December 2, 2021

Non-Citizens and Various Types of U.S. Residence

By Marissa Sandoval Rodriguez

Non-U.S. citizens may be surprised to find out that they can unwittingly become U.S. residents for tax purposes, without the benefits of becoming a U.S. resident for immigration purposes. Such non-U.S. citizens are often surprised to learn that at least three different types of “residence” exist under U.S. law: i) for immigration purposes, ii) for income tax purposes, and iii) for estate and gift tax purposes.

Obtaining a U.S. Permanent Resident Card, otherwise known as a Green Card, enables an immigrant to live and work permanently in the United States and to be protected by all of its laws. People seek Green Cards for various reasons, including as a steppingstone to obtaining U.S. citizenship, because they do not want to risk a denial of their visa renewal application based on changes in the political climate or otherwise. Such individuals may also desire to avoid the hassle of the visa renewal process every few years. Finally, they may want to avoid the extra scrutiny that non-U.S. citizens face when entering the United States. However, Green Cards come at a cost, as they also trigger important U.S. tax obligations, among other responsibilities to the U.S. government. Therefore, prior to applying for a Green Card, an applicant should seek legal and tax advice regarding the implications of becoming a U.S. Permanent Resident to determine whether or not such immigration status is truly in the applicant’s best interest. It may be the case that U.S. Permanent Residence is appropriate and beneficial for some, but not all, members of the same family.

Accordingly, Green Card holders are considered U.S. residents for U.S. income tax purposes even when living outside the United States. Further, a nonresident alien who meets the substantial presence test of being physically present during the year will also be considered a U.S. resident for U.S. income tax purposes, meaning that the length of stay in the U.S. can trigger income tax obligations. There are formulas used to determine how long a non-resident may be present in the United States without triggering income tax obligations, and for individuals with substantial non-U.S. income, it is very important to track their length of stay in the United States to ensure they do not exceed such threshold. U.S. residents for income tax purposes are generally subject to pay income taxes in the same manner as U.S. citizens. Therefore, similar to U.S. citizens, they must report their worldwide income on their U.S. income tax returns. Worldwide income includes dividends, wages, income from rental property or royalties, and any other form of income, and it includes income earned within or outside the United States. It is important to consider, in addition, the income tax withholding requirements for payments to the nonresident, and whether the nonresident is from a country with which the U.S. has a tax treaty which provides for the exclusion from withholding of some or all of the nonresident’s income, such as wages, scholarships/fellowship grants, and independent personal services.

The third type of U.S. residence is for U.S. estate and gift tax purposes and exists when someone has his or her domicile in the United States at the time of their death. A person becomes a U.S. domiciliary by living in the United States, even if for only a brief period of time, without the current intention of leaving. No government authorization or formula exists to establish when someone becomes a U.S. resident for estate tax purposes. Rather, the determination is made after the taxpayer has died and it is based on facts and circumstances used to determine the decedent’s intent. Factors used in making this determination include immigration status, statement of intent in important documents, and the location of business interests, and club and church affiliations, among others. The determination as to whether or not someone is a U.S. domiciliary can have a major impact on his or her estate, considering that the estate tax rate is up to 40% of the decedent’s assets. U.S. residents for estate tax purposes and U.S. citizens alike are subject to U.S. estate tax on their worldwide assets. However, they are entitled to an exemption/credit, which is currently $11.7M in 2021. The estates of persons who were not U.S. residents for estate tax purposes at the time of their death are also subject to U.S. estate tax, but only with respect to their assets located within the United States. They are entitled to a small exemption/credit of only $60,000. Accordingly, without proper planning, non-residents who own a second home or other assets in the United States may leave an estate tax problem for their estate. With proper legal and tax advice, non-residents can minimize the estate tax impact on their estates, allowing more assets to pass to their heirs rather than being devoted to paying U.S. estate tax.

Non-citizens should seek legal and tax advice on the various implications of their immigration status, length of stay in the U.S., and their intention to permanently live in the U.S. to conduct proper planning so as to avoid being caught by surprise by unintended U.S. tax obligations.