Essentials of U.S Tax Residency for International Workers

If you're frequently visiting the US—whether for business, vacation, or a temporary assignment—understanding the intricacies of US tax residency isn't just important; it's essential for strategic planning.

At the federal level, US citizens, Green Card holders, and Resident Aliens (RA) are taxed on their worldwide income, no matter where it comes from. On the other hand, Non-Resident Aliens (NRA) are only taxed on their US-sourced income. Therefore, managing your time in the US to maintain NRA status (where possible) can simplify your reporting and filing obligations.

It’s also crucial to track which states you spend time in, as some states may tax you as a non-resident, and there may not always be protections from double taxation through a bilateral tax treaty with your home country.

The Basics of US Taxation

The US tax system can be complex, but here are the key points to help you understand the fundamentals:

• The tax year follows the calendar year (January 1 – December 31).
• Federal taxes apply to income from personal and employment sources.
• 43 states and the District of Columbia also levy a state tax, and in some states, local or city taxes may apply.
• Federal and state income taxes are generally collected through payroll withholding.
• The deadline for filing federal tax returns (and most state returns) is April 15 of the year following the tax year.

Determining U.S. Tax Liability

Your US tax liability depends on your residency status. Here's how it works for different categories of individuals:

• US Citizens: You are subject to tax on worldwide income, regardless of where you live or work.
• Green Card Holders: You are taxable on worldwide income from the first day of the US tax year in which you establish lawful permanent resident status.#
• Substantial Presence Test (SPT): This test determines whether you are classified as a US resident or non-resident for tax purposes, based on the number of days you spend in the US.

How the Substantial Presence Test Works

You are considered a US resident for tax purposes if you meet the SPT for the calendar year. The test is based on the following:

• You must be physically present in the US for at least 31 days during the current year, and
• 183 days during the three-year period that includes the current year and the two prior years, counting:
  • All days you were present in the current year.
  • 1/3 of the days you were present in the first prior year.
  • 1/6 of the days you were present in the second prior year.

Example:

If you were present in the US for 120 days in each of the years 2021, 2022, and 2023, your SPT calculation for 2023 would be as follows:

• 120 days from 2023,
• 40 days from 2022 (1/3 of 120),
• 20 days from 2021 (1/6 of 120). This totals 180 days, so you would not be considered a US resident for tax purposes in 2023. However, if the total had been 183 days or more, you would be considered a resident and taxed on worldwide income from the date your residency began.

Tax Residency Considerations

• Start of Residency: Your tax residency begins on the first day you are physically present in the US during the year. However, the first 10 days of short visits can be excluded to delay the start of residency.
• End of Residency: Residency ends on the last day of the calendar year in which you meet the SPT. Moving out of the US and establishing a tax home and stronger connections in another country can also end your US residency, but you must maintain non-resident status for the following calendar year to fully break US residency.

Tax Treaties and Their Impact

Tax treaties between the US and other countries can provide relief for NRAs, potentially altering your tax obligations. Always check whether a tax treaty applies to your situation, as it can significantly affect your US tax liability.

Top 3 Actions to Take

1. Track Your US Visits: The SPT can unexpectedly result in tax residency, especially for frequent travelers. Keep a detailed record of your time spent in the US.
2. Document the States You Visit: Note the states you visit and the reason (work or leisure), as some states will require you to file state tax returns even as a non-resident. Bilateral tax treaties may provide relief, but it depends on the specific agreement.
3. Plan Your Arrival and Departure Dates: Whether you’re entering or leaving the US, careful planning around your arrival and departure dates can optimize your US tax exposure.

Understanding the nuances of US residency tests is essential for managing your tax status and minimizing compliance risks. Always consult with a tax advisor to navigate the US tax system effectively, especially if you frequently visit or work in the US.