Questioning Citizenship for Tax Purposes

BY ALEX GIL — There are many situations where a foreign person can be treated as a citizen of the United States for tax purposes without ever becoming a citizen of the United States. For the unwary American visitor that extends their stay for a longer period of time the consequences can be daunting. The United States taxes its “citizens” based on worldwide income. Which means, for purposes of the unaware visitor classified as a US citizen for tax purposes, any money they make abroad will be taxable to them in the US.

To avoid any unwanted consequences, it is important to be familiar with the particular tests utilized by the IRS to determine whether a person is a citizen for purposes of United States Federal Taxes. The first and easiest test to determine if a person is a citizen of the United States is if they are born in the US. If a person is born in the United States they are automatically deemed a citizen and will be taxed as a citizen. An issue that can occur is if a child is born in the United States and subsequently moves to another country. That child is a citizen of the United States and remains such unless they write a letter relinquishing their citizenship. However, in a situation such as this, the IRS does have discretion to determine that the child lost his/her United States citizenship as the child grew older, if the child had a good faith belief that he/she was not a citizen of the United States. One of the determining factors, articulated in Revenue Ruling 92-109, is whether the individual affirmatively exercised a specific right of United States Citizenship.

The Tax Reform Act of 1984 sets out objective criteria for determining whether an alien is a resident or nonresident of the United States for worldwide income taxation. Many of the subjective concepts used to determine residence prior to the 1984 Act have been integrated. Gaining an understanding of the subjective definitions previously relied on is useful to understand the objective criteria used today. For a determination of residency, an individual needed to be physically present in the United States and have the intent to remain in the United States. In this analysis, the length of time an alien spent within the United States was a key factor. According to Revenue Ruling 69-611, there was a presumption of residence if an alien remained within the United States for a full year. This presumption could be rebutted by proof that the alien was just visiting and had no intention on remaining. Other factors considered were: the abode taken up by the alien while in the United States; the degree upon which the alien participated in local affairs; the extent of the alien’s business activities within the United States; whether the alien retained ties with the individual’s country of residency; and whether the alien had a confirmed round-trip ticket.

Today, there are two tests used to determine whether an alien is considered a United States resident for income tax purposes. These two tests are the green card test and the substantial presence test. The green card test is satisfied if the individual is a lawful permanent resident at any time during the calendar year. An individual is classified as a lawful permanent resident if the individual has: (1) attained the privilege of residing permanently in the United States under the immigration laws; and (2) that status has not been revoked.

The substantial presence test is met if the alien is present in the United States for 183 days or more during the current calendar year. The substantial presence test can also be satisfied if the alien spends less than 183 days if they spend a significant amount of time in the United States each year, for consecutive years. The formula used to determine if the substantial presence test is satisfied is as follows: (1) days present during the current calendar year; (2) one-third of the days present during the preceding year; and (3) one-sixth of the days present during the second preceding year. If that formula adds up to 183 days or more, the substantial presence test is satisfied.

These are the basic inquiries necessary to determine whether an alien is considered a resident for income tax purposes. Each test has a number of exceptions. Having a basic understanding of the rules is important for aliens visiting the country for extended periods of time, so that they do not find themselves subject to world-wide taxation in the United States. This information was gathered primarily from an international income and estate planning treatise that can be found at the following website.

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