|Wednesday, Dec, 31, 1969; Posted: 4:00 p.m. EDT (16:00 GMT)
Pending immigrants usually have a puzzle. Will their global income be taxable in US while their immigration case is pending at USCIS? Especially for those who apply for EB-1C multinational managers and executives transferee and EB-5 investor immigration, this issue turns to be even more serious because of their relatively big global income. To answer this question, we must first figure out whose income will be taxed.
Generally speaking, except for some special rules for student and scholar which exempt some sort of income to them, all income comes from trade and business in US, namely US income will be taxable. Some exemptions may apply in certain circumstances, such as exemption for dependent who is qualifying under the tax law.
However, regarding to the global income, there is huge difference between resident alien and nonresident alien defined by tax law. According to IRS’s explanation, “A resident alien's income is generally subject to tax in the same manner as a U.S. citizen. If you are a resident alien, you must report all interest, dividends, wages, or other compensation for services, income from rental property or royalties, and other types of income on your U.S. tax return. You must report these amounts whether from sources within or outside the United States.” That is to say, global income will be taxed if one is deemed a resident alien under tax law. While if you are a nonresident alien, you can only report your US income for tax purpose.
What is a resident alien under tax law?
IRS will adopt two tests, the green card test and substantial presence test, if one of the two tests is met, the alien will be deemed a resident alien and his global income will be taxed just like a US citizen.
Substantial Presence Test
You will be considered a resident alien for tax purpose if you physically present in the United States on at least:
1. 31 days during the current year, and
2. 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:
• All the days you were present in the current year, and
• 1/3 of the days you were present in the first year before the year, and
• 1/6 of the days you were present in the second year before the current year.
Let’s do some math puzzles:
If Kevin stays in US 28 days in US in 2011, and whole year in 2010 and 2009, how many days he will be counted in the 3-year period?
Based on the calculation method above the days in which Kevin stay in US during the 3-year period will be 28+ (365/3) + (365/6) =210.5 days.
Will Kevin be deemed a resident alien?
No, the first prong which requires he stay in US at least 31 days in the current year, here the year of 2011.
If Kevin stays in US 60 days in US in 2011, 60 days in 2010, 60 days in 2009, will Kevin be counted as a resident alien for tax purpose?
The days in 3-year period for Kevin will be 60+60/3+60/6=90 days. Therefore, he will not be deemed a resident alien for tax purpose because the presence in 3-year period is less than 183 days (the second prong).
As mentioned above, some type of alien will be exempted under tax law. But note that they are not exempted individual. Only the days that they presented in US with those statuses are exempted being counted into the Substantial Presence Test. Those categories of statuses will include: foreign government-related individual, J or Q holder teachers or trainees, F, J, M, Q holder students or scholars and professional athletes.
There is still one exception enabling an alien to opt-out even if he has met the Substantial Presence Test. That is Closer Connection Exception. If you are present in the United States for fewer than 183 days during the current calendar year, you maintain a tax home in a foreign country during the year, and you have a closer connection to that country than to the United States.
Green Card Test
This test is fairly clear. If you are granted a green card from USCIS, you satisfy this test as a resident alien. This status will continue as you maintain your Legal Permanent Resident status unless your green card is otherwise nullified or terminated voluntarily or administratively.
If you meet the green card test at any time during the calendar year, but do not meet the substantial presence test for that year, your residency starting date is the first day on which you are present in the United States as a Lawful Permanent Resident. However, an alien who has been present in the United States at any time during a calendar year as a Lawful Permanent Resident may choose to be treated as a resident alien for the entire calendar year.
For example, Kathy received her green card on September 15, 2011, Now it is September 28, she will be deemed a resident alien on tax purpose although she does not meet the Substantial Presence Test (remember the 1st prong is more than 31 days presence in US during the current year). Her resident alien status for tax purpose will start at September 15, 2011. However, she can also choose to be treated as a resident alien for the whole year of 2011.
Why would an alien be willing to choose to be a resident alien?
People may confuse why an alien wants to make all his income taxable to US tax law. The reason is simple. Some alien may not have global income. Also, a resident alien can claim personal tax exemption and dependent tax exemption according to the law applicable for US citizen by which can make considerable deduction to their tax.