What is a Tax Resident?
A Tax Resident is a term used in taxation law to denote a person who is legally required to pay taxes in a particular jurisdiction. The concept of tax residency is crucial in determining an individual’s tax obligations.
Determining Tax Residency
In the United States, if you are not a U.S. citizen, you are considered a nonresident for U.S. tax purposes unless you meet one of two tests. You are a resident of the United States for tax purposes if you meet either the green card test or the substantial presence test for the calendar year (January 1 – December 31)
Green Card Test
The Green Card Test applies to individuals who are admitted to the United States as, or change their status to, a lawful permanent resident under the immigration laws.
Substantial Presence Test
The Substantial Presence Test is a numerical formula which measures days of presence in the United States. Even an undocumented individual who meets the Substantial Presence Test will be treated for tax purposes as a U.S. resident.
Exceptions and Special Cases
In some cases, you may choose to override the result of the Green Card Test and/or the Substantial Presence Test by:
- Making the “First-Year Choice” to be treated as a U.S. resident for at least part of the year of arrival,
- Choosing with your U.S. citizen or U.S. resident spouse to be treated as a U.S. resident,
- Claiming a closer connection to a foreign country, or
- Qualifying as a resident of a foreign country under its laws and being eligible to be treated, and claiming treatment, as a resident of the foreign country under the residency tie-breaker rules of an income tax treaty between that country and the United States.
Conclusion
Understanding the concept of Tax Resident/Tax Residency is crucial for anyone dealing with international taxation issues. It determines where and how an individual is taxed, and can have significant implications for one’s financial planning.
