Tax Impact of Resident & Nonresident Alien Status
Understanding how residency status, citizenship, and immigration rules play into filing federal taxes can be challenging. In this TaxBuzz Guide, we clearly explain how various resident and nonresident alien statuses can impact taxation.
Immigration Status
The immigration laws of the United States refer to aliens as immigrants, non-immigrants, and undocumented (illegal) aliens. A Foreign person in the U.S. will have one of the following statuses for immigration purposes.
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Immigrant - An immigrant has been granted the right by the U.S. Citizenship & Immigration Services (USCIS) to reside permanently within the U.S. and to work without restriction. They may also be referred to as an LPR or Lawful Permanent Resident., They will have a “green card” (form I-551) or for those awaiting issuance of the green card, their foreign passport will bear an I-551 stamp., Immigrants are treated as residents for withholding and tax purposes.
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Non-immigrant - A non-immigrant may reside temporarily within the U.S. according to the terms corresponding to the visa with which they entered the United States.,
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Undocumented (Illegal) Alien - An undocumented alien is generally someone who has entered the U.S. without any documentation, or an alien who entered the U.S. legally but has fallen “out of status”. An undocumented alien will be treated as a nonresident for tax purposes unless they pass the “substantial presence test” (see definition below). If they pass the substantial presence test then they are treated as a resident for tax purposes.
Tax Status
The tax laws of the United States do not refer to the same three categories as the immigration laws and refer only to the following two controlling principles:
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RESIDENT ALIENS are taxed in the same manner as U.S. citizens on their worldwide income, and,
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NONRESIDENT ALIENS are taxed according to special rules contained in certain parts of the IRC.
A major distinguishing feature of this special tax regime concerns the source of income: a nonresident alien (with certain narrowly defined exceptions) is subject to federal income tax only on income which is derived from sources within the United States and/or income that is effectively connected with a U.S. trade or business.
The residency rules for tax purposes are found in IRC § 7701(b). Although the tax residency rules are based on the immigration laws concerning immigrants and nonimmigrants, the rules define residency for tax purposes in a way that is very different from the immigration laws. Under the residency rules of the Code, any alien who is not a RESIDENT ALIEN is a NONRESIDENT ALIEN. An alien will become a RESIDENT ALIEN in one of three ways:
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By being admitted to the United States as, or changing status to, a Lawful Permanent Resident under the immigration laws (the Green Card test);
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By passing the Substantial Presence Test (which is a numerical formula which measures days of presence in the United States); or
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By making what is called the "First-Year Choice" (a numerical formula under which an alien may pass the Substantial Presence Test one year earlier than under the normal rules). Refer to the discussion of "First-Year Choice" in Chapter 1 of Publication 519.
Under these rules, even an undocumented (illegal)alien under the immigration laws who passes the Substantial Presence Test will be treated for tax purposes as a RESIDENT ALIEN.
Alien Residency - Green Card Test
Taxpayers are considered residents, for tax purposes, if they are a Lawful Permanent Resident of the United States at any time during the calendar year. This is known as the "green card" test. They generally have this status if the U.S. Citizenship and Immigration Service (USCIS) has issued them Form I-551, also known as a "green card,” or their foreign passport bears an I-551 stamp while awaiting issuance of the actual green card. That status continues unless voluntarily renounced and abandoned or terminated by the USCIS or a U.S. federal court. Their residency starting date is the first day on which they are present in the United States as a Lawful Permanent Resident, or they choose to be taxed as a resident alien for the entire calendar year.
Substantial Presence Test
An individual will be considered a U.S. resident for tax purposes if they meet the substantial presence test for the calendar year. To meet this test, they must be physically present in the United States on at least:
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31 days during the current year, AND,
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183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting :
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All the days present in the current year, and
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1/3 of the days present in the first year before the current year, and
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1/6 of the days present in the second year before the current year.
“ Example - Substantial Presence Test - A foreign individual, Maria, has been visiting the U.S. during the current and past two calendar years. For the current year (2022) Maria spent 112 days in the U.S, 119 days in 2021 and 136 days in 2020. She meets the first half of the test by being in the U.S. for at least 31 days in 2022. However, she does not meet the 183-day test (see below), and therefore must be treated as a non-resident for withholding and taxation purposes. ”
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| Year | Days | Multiplier | Test Days |
| 2022 | 112 | x 1.0 | 112 |
| 2021 | 119 | x 0.333 | 39.63 |
| 2020 | 136 | x 0.167 | 22.71 |
| Total | 174.34 | ||
| Required 183, thus failed the test |
What Constitutes a Day – Generally, any portion of a day is considered a full day for purposes of this test. However, there are exceptions to this rule. Do not count the following as days of presence in the United States for the substantial presence test.
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Days the individual commutes to work in the United States from a residence in Canada or Mexico, if he or she regularly commutes from Canada or Mexico.,
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Days in the United States for less than 24 hours, when in transit between two places outside the United States.,
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Days in the United States as a crew member of a foreign vessel.,
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Days the individual is unable to leave the United States because of a medical condition that develops while he or she is in the United States.,
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Days the person is an exempt individual.,
For details on days excluded from the substantial presence test for other than exempt individuals, refer to Publication 519, U.S. Tax Guide for Aliens.
Exempt Individual - Do not count days for which the individual is an exempt individual. The term "exempt individual" does not refer to someone exempt from U.S. tax, but to anyone in the following categories who is exempt from counting days of presence in the U.S.:
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An individual temporarily present in the United States as a foreign government-related individual.,
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A teacher or trainee temporarily present in the United States under a "J” or "Q” visa, who substantially complies with the requirements of the visa.,
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A student temporarily present in the United States under an "F”, "J", "M", or "Q” visa, who substantially complies with the requirements of the visa.,
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A professional athlete temporarily in the United States to compete in a charitable sports event.,
If days of presence in the United States are excluded because the individual falls into a special category, a fully completed Form 8843, Statement for Exempt Individuals and Individuals with a Medical Condition, must be filed.
Closer Connection Exception to the Substantial Presence Test - Even if the substantial presence test is met the individual can avoid being treated as a U.S. resident if he or she is:
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Present in the U.S. on fewer than 183 days during the year, and
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Establishes that for the year, he has a tax home in a foreign country to which he has a closer connection than to the U.S.
To claim the closer connection exception, the taxpayer must include Form 8840, Closer Connection Statement, which must be attached to either the taxpayer’s 1040NR or 1040NR-EZ for the year. If the individual is not required to file for the tax year, the 8840 must be filed separately (follow the instructions for the 8840).
First Year of Residency - If an individual is a U.S. resident for the calendar year, but not a U.S. resident at any time during the preceding calendar year, he or she is a U.S. resident only for the part of the calendar year that begins on the residency starting date and is a nonresident alien for the part of the year before that date (Pub 519).
COVID-19 Relief from Substantial Presence Test – Rev Proc 2020-20 provides tax relief to nonresident individuals who were in the U.S., and due to the coronavirus pandemic, were prevented from leaving the U.S. Eligible individuals may exclude up to 60 calendar days of presence in the U.S. when applying the substantial presence test. An eligible individual is defined as any individual who:
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At the end of 2019 was not a U.S. resident;
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Was not a lawful permanent resident at any time in 2020;
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Was present in the U.S. each day during their “COVID-19 Emergency Period”; and
Who does not become a U.S. resident in 2020 when days present in the U.S. other than days during their COVID-19 Emergency Period are considered.
An individual’s COVID-19 Emergency Period is a single period of up to 60 consecutive calendar days that the individual chooses and that starts on or after February 1, 2020, and on or before April 1, 2020, during which the individual is physically present in the U.S. on each day. The relief applies even if the individual was not infected with the COVID-19 virus.
Eligible individuals who are required to file Form 1040NR will need to complete and attach to the return Form 8843, Statement for Exempt Individuals and Individuals with a Medical Condition, to claim the relief.
For additional information, refer to Rev Proc 2020-20.