Resident Alien

A resident alien is an individual who is not a US citizen but is treated as a resident of the United States for federal income tax purposes, and is therefore taxed on worldwide income rather than only on US-source income. Internal Revenue Code section 7701(b)(1)(A) is exhaustive about how someone gets there: an alien individual is treated as a US resident for a calendar year "if (and only if) such individual meets the requirements of clause (i), (ii), or (iii)". Clause (i) is the green card test, being "a lawful permanent resident of the United States at any time during such calendar year". Clause (ii) is the substantial presence test, a weighted day count over three years. Clause (iii) is the first year election, a taxpayer's own choice in a specific set of circumstances.

The consequence is the entire point of the classification. A resident alien files Form 1040 and reports income from every country, exactly as a US citizen does. A non-citizen who meets none of the three tests is a nonresident alien, taxed only on US-source income under a different set of rules. Nothing about visa category, intent to stay, or where a person feels at home enters into it.

The green card test is broader than most people expect. Section 7701(b)(1)(A)(i) treats an alien as a US resident if they are a lawful permanent resident "at any time during such calendar year." One day of the year is enough, and physical presence is not required, so a green card holder who spends the entire year in another country is still a US tax resident reporting worldwide income. Section 7701(b)(6) defines the status as having been "lawfully accorded the privilege of residing permanently in the United States as an immigrant in accordance with the immigration laws", where that status "has not been revoked (and has not been administratively or judicially determined to have been abandoned)." That last clause is why simply moving away does not end the tax obligation: the card has to be formally given up or determined to be abandoned.

There is one further exit written into the same paragraph, and it is easy to trigger without meaning to. An individual ceases to be treated as a lawful permanent resident if they begin to be treated as a resident of a foreign country under a tax treaty, do not waive the treaty benefits available to residents of that country, and notify the Secretary. Claiming treaty residence elsewhere therefore ends US tax residency, and can start the clock on consequences that belong to giving up the status.

The substantial presence test catches people who never planned on it. Section 7701(b)(3) requires at least 31 days of presence in the current year and a weighted three-year total of at least 183 days, counting all days in the current year, one third of the prior year's, and one sixth of the year before that. Because those weights add to one and a half, someone who spends about 130 days a year in the United States for work crosses it in the third year without anything changing in their life. The test has exceptions of its own, including a closer-connection escape and exempt-individual categories for students, teachers, trainees and certain visa-holders, which is where the detail lives.

The first-year election is narrow and deliberately awkward. Section 7701(b)(4) lets someone who does not meet the substantial presence test this year, was not a resident last year, but will meet the test next year, elect to be treated as a resident for part of this year. It requires at least 31 consecutive days of presence in the election year and presence on at least 75 percent of the days from the start of that 31-day run to the end of the year, with up to five absent days ignored. The election cannot even be made until the individual has met the substantial presence test for the following year, so it usually arrives with an extension or an amended return.

The first and last years are split years, not whole ones. Section 7701(b)(2) fixes the boundaries. A person who becomes a resident this year but was not one last year is treated as a resident only from the residency starting date: for a green card holder who does not also meet the substantial presence test, the first day of the year they were present in the United States while a permanent resident; for someone who meets the substantial presence test, the first day of presence in the year. Residency ends after the last day of presence, provided the person has a closer connection to a foreign country for the rest of the year and is not a US resident again the next year. A small amount of nominal presence at either edge can be disregarded, but section 7701(b)(2)(C)(ii) caps that at 10 days. The result is a dual-status year, in which the resident part is taxed on worldwide income and the nonresident part only on US-source income, on one return combining both.

Two elections can make a mixed-status couple file jointly. Section 6013(g) lets a US citizen or resident and a nonresident alien spouse elect to treat the nonresident spouse as a US resident, for all of the taxable year and for all subsequent years until the election terminates. Section 6013(h) handles the narrower case where one spouse was a nonresident alien at the start of the year and a resident at the end. Both open the door to a joint return, which is otherwise barred outright where either spouse was a nonresident alien during the year. Both also bring that spouse's worldwide income into the US tax base for the whole year, which is the trade being made. A section 6013(g) election that is once terminated cannot be made again by the same two people.

Resident status carries the reporting duties, not just the tax. The foreign-account and foreign-asset regimes attach to US persons, and a resident alien is one. The FBAR regulation at 31 CFR 1010.350(b)(2) defines a US person to include "an individual who is a resident alien under 26 U.S.C. 7701(b)", and the Form 8938 rules apply to specified individuals, which include resident aliens. Someone who becomes a US tax resident partway through a career abroad usually acquires a stack of reporting obligations on assets they have held for years, and the penalties for missing them are unrelated to how much tax is owed.

The sequence is: apply the three tests in section 7701(b)(1)(A) for the calendar year; if any is met, find the residency starting date under section 7701(b)(2); treat income from the starting date to year end as worldwide income on Form 1040; treat the earlier part of the year under the nonresident rules; and add the foreign-account and foreign-asset reports if the thresholds are crossed.

A hypothetical example. Ana is a Chilean citizen. She receives an immigrant visa and first enters the United States as a lawful permanent resident on June 1. She was not a US resident in any earlier year and spent no time in the country before that date. She owns an apartment in Santiago that rents for $1,500 a month all year, and she has no US-source income before June.

She meets the green card test, so she is a resident alien for the year. Her residency starting date is June 1, the first day she was present in the United States while a permanent resident. That splits the year:

From June 1 through December 31 is seven months of resident status, so $1,500 × 7 = $10,500 of Chilean rent is US-taxable worldwide income reported on Form 1040. From January 1 through May 31 she was a nonresident alien, and Chilean rent is foreign-source income with no US connection, so the remaining $18,000 − $10,500 = $7,500 is outside the US tax base entirely. Chile may tax all $18,000, and the foreign tax credit is the mechanism that keeps the overlapping $10,500 from being taxed twice.

Change one fact. If Ana had received the green card while already living in the United States on a work visa, and had met the substantial presence test for the year, her residency starting date would instead be the first day of presence in that calendar year, and far more of the year would fall on the resident side.

Pros

• The ordinary rules apply. A resident alien claims the standard deduction, the full range of credits and deductions, and the same graduated rates as a citizen, none of which a nonresident alien gets.
• A joint return with a spouse becomes possible, which a nonresident alien is barred from by statute.
• Foreign tax paid on the same income is creditable, so worldwide taxation is not the same as double taxation in most cases.
• The tests are objective and published, so the status can usually be predicted in advance rather than argued about afterwards.

Cons

• Worldwide income means exactly that, including foreign salary, foreign rental income, foreign pension accruals and gains on assets held long before any connection to the United States.
• The green card test does not care where you live, so a permanent resident who has moved abroad keeps filing until the status is formally given up.
• The reporting stack arrives with the status. Foreign accounts and foreign financial assets become reportable, with penalties that do not depend on how much tax is owed.
• Split first and last years are procedurally awkward, and the nominal-presence relief at the edges is capped at 10 days.
• Investments that were perfectly ordinary in the former home country, such as locally domiciled mutual funds, can become punitively taxed once the holder is a US tax resident.