Coming to the United States. Like most countries, the United States imposes income and estate taxes on its residents. It is important therefore for any foreign national visiting the United States to be careful about resident status. It is also important to remember that the criteria for income tax residence are different from the tests for estate tax residence.
The income tax. The United States imposes an income tax on the worldwide income of all residents. This includes income from all sources, including income earned in foreign countries. Further, the resident may have to include income earned by corporations owned by him or her, even if the corporate earnings are not distributed. Generally, the only relief available to the resident is a credit for taxes paid to a foreign country.
For purposes of the income tax, a person becomes a resident only if he or she passes a test referred to as the substantial presence test. Under this test, a person will be a resident for any year if (a) the person is present in the United States for at least 31 days in that year, and if (b) the following sum equals or exceeds 183 days: (1) the number of days the person is present in the United States during the current year, plus (2) one-third the number of days the person was present in the United States during the prior year, plus (3) one-sixth the number of days the person was present in the United States the year before that.
Generally, this means that you can safely stay in the U.S. for 121 days every year and still not become a U.S. resident for income tax purposes. If you stay any longer, you will have to make sure that you pass the test by taking the two prior years into account and doing the calculation.
Finally, you are automatically considered to be a resident for income tax purposes if you become a lawful permanent resident, that is, if you obtain a “green card.”
What if you fail the substantial presence test? Even if you fail the substantial presence test, there are several ways to avoid resident status. For example, you may be able to claim nonresident status pursuant to a tax treaty – or you may be able to claim to have a “closer connection” to a foreign country. While these might be helpful to a person who has failed the substantial presence test, each requires that the person claiming them must file a statement with the United States Internal Revenue Service stating the basis for the claim of nonresident status. This filing is not required unless you fail the substantial presence test. In any event, if you fail the substantial presence test, you should check with your tax advisor to determine whether you qualify for these other provisions.
The estate tax. Foreign investors have to take into consideration the estate taxes that would be imposed against their investments in the U.S.. at the time of death. In the case of an American corporation, for example, shares in a company are considered assets in the United States and are subject to estate tax if the beneficiary is an American non resident alien. The difference between the shares of an American company and those in an off-shore company is that the foreign shares are not considered to be in the U.S. and therefore not taxed in the event of the death of the owner. This is why many investments such as apartments, houses, bank accounts and portfolio interest rate loans, are in the name of a foreign company – an “off-shore” company. The estate taxes for non-resident aliens are based on a scale which rapidly increases to 55% of the asset’s market value with an exemption of only the first $60,000.00
If a person dies while a resident of the United States, he or she will be subject to the estate tax on all property owned by him or her at the time of death. Once again, the only relief available is credit for taxes paid to a foreign country.
A person is generally considered resident in the United States if he or she is domiciled in the United States. A person is generally considered to have a domicile in the United States if he or she maintains his or her residence there and has no present intention of establishing residence in a different country. In making the determination of residence, one must examine all the facts and circumstances surrounding the person’s living situation. While this test provides less certainty than the substantial presence test, it allows the foreign citizen somewhat more control over whether he or she will be considered a resident.