. income tax, ask yourself the following questions.

Are you a U.S. citizen?

This may seem like a strange question, but you might be a U.S. citizen and not realize it. These people are sometimes referred to as “accidental Americans.” And because the U.S. is one of only two countries in the world where taxation is based on citizenship, if you’re U.S. citizen, you’re subject to U.S. income tax. There are two common ways you could be a U.S. citizen — even “accidentally.”

  • Were you born in the U.S.?
    It’s not uncommon for people to go to the U.S. for medical treatment — particularly those from Caribbean and Central American countries. Being born in the U.S. or one of its territories automatically makes you a U.S. citizen.
  • Were either of your parents U.S. citizens when you were born? If you are child of a U.S. citizen, you’re probably a U.S. citizen (even if you’ve never taken any action or visited the U.S.). In both cases above, in order to renounce your U.S. citizenship and the tax obligation it requires, you must apply for formal expatriation.

Do you have a Green Card?

Having a Green Card (also known as a Permanent Resident Card) allows you to live and work permanently in the U.S. Therefore, if you are a lawful permanent resident (whether you spend anytime physically in the U.S.) you are resident for U.S. income tax purposes.

Do you meet the substantial presence test?

The Substantial Presence Test is based on the number of days a person spends in the U.S. over a three-year period.

A person is resident for income tax for a year if they spend 183 or more days in the U.S. that year.

If a person is not present in the U.S. for 183 days in a year but is present for at least 31 days, then the number of days they were present in the U.S. in each of the prior two years is taken into account when calculating whether they are resident for income tax.

To calculate whether a person is resident for income tax, the number of days a person is present in the current year is added to one third of the days they were present the prior year, and one sixth of the days a they were present the preceding year (i.e. the year before last). If the total number of days (current year + 1/3 prior years + 1/6 two years prior) is 183 or greater, then the person is resident for U.S. income tax for the current year.

Substantial Presence Test Calculation

For example, let’s say you visit the U.S. each year. This year, you’ve been in the U.S. for 82 days, so you might think you can stay another 100 days. However, last year you spent a total of 120 days in the U.S. and the year before that you spent a total of 94 days in the U.S.

The formula says to count all of the current year’s days, one-third of the prior year’s days and one-sixth of days from the year before that. So, this example would break down as follows:

Substantial Presence Calculation Example
Days in the U.S. (Current Year):82 Days
Calculation for Days in the U.S. (Based on Previous Year): 1/3 x 120 Days = 40 Days
Calculation for Days in the U.S. (Based on Two Years Prior):1/6 x 94 Days = 15.66 Days
Total Days Considered Spent in the U.S. This Year for Tax Purposes:82 Days + 40 Days + 15.66 Days = 137.66 Days

With a current total of 137.66 days, this means you can only stay in the U.S. for 45 more days this year before you’re considered a resident for U.S. income tax purposes — a consequence that would apply to your worldwide income for the year, not just the income you earned while staying in the U.S.

There are, as always, exceptions to this rule. The first exception is the Closer Connection Exception, which looks at various facts and circumstances to establish a closer connection with another country. Some examples include the location of one’s permanent home, immediate family, personal bank account, personal effects, club memberships, and social and religious affiliations as well as the place of issuance of one’s driver’s license, where one votes, how one answers questions on official documents, etc.

If days spent in the U.S. within a year total fewer than 183 and a “closer connection” can be clearly established, these rules may not apply. Naturally, applying for residence in the U.S., or similar activity, will negate such claims.

Are you subject to treaty provisions?

Tax treaty provisions contain rules to determine in which country you are a resident. Treaties often contain “tie-breaker” rules when the treaty’s own basic provisions leave doubt in an individual case.

As a foreign national, it’s is important to know if you are a U.S. citizen or resident.  If you are unaware of your status, you can make some serious mistakes in your financial planning. Failure to pay U.S. income tax can be bring serious legal and financial consequences that can be easily avoided with proactive attention and planning.

Request a meeting with an international wealth manager today to get help making the right financial decisions while living abroad in the U.S.

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This commentary is provided for general information purposes only and should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.

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