Determining U.S. Tax Residency: Comprehensive Rules and Implications
- T Anagesh
- Jul 31
- 9 min read
Updated: Oct 7
Understanding how the United States defines tax residency is fundamental to complying with its income tax laws. Unlike many countries that rely solely on citizenship or domicile, the U.S. applies objective, rule-based tests to determine whether a foreign national is considered a resident alien or a non-resident alien for federal income tax purposes. This classification is essential because it determines the scope of income subject to U.S. taxation, the reporting obligations, and the eligibility for deductions and credits. While resident aliens are taxed similarly to U.S. citizens on their worldwide income, non-resident aliens are taxed only on U.S.-sourced income, and under different rules and rates.
The Internal Revenue Service (IRS) uses two primary criteria to assess whether a foreign individual qualifies as a tax resident: the Green Card Test and the Substantial Presence Test. In certain cases, individuals may be considered residents under a combination of these rules or may claim an exception or treaty benefit to avoid being treated as U.S. tax residents.
Below is a detailed breakdown of these residency determination mechanisms, related exceptions, and filing consequences.
Residency Determination Methods under U.S. Tax Law
2.1 Green Card Test
An individual is considered a resident for tax purposes if they are a Lawful Permanent Resident (LPR) of the United States at any time during the calendar year. This is commonly known as the Green Card Test.
A person qualifies under this test from the first day they are physically present in the U.S. as a Green Card holder, regardless of the number of days spent in the U.S. during the year.
Once someone holds a Green Card, they remain a tax resident until the Green Card is either formally surrendered (via Form I-407), administratively revoked, or judicially determined to be abandoned.
This means even if a Green Card holder resides abroad or no longer considers the U.S. their primary home, they are still taxed on worldwide income unless the Green Card is officially relinquished.
Example:
Rahul, an Indian national, received a Green Card in 2022 but relocated permanently back to India in 2024. Unless Rahul officially files Form I-407 (Record of Abandonment of Lawful Permanent Resident Status) to surrender his Green Card, he remains a U.S. tax resident and must report all income earned worldwide on Form 1040 in 2025, even if he spent zero days in the U.S. during the year.
2.2 Substantial Presence Test (SPT)
The Substantial Presence Test is a day-counting formula used to determine residency for individuals who do not have a Green Card. It applies to anyone who has spent time in the U.S. on non-immigrant visas (e.g., H, L, B, F, J).
To meet the Substantial Presence Test, an individual must:
Be physically present in the U.S. for at least 31 days during the current year, and
Be present for a total of 183 days over a three-year period, calculated as follows:
If the total of these calculated days is 183 or more, and the individual was present for at least 31 days in the current year, they are considered a resident alien for tax purposes.
Exceptions to the Substantial Presence Rule
Not all days spent in the U.S. count toward the Substantial Presence Test. Certain individuals, referred to as “exempt individuals,” are allowed to exclude some or all days of physical presence, provided they meet specific requirements and file the necessary form.
Categories of exempt individuals include:
Foreign government-related individuals, including diplomats and consular officers (A, G, C-2, or C-3 visa holders)
Teachers and trainees temporarily in the U.S. on J or Q visas, under certain conditions
Students on F, J, M, or Q visas, provided they do not exceed a five-calendar-year threshold
Professional athletes in the U.S. for a charitable sports event. These individuals may file Form 8843 with the IRS to exclude days of presence in the U.S. and prevent residency classification under the Substantial Presence Test.
Example 1:
Emily, a Canadian marketing consultant, travels to the U.S. frequently:
2025: 120 days (in current year the person must be present for 31)
2024: 120 days
2023: 180 days
Calculation:
2025 = 120 days
2024 = 120 × 1/3 = 40 days
2023 = 180 × 1/6 = 30 days
Total = 190 days
Emily meets the Substantial Presence Test for 2025. Unless she claims a closer connection or treaty exemption, she must file Form 1040 and report her global income.
Example 2:
Not Meeting the Substantial Presence Test – Tax Year 2025
Carlos a Spanish software engineer, visits the U.S. occasionally on business:
2025: 40 days
2024: 60 days
2023: 90 days
SPT Calculation:
2025: 40 days
2024: 60 × 1/3 = 20 days
2023: 90 × 1/6 = 15 days
Total = 75 days
Carlos’s total presence is 75 days, which is below the 183-day threshold required to meet the Substantial Presence Test. Therefore, Carlos is considered a non-resident alien for tax year 2025. He would typically file Form 1040-NR and report only his U.S.-source income, unless he becomes a resident through another means (such as a Green Card).
Residency Status Classifications
Based on the rules outlined above, individuals fall into one of the following classifications for tax purposes:
Resident Alien
Meets either the Green Card Test or the Substantial Presence Test.
Are Subject to U.S. taxation on worldwide income.
Required to file Form 1040 annually.
Generally eligible for standard deduction, foreign tax credits, Child Tax Credit, and other benefits available to U.S. citizens.
Non-resident Alien
Does not meet either residency test.
Taxed only on U.S.-source income, such as wages earned in the U.S. or U.S.-based investments.
Required to file Form 1040-NR.
Not eligible for most credits and cannot claim the standard deduction (unless from a treaty-eligible country).
Dual-Status
A dual-status alien is an individual who is classified as both a resident and a non-resident during different parts of the same tax year.
This situation commonly arises when a person:
Moves to the U.S. mid-year and meets the Substantial Presence Test later in that same year, or
Surrenders a Green Card or leaves the U.S. mid-year and no longer meets U.S. residency criteria.
A dual-status tax return must be filed in such cases. The form used as the main return depends on the individual’s residency status on the last day of the tax year:
If the individual is a non-resident alien (NRA) at the end of the year, Form 1040-NR must be filed as the main return, accompanied by a statement using Form 1040 to report income earned during the resident period.
If the individual is a resident alien at the end of the year, Form 1040 is filed as the main return, with a statement using Form 1040-NR to report income from the non-resident period.
This special filing status ensures that the correct U.S. tax obligations are met for both parts of the year.
Example: Dual-Status Scenario
Priya arrives in the U.S. from India on an H-1B visa in July 2025. She meets the Substantial Presence Test by December 2025. Since she was a non-resident from January to June and a resident from July onward, she must file a dual-status return, Form 1040-NR with an attached Form 1040 statement.
Residency Tie-Breaker and Closer Connection Exceptions
If an individual qualifies as a resident under the Substantial Presence Test but also maintains stronger ties to a foreign country, they may avoid U.S. residency by invoking:
Closer Connection Exception:
Available if the individual:
Is present in the U.S. less than 183 days in the current year, and
Has a closer connection to a foreign country where they maintain a tax home.
Must file Form 8840(Closer Connection Exception Statement for Aliens) with a timely return.
Tax Treaty Tie-Breaker:
Many U.S. tax treaties contain provisions that help resolve dual residency conflicts. An individual may claim non-resident treatment under a treaty if:
They meet the residency test of both the U.S. and the foreign country, and
Their center of vital interests, habitual abode, or nationality Favors the other country.
Must disclose the treaty position on Form 8833, if required.
Lukas, a German citizen, entered the United States in 2022 to pursue a graduate degree at a U.S. university. He holds an F-1 student visa, which grants him non-resident alien status under U.S. tax law for a limited period. According to IRS rules, individuals present in the U.S. on an F-1 (student) visa are generally considered "exempt individuals" for the purposes of the Substantial Presence Test (SPT) during their first five calendar years in the U.S.
In the 2025 tax year, Lukas is still within his five-year exemption window (2022–2026), meaning his days of physical presence in the U.S. do not count toward the Substantial Presence Test calculation. This exemption applies regardless of how many days he physically spent in the U.S. during the year, as long as he continues to comply with the terms of his F-1 visa and remains a full-time student.
To maintain this exempt status, Lukas must file Form 8843 with the IRS. This form is a statement of exemption, affirming that he is a non-resident for tax purposes based on his visa status and the nature of his stay in the United States. It must be filed even if Lukas had no income, but it is especially important if he is filing a return alongside it.
In 2025, Lukas participates in a summer internship with a U.S. company and earns taxable income from that position. Because he is classified as a non-resident alien, he must file Form 1040-NR (U.S. Non-resident Alien Income Tax Return) to report his U.S.-source internship income. He is not required to report income from outside the United States, and he is not subject to U.S. taxation on foreign earnings such as income from Germany or foreign scholarships, unless they are considered U.S.-source.
FREQUENTLY ASKED QUESTION
1. What are the implications of being classified as a Resident Alien vs. Non-Resident Alien?
2. Can I avoid being classified as a U.S. tax resident even if I meet the Substantial Presence Test?
Yes. There are two keyways to avoid U.S. tax residency even after meeting the SPT:
a. Closer Connection Exception (Form 8840)
You may claim that your tax home and personal connections are in another country if:
You are present in the U.S. for fewer than 183 days in the current year, AND
You maintain a closer connection to your home country (e.g., family, permanent home, business, etc.)
You must file Form 8840 with a timely U.S. tax return to claim this exception.
b. Tax Treaty Tie-Breaker (Form 8833)
If you are a resident of both the U.S. and another country under their respective laws:
The tie-breaker provisions in a tax treaty (Article 4 in most treaties) determine your tax residency.
Factors include permanent home, center of vital interests, habitual abode, and nationality.
You must disclose this treaty position using Form 8833, especially if it changes your U.S. filing status.
3. What happens if I qualify as a U.S. tax resident but don't file taxes accordingly?
If you meet the criteria for U.S. residency (under either test) but fail to file as a resident, the IRS may:
Impose penalties for non-filing
Assess tax on unreported worldwide income,
Deny foreign tax credits or other deductions,
In serious cases, this may impact future immigration status.
4. Which forms are commonly associated with tax residency and exceptions?
5. Why is it so important to correctly determine my U.S. residency status?
Accurately determining your U.S. tax residency status is crucial because it directly impacts several key areas of your tax obligations. It determines what types of income are subject to U.S. taxation, which tax forms and schedules you must file, and your eligibility for deductions, tax credits, and treaty benefits. Your residency status also influences the tax rates that apply to your income and affects additional compliance requirements, such as the need to report foreign financial accounts under FBAR (Foreign Bank Account Report) and FATCA (Foreign Account Tax Compliance Act). Misclassification can result in overpayment, penalties, or missed benefits.
Comments