When you see a headline or come across a snippet involving federal agencies like the Internal Revenue Service (IRS) and U.S. Citizenship and Immigration Services (USCIS), don’t assume that terms are interchangeable and don’t be fooled into thinking that the same kinds of treatment apply across the board. A policy alert issued this week by the USCIS addressed requirements for residence, making clear that there is a distinction between residence and physical presence (link downloads as a PDF). But for tax purposes, residence and physical presence can mean something very different.
When it comes to tax, I’m often asked, “Where do I pay taxes?” Sometimes it comes from a person from another country who is present in the United States (U.S.) on a work or student visa. Sometimes it’s directed from a U.S. citizen living and working in a foreign country. Other times, it’s from a long-term resident in the U.S. who returns to a home country for stretches at a time. But my answer is almost always the same: It depends. And that’s not just because I’m a lawyer. It’s because the rules for tax law (which are constantly changing) don’t always line up nicely with the rules for immigration law (which are also constantly changing).
A lot of the confusion for international taxpayers focuses on the idea of residence. Residency feels like it should be an easy thing – it’s where you live, right? But what if where you live changes? Or if where you live isn’t where you intend to remain? Or if where you live isn’t the country where you were born? On the tax side, things can get tricky. It’s complicated even more because the definitions used by the Internal Revenue Service (IRS) to describe residency aren’t necessarily the same as those used by the USCIS.
Our tax system generally starts with the premise that all U.S. citizens are taxed on their worldwide income unless otherwise excluded. That’s a pretty big net.
For tax purposes, those who are not U.S. citizens are considered aliens. Aliens are further divided into non-resident aliens and resident aliens. By default, non-U.S. citizens inside the country are considered non-resident aliens unless they meet one of two tests: the green card test or the substantial presence test.
The green card test is precisely what it sounds like: You are a resident for U.S. federal tax purposes if you are a Lawful Permanent Resident of the U.S. at any time during the calendar year. The most obvious evidence is an alien registration card, Form I-551, which we also call a green card.
The substantial presence test is more complicated – and there’s math. To meet this test, you must be physically present in the U.S. on at least 31 days during the current year, and 183 days during the three-year period that includes the current year and the two 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 current year, and
- 1/6 of the days you were present in the second year before the current year.
(Ok, it’s not just simple math: there are fractions involved.)
For tax purposes, you’re present in the U.S. for any day that you’re physically present in the country for any period of time. And typically, the longer you are here, the more likely you are a resident for tax purposes. There are some exceptions. Those exceptions include commuting days to Canada or Mexico, days you are in transit or in the country as a crew member of a foreign vessel, days that you can’t leave because of a medical condition that developed while you were in the U.S., and days that you are an exempt individual. Exempt individuals typically include folks here on certain kinds of visas (mainly government, student and teacher visas) and professional athletes here to compete in a charitable sports event.
Even if you pass the substantial presence test, you can still be treated as a non-resident alien if you have a closer connection to a foreign country in which you have a tax home than to the U.S. Some exceptions apply, but the IRS typically looks at where you and your family live, where you keep your stuff, where you conduct your business, and where you drive and vote when determining how close your connection is to a foreign country. It’s very facts and circumstances dependent.
(For more information, check out IRS Pub 519, which downloads as PDF.)
You probably assume that folks are clamoring to be considered residents, right? Not always. For U.S. tax purposes, residents are treated – and taxed – like U.S. citizens. On the plus side, that means that they’re entitled to the same tax credits and deductions as U.S. citizens. But that also typically means that they must report their worldwide income and disclose their foreign assets; perhaps not so surprisingly, that doesn’t have universal appeal.
Non-residents, on the other hand, typically only have to report and pay tax on their U.S.-sourced income. But they also do not get the benefit of most tax breaks afforded to U.S. citizens.
For tax reasons, physical presence in the country is typically (but not always, remember there are exceptions) linked to residency. The longer you stay here, the more likely it is that you are a resident. But for immigration purposes, that is not necessarily the case. In their policy alert, the USCIS purported to make clear that there is a distinction between residence and physical presence. Citing the Immigration and Nationality Act (INA), the USCIS explained: The term residence should not be confused with physical presence, which refers to the actual time a person is in the United States, regardless of whether he or she has a residence in the United States.
The policy alert was an effort to clarify the status of children who are not yet citizens and are adopted or born to U.S. service members or certain government employees overseas. The controversial statement made clear that those children would not automatically become citizens because they do not meet the residency requirements under existing immigration law. USCIS policy had previously provided that children of U.S. government employees and members of the U.S. armed forces who were employed or stationed outside of the country should be considered to be both “residing in the United States” and “residing outside of the United States” for immigration purposes. However, the USCIS has rescinded the prior policy permitting children of U.S. government employees and U.S. armed forces members stationed outside of the country to be considered “residing in” the U.S. With that, it may be necessary for affected parents to apply for citizenship on behalf of their children.
A key takeaway from the update is the importance of understanding that terms don’t always mean what you might think they mean, and even interpretations that you might think are settled can change over time. It also underlines that different agencies may use similar terms and yield different results. For example, for tax purposes, U.S. tax residents are largely treated like U.S. citizens. But that’s not the case for immigration purposes: lawful permanent residents may not vote in elections, and if they remain outside of the U.S. for extended periods, they may be considered to have abandoned their permanent residence. That presumption is hard to refute for immigration purposes; it’s a lot easier to prove a U.S. connection for tax purposes even if you leave the country.
It’s also complicated when the two worlds – immigration and tax – collide. Under U.S. law, immigrants can be deported if they are convicted of a crime of moral turpitude or an aggravated felony. Aggravated felonies include certain financial crimes such as those involving fraud or deceit. When it comes to tax, something as relatively minor as the failure to file a tax return is typically considered a misdemeanor – but if the violation is found to be willful, it can be treated as a felony.
For those who are not permanent residents, that could result in removal proceedings. As Jonathan Grode, an immigration attorney for Green & Spiegel, LLC, explains, “With nonimmigrant status, a crime that renders the person inadmissible – one involving a crime of moral turpitude and a sentence that carries a maximum of greater than a year – then under INA 212 the foreign national is removable from the United States.” But deportation can also extend to permanent residents – remember Joe Giudice?
As the world grows smaller, it’s clear that tax and immigration will continue to overlap and change. That doesn’t mean that the terms that apply to one apply to the others, or that the respective agencies share common guidelines. When you see words that could have dual meanings, use caution and make sure that you’re applying them in the right context. If you have questions, it’s always a good idea to check with a professional for guidance.
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