A foreign national must file a US resident tax return and pay taxes on worldwide income if s/he is considered a resident alien for tax purposes by the IRS. Moreover, this foreign national must report foreign financial assets and file the FBAR (read What is FBAR) or FATCA (read What is FATCA), if this person meets the requirements. This is the reason that it is essential to understand the definition of a resident alien for tax purposes.
When is a foreign national considered a resident alien so s/he has to file a resident tax return?
A foreign national is a resident alien if one of the following 3 conditions is met:
- Foreign national is a green card holder (permanent resident).
- Foreign national chooses to be treated as resident alien for tax purposes.
- Foreign national meets the Substantial Presence Test if s/he is physically present in the United States on at least:
- 31 days during the current year, and
- 183 days during the 3-year period. This 3-year period includes the current year and previous 2 years. The calculation is the following:
- All days in the current tax year, plus
- 1/3 days in the USA during the previous year, plus
- 1/6 days in the USA during the second year before the current year.
Let’s review in more details the definition of a green card holder for resident tax purposes.
A foreign national is considered a lawful permanent resident of the USA if the USCIS (U.S. Citizenship and Immigration Services) has issued an alien registration card (green card) and has given a foreign national a permission to reside permanently in the USA as an immigrant.
The day a foreign national becomes a green card holder, s/he is automatically considered a resident alien for USA tax return purposes going forward. A green card holder must file a resident tax return. Although, a green card holder is required to report worldwide income on US resident tax return, s/he can claim deductions and credits available to U.S. citizens. Also, this person might claim some exemptions under a Tax Treaty.
If a foreign national received a green card during the year, s/he might be considered a dual status alien for USA tax return purposes. If this is the case, the person has to file both 1040 and 1040NR during the same year.
If you are a foreign national residing in the USA and you don’t know whether you have to file a resident tax return, please seek advice of a tax professional that provides international tax services. International tax experts at Artio Partners are here to help you.