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What's your tax residency status in the US?

All non-US citizens who live in the United States are considered to be non-resident aliens unless they meet the criteria for one of the following two tests.

The Green Card Test

A person fulfils the criteria for the Green Card Test and is therefore considered by the Internal Revenue Service to be a US tax resident if they are a Lawful Permanent Resident in the United States at any point during the calendar year.

In effect this means that you have been granted permission to reside in the United States as an immigrant via the so-called "green card", Form I-551. The only way you can lose this status is if you have your card terminated by a federal court, have your card terminated by the U.S. Citizenship and Immigration Services (USCIS) or voluntarily renounce your card in writing to USCIS.

It is worth bearing in mind that even if you are not in the United States for a single day during the duration of calendar year, you may elect to be treated as a resident alien by the IRS.

The Substantial Presence Test (SPT)

Any expat who meets the criteria of the SPT is taxed as a resident alien. If you meet the SPT, it usually means that you have been present in the United States for at least 30 days of the current year and at least 183 days of the past three years. However, the calculation of this 183 days is not as straightforward as it might seem; the total number of days is worked out using the following formula:

  • One day equals one day in the current year
  • One day equals one-third of a day in your second year
  • One day equals one-sixth of a day in your first day

Exceptions to the Substantial Presence Test

There are a number of important exceptions to the application of the Substantial Presence Test. This is both to protect the integrity of the taxation system and also to ensure that cross-border individuals who have no intention of residing in the United States are not unfairly subjected to tax.

Notable examples of these exceptions including the following:

  • Stopovers: The most common example of this is a person who stops over in the United States for less than 24 hours (unless the purpose of the stopover is to conduct business or to perform work). This exception rule is important as it can ensure that a person who is on the margins of meeting the SPT does not pass the threshold purely as a result of their travel arrangements
  • Medical emergencies: This exception applies if a person had verifiable plans to leave the United States but was prevented from doing so because of a medical emergency. This exception is unlikely to hold if the person concerned travelled to the United States for medical care but, through unforeseen circumstance, was forced to remain longer than they originally intended.
  • Visa status: For the most part, students, teachers and trainees are not subject to the SPT unless they trigger other criteria – for example, their visa expires.
  • Commuters: Individuals who commute from either Mexico or Canada do not usually have the days on which they commute count towards the SPT. However, there are certain other qualifying criteria that apply here, so it is essential that you discuss this possible exemption with your advisor
  • Diplomats: Diplomats and their close family are not subject to the SPT.

The Closer Connection Exemption

The closer connection exception may apply if the individual concerned:

  • Is present in the US for fewer than 183 days in the year in question
  • Maintains a tax home in a foreign country during the year in question
  • Has a closer connection during the year in question to one foreign country in which they have a tax residence than they do to the United States (this tax residence must apply for the entire year).

Application of the closer connection test can be complex and should generally only be used as a last resort and after careful consideration with your wealth manager and/or tax advisor.

Wealth Management Advice for Both Resident Aliens and Non-Resident Aliens

Even if you are classed as a non-resident alien, you may still live in the United States and have US and overseas financial interests that need to be structured to your long-term advantage. Cross border tax planning is therefore essential for effective wealth management.

Blacktower (US) LLC helps all US-interested parties, including Green Card holders and SPT individuals, to structure and manage their wealth in the way that best aligns with their financial and retirement goals. For more information about how we may be able to help you make suitable provision for your future and that of your family, contact our wealth management team today.

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