1.3 U.S. Residency & Tax Status

The Worldwide Income Taxation Principle

The United States exercises individual income taxation based upon both citizenship and residency:

• U.S. Citizens & Resident Aliens: Subject to federal income taxation under the Internal Revenue Code on their worldwide gross income, regardless of where the income is earned, where the services are performed, or where the payer is located.
• Nonresident Aliens (NRAs): Subject to federal income taxation only on U.S.-source income, categorized either as income effectively connected with a U.S. trade or business or non-connected passive investment income.

The Two Statutory Residency Tests (IRC §7701(b))

Under IRC §7701(b), an alien individual is classified as a U.S. resident alien for tax purposes if they satisfy either the Green Card Test or the Substantial Presence Test for the calendar year.

1. The Lawful Permanent Resident (Green Card) Test

An alien satisfies the Green Card Test if they have been granted lawful permanent resident status by the U.S. Citizenship and Immigration Services (USCIS) at any time during the calendar year and that status has not been administratively or judicially determined to have been abandoned or revoked.

• Residency Starting Date: The first day of the calendar year on which the individual is physically present in the United States as a lawful permanent resident.
• Administrative Termination Rule: Green card status for tax purposes does not end merely because the physical card expires, or because the individual leaves the United States. It ends only when the status is formally revoked by an immigration authority or judge, or when the taxpayer files USCIS Form I-407 (Record of Abandonment of Lawful Permanent Resident Status) or an official letter of abandonment accompanied by the surrendered card.

2. The Substantial Presence Test (SPT)

An alien who does not hold a green card is treated as a U.S. resident alien under the Substantial Presence Test if they satisfy a two-prong physical presence requirement:

• Prong 1: The individual must be physically present in the United States for at least 31 days during the current calendar year; AND
• Prong 2: The individual must accumulate at least 183 weighted days over the three-year period consisting of the current year and the two immediately preceding calendar years.

The Weighted Three-Year Formula

Physical Presence Day Counting Rules

A taxpayer is treated as present in the United States on any day they are physically present in the country for any part of the day, subject to narrow statutory exceptions:

• Days commuting to work in the U.S. from a residence in Canada or Mexico if the individual commutes regularly;
• Days in the U.S. for less than 24 hours while in transit between two foreign points;
• Days present as an exempt individual; and
• Days the individual was unable to leave the U.S. due to a medical condition that arose while the individual was present in the country.

Step-by-Step SPT Calculation Example

Scenario: Heinrich, a German engineer on a temporary work assignment who does not have a green card, was physically present in the United States for the following days:

• 2025 (Current Year): 130 days
• 2024 (1st Preceding Year): 120 days
• 2023 (2nd Preceding Year): 90 days

Step 1: Check the 31-day Current Year Rule: Heinrich was present for 130 days in 2025, which exceeds the mandatory 31-day minimum.

Step 2: Apply the Weighted Formula:

• 2025 Days: $130 \times 1 = 130.0$ days
• 2024 Days: $120 \times \frac{1}{3} = 40.0$ days
• 2023 Days: $90 \times \frac{1}{6} = 15.0$ days
• Total Weighted Days: $130 + 40 + 15 = 185.0$ weighted days

Result: Because Heinrich's weighted day count is 185 days (which equals or exceeds 183 days), Heinrich meets the Substantial Presence Test and is classified as a U.S. resident alien for 2025, subject to U.S. taxation on his worldwide income unless an exception applies.

Exempt Individuals & Form 8843

On the EA exam, candidates must understand that an exempt individual is NOT exempt from paying U.S. federal income tax; rather, their days of physical presence in the United States are exempt from being counted toward the Substantial Presence Test.

Statutory Exempt Categories

1. Foreign Government-Related Individuals: Individuals temporarily present in the U.S. under A or G visas (diplomats, consular officers, ambassadors, and international organization employees) and their immediate families. Exemption applies indefinitely.
2. Teachers or Trainees: Present under J or Q visas who are substantially complying with visa requirements. Days are exempt if the individual has not been an exempt teacher, trainee, or student for more than 2 calendar years out of the preceding 6 calendar years.
3. Students: Present under F, J, M, or Q visas. Days are exempt for up to 5 calendar years. Beyond 5 calendar years, days count toward the Substantial Presence Test unless the student establishes to the satisfaction of the IRS that they do not intend to reside permanently in the United States and have maintained a closer connection to a foreign country.
4. Professional Athletes: Temporarily present to compete in a charitable sports event.

Mandatory Information Return: Form 8843

Every exempt individual who excludes days from the Substantial Presence Test must file Form 8843 (Statement for Exempt Individuals and Individuals with a Medical Condition). If the individual is not required to file an income tax return, Form 8843 must be filed independently with the IRS by June 15 of the following year.

The Closer Connection Exception (Form 8840)

An alien who meets the mathematical Substantial Presence Test may nonetheless be treated as a nonresident alien under the Closer Connection Exception (IRC §7701(b)(3)(B)) if they satisfy all four statutory criteria:

1. The individual was present in the United States for fewer than 183 days during the current calendar year;
2. The individual establishes that they maintained a tax home in a foreign country during the entire current calendar year;
3. The individual establishes that they had a closer connection to that foreign country than to the United States (determined by evaluating the location of their permanent home, family, personal belongings, banking facilities, social ties, and voting jurisdiction); and
4. The individual has not applied for an adjustment of status or taken affirmative steps to obtain a Green Card during the year.

Procedural Requirement: The taxpayer must file Form 8840 (Closer Connection Exception Statement for Aliens) attached to Form 1040-NR by the statutory filing due date.

Nonresident Alien Taxation & Form 1040-NR

Nonresident aliens file Form 1040-NR (U.S. Nonresident Alien Income Tax Return). Under IRC §871, income is strictly bifurcated into two mutually exclusive regimes:

1. Effectively Connected Income (ECI / IRC §871(b))

• Definition: Income derived from the conduct of a trade or business within the United States, including wages, salaries, self-employment earnings, and business profits.
• Taxation: Taxed on a net basis at the progressive, graduated individual income tax rates (10% to 37%) applicable to U.S. citizens.
• Deductions: Ordinary and necessary business expenses directly connected with generating the ECI are fully deductible.

2. Fixed, Determinable, Annual, or Periodical Income (FDAP / IRC §871(a))

• Definition: Passive investment income derived from U.S. sources that is not effectively connected with a U.S. trade or business. Examples include dividends, royalties, gross rents, annuities, and taxable interest (excluding portfolio interest and bank deposit interest, which are statutorily exempt).
• Taxation: Taxed on a gross basis at a flat statutory rate of 30% (or a lower bilateral income tax treaty rate).
• No Deductions: No deductions, basis offsets, or expense allocations are permitted against gross FDAP income.

Dual-Status Taxpayers

An individual is a dual-status taxpayer when they are both a resident alien and a nonresident alien in the same calendar tax year (typically the year of initial arrival or final permanent departure).

Critical Dual-Status Restrictions

• No Standard Deduction: Dual-status filers are statutorily prohibited from claiming the standard deduction. They must itemize deductions on Schedule A or take zero deductions.
• No Joint Return: A dual-status taxpayer cannot file a joint return with their spouse, but must file as Single or Married Filing Separately, unless an IRC §6013 election is executed.
• Disallowed Tax Credits: Cannot claim the Earned Income Tax Credit (EITC), American Opportunity Tax Credit, or Lifetime Learning Credit.
• Filing Mechanics: If a resident alien on the last day of the tax year, file Form 1040 with "Dual-Status Return" written across the top, attaching Form 1040-NR as an informational "Dual-Status Statement." If a nonresident on the last day, file Form 1040-NR with Form 1040 attached as the statement.

IRC §6013(g) and §6013(h) Spousal Elections

To overcome the restrictive filing penalties imposed on cross-border couples, Congress provided two statutory elections:

IRC §6013(g): Nonresident Alien Married to U.S. Citizen or Resident

If, at the close of the tax year, one spouse is a U.S. citizen or resident alien and the other spouse is a nonresident alien, both spouses may execute an IRC §6013(g) election to treat the nonresident spouse as a full-year U.S. resident alien.

• Benefits: Permits the couple to file a Married Filing Jointly return, utilizing the full joint standard deduction ($31,500 for 2025) and joint tax brackets.
• The Burden: The nonresident spouse's worldwide gross income becomes subject to federal income taxation for the entire tax year.
• Revocation: Once formally revoked by either spouse, the death of either spouse, legal separation, or IRS termination for inadequate records, the election cannot be made again for any subsequent year.

IRC §6013(h): Dual-Status Alien Married to U.S. Citizen or Resident

Applies when an alien is a nonresident alien at the beginning of the tax year but becomes a resident alien by the close of the year, and is married to a U.S. citizen or resident alien on December 31. The spouses may elect under IRC §6013(h) to treat the arriving alien as a resident alien for the entire tax year, allowing a joint return and avoiding dual-status filing restrictions.