by Jeff Heimler, CPA
Often United States residents are very confused by the tax laws. This is because they are subject to some very specific and complicated rules. This article will provide an overview of the basic rules, including whether you are considered a resident or nonresident, the substantial presence test, the closer connection to a foreign country test, and the nonresident income tax laws and the resident income tax laws.
The first determination that needs to be made is whether you are considered a resident or nonresident for income tax purposes. Your status as a nonresident may be completely different for income tax purposes than the determination shown on your visa by the United States Immigration Department. The tax system has its own rules for determining whether you are a nonresident or a resident.
Usually if you do not have a permanent resident's visa such as a green card or some other form of lawful permanent residency at anytime during the calendar year, you would be considered a nonresident. However, even without a green card, you may be considered a resident for income tax purposes if you have been in the United States enough days to come under the Substantial Presence Test. But, even if you do come under the Substantial Presence Test, you may still be considered a nonresident for income tax purposes if you qualify under the Closer Connection to a Foreign Country Test.
The Substantial Presence Test is used to determine if you have been in the United States long enough to be considered a resident for income tax purposes. You may need to be considered a resident on an income tax return even if your visa says you are not a permanent resident. The determination of the test has two parts. If you answer both parts yes, you have been here long enough to be considered an income tax resident. However, if you answer no to either part, you are considered a nonresident.
The first part asks if you have been in the United States 31 days or more during the calendar year. The second part asks if you have been in the United States 183 days or more during a three-year period that includes the current calendar year and the two preceding years. Not every day in the United States counts to determine if you were here 183 days or more. For example, if you are in the United States on behalf of a foreign government, or you are a teacher or trainee temporarily here on a "J" or "Q" visa, or a student temporarily in the United States on an "F", "J", "M", or "Q" visa, these days do not count as part of the 183-day test.
Even if you come under the Substantial Presence Test, providing the 183 days you were present in the United States were not all in the current year, you may still be considered a nonresident. To qualify as a nonresident, you must show that you had a closer connection during the year to one or more foreign countries where you had a tax home. A closer connection country where you had a tax home is usually the primary place of your business or the place of your employment and where you have maintained more significant contacts than in the United States. Usually this is the place where you live or where your family lives, where you have a driver's license and where you vote.
Once you have made the determination of whether you are a resident or nonresident, you will then be taxed in one of two ways. Generally, nonresidents are required to pay income tax only on their income that has a United States source. United States source means income that is earned or has originated within the United States, or is connected with conducting business with the United States. There are many exceptions to these general rules that are not covered in this article. A nonresident generally cannot claim deductions from his income unless he is reporting income from a business conducted in the United States. A flat 30 percent tax rate applies to the nonresident unless there is a tax treaty in effect with the foreign country at a lower rate. Nonresidents would use the Form 1040-NR for their U.S. taxes. The California form is 540-NR.
Residents, like citizens, are required to pay United States income taxes on all of their worldwide income. The tax rates are the same graduated rates that apply to citizens. Resident aliens would use forms 1040 and 540 respectively for federal and California taxes.
The rules I have explained here are just some of the more general requirements. This is a very complicated area of the tax law and you should seek professional advice if you fall into these circumstances.
Jeff Heimler is with Heimler & Associates He can be reached at (949) 252-8192.
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