The residency rules that can make or break a tax return

A green card doesn't always mean U.S. residency for tax purposes. Neither does a work visa. Practitioners run into clients whose situation doesn't fit neatly into "resident" or "nonresident" more often than the forms suggest, and getting the determination wrong can mean the wrong form, the wrong income reported, or a missed election. Here's a closer look at the issues that keep coming up in practice. 

Applying the substantial presence test 

The substantial presence test (SPT) is the starting point for most residency questions involving non-U.S. citizens. To meet it, a taxpayer must be present in the United States at least 31 days in the current year and 183 days over a three-year period, counting all days in the current year, a third of the days in the first preceding year, and a sixth of the days in the second preceding year [§7701(b)(3)]. 

Holding a work visa doesn't automatically settle the question. Most work visa holders, including H-1B, L-1, O-1, TN and E-2, count every day of U.S. presence toward the SPT. Meet the test, and the taxpayer generally files Form 1040 and reports worldwide income. Fall short, and they're typically a nonresident filing Form 1040-NR and reporting only U.S. source income. Some categories, like students and exchange visitors on F, J, M or Q visas, are treated as "exempt individuals," meaning their days don't count toward the SPT. That's not the same as being exempt from tax; it just keeps those days out of the calculation.  

When a taxpayer can still claim nonresident status 

Meeting the SPT isn't always the end of the story. A taxpayer who maintained a foreign tax home for the entire year and had a closer connection to that country can claim the closer connection exception by filing Form 8840, Closer Connection Exception Statement for Aliens. Without a foreign tax home for the full year, though, that exception isn't available. 

There's also the treaty tie-breaker route. A dual resident, someone who qualifies as a resident of both the U.S. and a treaty country, can claim nonresident status by filing Form 1040-NR with Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), attached. Green card holders can use this route too, in limited cases, but U.S. citizens cannot; citizens are taxed as residents on worldwide income no matter what a treaty says. And there's no special form to revoke a treaty position later. The taxpayer just resumes filing Form 1040 as a resident.  

Spouses, elections and ITINs 

Marrying into residency questions is its own category. When a nonresident spouse marries a U.S. resident, the couple can file jointly by attaching a statement electing to treat the nonresident spouse as a U.S. resident for the full year. It's a real trade-off: the couple gains the standard deduction and potentially better brackets and credits, but the nonresident spouse becomes subject to U.S. tax on worldwide income and possibly new foreign reporting obligations. 

That election often means applying for an ITIN, and the process has a wrinkle worth flagging for clients: the initial return filed with a Form W-7 application must be paper filed, not e-filed, regardless of who's applying. The good news is that a spouse living abroad doesn't need to travel to the U.S. to apply. Form W-7, Application for IRS Individual Taxpayer Identification Number, can be submitted by mail or through a certifying acceptance agent or U.S. consulate.  

A few things that surprise people 

TN visa holders are generally on the hook for Social Security and Medicare taxes. The FICA exemption applies to F-1, J-1, M-1 and Q-1 visa categories, not TN, so that assumption trips people up more than it should. And a dual-status tax year, where someone is both a resident and nonresident alien in the same year, isn't rare; it happens whenever residency status changes mid-year, whether through arrival, departure, or a shift in green card or SPT status. 

Prepare for complex residency scenarios 

Residency status was never going to be decided by a passport stamp or a visa category, no matter how much clients wish it were that simple. It comes down to counting days, reading the fine print of a treaty, and matching the right form to the right fact pattern. Get that sequence right, and the rest of the return tends to fall into place. Get it wrong, and no software update will fix a return built on the wrong starting point.