The IRS uses two tests, the green card test and the substantial presence test, to evaluate your alien status. If you meet the requirements of either test, you are considered a resident alien for tax purposes, otherwise you are treated as a nonresident alien.
If you are an alien with a green card, that is, when the U.S. Citizenship and Immigration Services allows you to legally reside in the country, you are a resident alien. However, if you do not have a green card and you spend at least 31 days in the U.S. during the current fiscal year and a total of 183 days during the last three fiscal years (including the current fiscal year), you will most likely meet the physical presence requirement and also be treated as a resident alien.
Counting 183 days
When counting the number of days you are present in the U.S. during the three-year period, you do not have to include each day. Instead, count only a fraction of the days in two of the three years. Suppose, for example, that you are trying to find out your status for fiscal year 2017, since you lived in the U.S. for 60 days. Count the 60 days for 2017, a third of the days in 2016, and a sixth of the days in 2015. Therefore, if you were in the U.S. for 120 days in 2016 and 180 days in 2015, it only includes 40 days for 2016 and 30 days in 2015, with the total for the three-year period being 130 days. In this scenario, you pay income tax as a nonresident alien.
In addition, days when they are physically present in the U.S. are not taken into account under the following circumstances:
- Days you travel to work in the United States from a residence in Canada or Mexico, if you regularly travel from Canada or Mexico
- Days you are in the U.S. for less than 24 hours when you are in transit between two locations outside the U.S.
- Days you're in the United States as a crew member of a foreign ship.
- Days you cannot leave the United States due to a medical condition that arose during your stay.
- Days you're an "exempt individual."
An "exempt individual" for the purposes of this trial refers to the following persons:
- An individual temporarily present in the United States as an individual of a foreign government under an "A" or "G" visa.
- A teacher or trainee temporarily in the United States under a "J" or "Q" visa, who substantially meets the requirements of the visa
- A student temporarily in the United States under an "F", "J", "M" or "Q" visa, who substantially meets the requirements of the visa
- A professional athlete temporarily in the United States to compete in a charity sporting event.
Taxes for foreign residents
As a legal resident of the United States, you are subject to the tax rules of U.S. citizens. This means that you have to report all the income you earn on your annual tax returns, regardless of the country in which you earn it. When preparing your return, you can always use the 1040, or if you are eligible, the 1040A or 1040EZ.
Taxes for non-residents
A nonresident must also pay income taxes to the IRS, but only on income that is effectively tied to the U.S., which generally includes money earned while in the U.S. The IRS, however, has no authority to impose taxes on income that nonresidents earn in their home countries or in any foreign country for that matter. When preparing your U.S. tax return, you should use Form 1040NR or a shorter Form 1040NR-EZ, if you are eligible. Regardless of which form you use, you will only report amounts that are considered U.S.-source income. Like resident aliens and U.S. citizens, there are deductions and credits you can claim to reduce your taxable income.
Dual status of taxpayers
In the transition year between being a non-resident and a resident for tax purposes, you are generally considered a Dual Status Taxpayer. A Dual Status Taxpayer files two tax returns for the year, one for the portion of the year that was considered a nonresident and one for the portion of the year that was considered a resident. In some situations, the taxpayer may elect to be treated as a resident for the entire year in the transition year to avoid having to file two separate returns.