US Tax for Legal Permanent Residents – IRS Tax Green Card or SPT
Legal Permanent Resident & Tax Resident: One of the most complicated aspects about U.S. tax, is just trying to decide who is subject to U.S. tax. There are many different types of IRS taxes and tax rules, but for purposes of this article, we will focus on income tax and U.S. tax resident status.
For non-US citizens, there are two primary ways to become subject to US tax.
Either a person is a legal permanent resident, or the person meets the substantial presence test.
Legal Permanent Resident
When a person receives what is commonly referred to as a “Green Card,” they are considered a U.S. person for tax purposes. This means that the individual will become subject to U.S. tax on their worldwide income.
It generally includes income that was earned either inside or outside of the United States. It may also include income that was generated tax-free in a different jurisdiction. (in other words, just because it was tax-free abroad does not mean it is considered tax-free in the U.S.)
Moreover, it also requires the individual to report foreign accounts, assets, and investments on a myriad of different international reporting forms such as the FBAR, Form 8938, Form 5471, etc.
Substantial Presence Test
Just because you have not received legal permanent resident status, does not mean you’re out of the clear just yet. There is another method the IRS uses to extend U.S. tax requirements to non-citizens.
It is called “substantial presence.”
If a person meets the substantial presence test, they can become subject to U.S. tax on their worldwide income along with the same reporting requirements studying legal permanent resident must adhere to.
Summary of Substantial Presence Test
As a non-US citizen and non-US green card holder, you are generally only required to pay tax on your “US Effectively Connected Income” (money you earn while working in the United States). However, if you qualify for the Substantial Presence Test, then the IRS will tax you on your WORLDWIDE income.
IRS Substantial Presence Test generally means that you were present in the United States for at least 30 days in the current year and a minimum total of 183 days over 3 years, using the following equation:
- 1 day = 1 day in the current year
- 1 day = 1/3 day in the prior year
- 1 day = 1/6 day two years prior
Example A: If you were here 100 days in 2016, 30 days in 2015, and 120 days in 2014, the calculation is as follows:
- 2016 = 100 days
- 2015 = 30 days/3= 10 days
- 2014 = 120 days/6 = 20 days
- Total = 130 days, so you would not qualify under the substantial presence test and NOT be subject to U.S. Income tax on your worldwide income (and you will only pay tax on money earned while working in the US).
Example B: If you were here 180 days in 2016, 180 days in 2015, and 180 days in 2014, the calculation is as follows:
- 2016 = 180 days
- 2015 = 180 days/3= 60 days
- 2014 = 180 days/6 = 30 days
- Total = 270 days, so you would qualify under the substantial presence test and will be subject to U.S. Income tax on your worldwide income, unless another exception applies.
Tax Liability – Substantial Presence Test
Once a person meets the substantial presence test, they are required to report their worldwide income in the United States on a 1040 instead of at 1040 NR. Depending on any tax treaties the United States has with any particular country, the foreigner may find himself or herself under heavy tax scrutiny by the United States.
Form 8840 Closer Connection Exception
Even if a person meets the substantial presence test, they may still be able to avoid U.S. tax by showing they have a closer connection to another country.
Form 8833 Treaty Position
Moreover, even if a person does not meet the closer connection exception, they may still be able to avoid U.S. tax on worldwide income by taking a treaty position for a particular type of income(s).
Out of IRS Compliance?
If you are out of US tax compliance, the penalties can be steep.
Golding & Golding can help.
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Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver. He has also earned the prestigious IRS Enrolled Agent credential. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo, and various Law Journals nationwide.