RICHARD FURLONG: So, I think were just about at the top of the hour, so let me get started. And
I'd like to welcome everyone today to our IRS presentation on the topic of determining tax
residency status. We are very pleased that you are joining us today. My name is Richard Furlong,
and I am a Senior Stakeholder Liaison with the Internal Revenue Service. I will be your moderator
for today's webinar. And we slated today's webinar for 100 minutes. But, before we actually
begin, if we have anyone in the audience attending today who is associated with the media, please
send an email to the address provided on the slide, the slide you're looking at now. Please
include your contact information and the news publication that you're with. Our Media Relations
or Stakeholder Liaison staff can assist you and answer any questions you may have. Now, I know
that email address may be a bit small, depending upon the device that you're watching today's
webinar, so I'm going to read it to you. It is CL.SL.Web.Conference.Team@IRS.gov. Again, that's
CL.SL.Web.Conference.Team@IRS.gov. So, that's for any media inquiries for today's webinar. And in your
email, please include your contact information, again, the news publication or media outlet that
you're associated with, and either our Media Relations staff or Stakeholder Liaison will assist
and answer any questions that you may have. And I do want to remind everyone that this webinar
will be recorded and posted to the IRS Video Portal in a few weeks. And you can find this and
all of our webinars when posted at the video portal at this website www.IRSvideos.gov. Again,
that's www.IRSvideos, one word, .gov. Now, if you have a technology issue during the webinar,
the slide you are looking at now shows some helpful tips and reminders. We've also posted a
technical help document that you can download from the Materials button, which is on the left
side of your screen. It provides the minimum system requirements for viewing this webinar along
with some best practices and quick solutions. And if you have completed and passed your system
check and you are still having problems, then I recommend trying one of the following two
options. The first option is to close the screen where you are viewing the webinar and then
simply relaunch it. And the second option is to click the gear icon. Now, depending upon your
device, not all of you may see the gear icon. It depends on your browser. But, if you see it,
you will find it in the top right corner of the slide in photo boxes. And you will be given two
choices when you click on the gear item, gear icon, excuse me. Please select Flash instead of
HLS from the Available Media box. And, finally, if you don't have the gear icon and relaunching
your viewing screen does not fix your problem, you might want to try a different browser to
launch and view the webinar. You may also want to close all the windows and apps that you might
have open on your viewing device. Now, we hope you receive the PDF version of the PowerPoint
that we sent out in a reminder email to all the registrants. But, if you did not, fear not. You
can download it by clicking on the Materials button on the left side of your screen. And you can
see that right now on this slide. We also have closed captioning available for today's
presentation. If you're having trouble hearing the audio through your computer speakers, please
click on the CC button that you see on the screen. .And this feature will be available throughout
today's webinar. Now, during the 100-minute presentation today, we will take a few breaks to
share knowledge-based questions with you. At these times, a polling-style question will pop up on
your screen with a question and multiple-choice answers. Please select the response you believe
is correct by clicking on the Radio button next to your selection and, then, click Submit. But,
if you do not get the pop-up box for responding, please enter your response timely in the Ask
Question feature so that we here at the IRS can track your participation in today's webinar.
Now, if you have a topic-specific question today for our subject matter experts, please click,
submit it by clicking on the Ask Question button. And you can see that on your screen right now.
Enter your question in the text box and click Submit. Please, and this is extremely important; I
cannot emphasize this point enough, please do not enter any sensitive or taxpayer-specific
information. We ask that you wait for your specific topic in today's webinar to be addressed by
our presenters before submitting your question because the answer to the question you might have
may be in the material that they are covering today. So, now, moving along with our session, let
me introduce today's speakers. We are Slide extremely fortunate to have back (Bethany Krause)
and Tracy McFee. Bethany and Tracy are Senior Revenue Agents with Withholding and International
Individual Compliance, and they are in the IRS Large Business and International Division. As
technical specialists, Bethany and Tracy facilitate and coordinate the identification, the
development and the resolution of international tax issues. Both of our speakers have expertise
with tax issues of nonresident aliens and also U.S. citizens working abroad. So, with that, I'm
going to turn it over to you, Tracy, to get us rolling and begin today's presentation. Tracy,
it's all yours. TRACY MCFEE: Thank you, Rich. I'd like to welcome you all to today's seminar,
and I really appreciate your attending. Our topic today is Determining Residency Status. The
focus of today's presentation will be tax residency for federal income tax purposes, and we are
not going to be able to discuss how residency is determined at the state level. So, that, I just
want to let the audience know that you need to be aware that the state rules may be different
than the federal rules. During today's webinar, we are going to discuss and explain the impact
of residency status on U.S. taxation for federal tax purposes. We will discuss the differences
between residency status under U.S. immigration law and residency status under U.S. tax law.
And they can be very different. We will talk about how an individual's residency status is
determined for U.S. purposes, and we will go over the special tax rules that apply to dual-status
aliens. We have a lot of information to share today, and I want to make sure that we have some
time available to answer your questions at the end of this presentation. So, let's go ahead and
get started. So, we are talking about the topic of residency status today because the
determination of residency status for U.S. tax purposes is very important in that it affects how
you are taxed. Your tax residency status determines your filing status such as which tax forms
you file, the amount of your income that's going to be subject to U.S. income tax, which
deductions, credits and exemptions you are able to claim and the applicable tax rate. FURLONG:
Excuse me. MCFEE: Yes. FURLONG: I'm sorry, Tracy. I think someone in our audience today may have
their speakers on, and we can hear background noise. So, please, if you are listening, please put
yourselves on mute today. Thank you. I'm sorry, Tracy. MCFEE: No problem, Rich. OK. And, so, as I
was just discussing, we are, we are going to talk about the status, the topic of residency
status for federal tax purposes because it's very important to know how residency is determined
for U.S. income tax purposes because it's going to affect how an individual is taxed. Tax
residency status will determine what tax forms an individual has to file, the amount of income
that's subject to U.S. income tax and the types of deductions, credits and exemptions that
they're able to claim. And it will also affect tax rates that the individual will pay. Now, I'm
sure all of you are aware but, just as a reminder, the U.S. generally will tax its U.S. citizens
and residents on worldwide income and they also may be subject to employment taxes. U.S.
citizens and resident aliens, which we are going to define throughout the session and talk about
more specifically, generally will file a Form 1040. On the other hand, nonresident aliens are
taxed only on U.S.-sourced investment income and income that is effectively connected with the
U.S. trade or business. And they generally will file a Form 1040NR. Now, residency concepts
under U.S. tax law and U.S. immigration law overlap, but they're not the same Under U.S.
immigration law, individuals are classified as U.S. citizens, U.S. Nationals and Aliens. United
States Citizenship and Immigration Services, which we will refer to as USCIS throughout today's
webinar, is the federal agency that oversees lawful immigration to the United States. The
Internal Revenue Service administers and enforces U.S. federal tax law. Under U.S. tax law,
individuals are classified as Resident Aliens, Nonresident Aliens, and Dual-Status Aliens. So,
let's start out by talking briefly about U.S. citizens. Under U.S. immigration law, an individual
may become a U.S. citizen at birth if they're born in the United States or within certain
territories. And those territories are the Commonwealth of Northern Mariana Islands, Guam,
Puerto Rico, and the U.S. Virgin Islands. Now, some of you may be thinking, She didn't one of the
territories, and that's American Samoa., Well, the reason I don't mention American Samoa is that
persons who are born in American Samoa are generally U.S. nationals but not citizens. A U.S.
national is an individual who owes his or her sole allegiance to the United States. This term
includes all U.S. citizens, individuals who are born in American Samoa, as well as those born in
the Commonwealth of Northern Mariana Islands before November 4, 1986 who have made an, who have
made an election to be treated as U.S. nationals and not as U.S. citizens. So, all U.S.
citizens are U.S. nationals but not all U.S. nationals are U.S. citizens. An individual may also
become a U.S. citizen at birth if they're born abroad to U.S. citizen, U.S. citizen parent or
parents. An individual whose parent is a U.S. citizen and who did not establish U.S.
citizenship at birth may acquire U.S. citizenship by obtaining a Certificate of Citizenship. And
that's USCIS Form N-560. A Certificate of Citizenship may be registered by filing the Form N-600
or Form N-600K with USCIS. Naturalization is what we call the process by which a foreign
individual applies for U.S. citizenship. If the person is eligible and fulfills requirements
established by Congress, then he or she will be granted U.S. citizenship. The document that
shows a person has been naturalized is called a Certificate of Naturalization, which is USCIS
Form N-550 or USCIS Form N-570. Now, U.S. law allows for dual nationality and doesn't require a
person to choose one nationality or another. A U.S. citizen may naturalize in a foreign state
without any risk to his or her U.S. citizenship. A dual citizen is generally taxed in the same
way as any other U.S. citizen. And that, by that, I mean on worldwide income. Individuals who
are not U.S. citizens are referred to as aliens. And Bethany is going to talk about the various
categories of aliens. Bethany? BETHANY KRAUSE: Thank you, Tracy. OK. As Tracy mentioned earlier,
U.S. immigration law and U.S. tax law have concepts that overlap but are not necessarily
synonymous. Under U.S. immigration law, an alien is classified as either an immigrant, a
nonimmigrant or an undocumented alien. And these categories are related to but not the same as
the categories of aliens for tax residency purposes. An alien that's classified as an immigrant
is someone who has been granted the right to permanently reside in the United States, and we
commonly refer to them as lawful permanent residents or Green Card holders. A nonimmigrant under
immigration law is someone who has been granted the right to temporarily stay in the U.S. And
that's usually on a visa. There are many different types of visas. An undocumented alien is
someone who has either overstayed their visa or has entered the United States illegally. Now,
the three categories of alien residency status for U.S. income tax purposes are resident alien,
nonresident alien and dual-status alien. An individual who is an immigrant, in other words, a
lawful permanent resident or a Green Card holder under U.S. immigration law, is a resident alien under U.S. tax law. An individual who is either a nonimmigrant or an undocumented alien under
U.S. immigration law could, depending on the circumstances, be a resident alien, a nonresident
alien or a dual-status alien under U.S. tax law. For example, someone who is an undocumented
alien under U.S. immigration law and is in the United States long enough to meet the substantial
presence test, which we will discuss in a little bit, would be considered a resident alien under
U.S. tax law. bit, would be considered a resident alien under U.S. tax law. OK. So, looking here
at the bullets under each of these categories, looking under Resident Alien, a lawful permanent
resident is a resident alien for U.S. tax purposes. And this is generally true even if the lawful
permanent resident or Green Card holder is not physically present in the United States during
the tax year. An individual can also be a resident alien for U.S. income tax purposes under the
substantial presence test which, again, we will discuss that more, in more detail shortly. Or
they could be making a First-Year Election under Internal Revenue Code Section 7701(b)(4) to be
treated as a resident alien for that tax year if they meet the qualification. So, those are the
three ways that they could be a resident alien, the Green Card or lawful permanent residency, the
substantial presence test or by making what is called a First-Year Election under 7701(b)(4) of
the Internal Revenue Code. Now, there are some exceptions. If an individual who meets the
substantial presence test has a closer connection to a foreign country than they have to the
U.S., then they may be able to be treated as a nonresident alien for U.S. income tax purposes
under what is known as the Closer Connection Exception. And, again, we will go into more detail
shortly on the, on the substantial presence test as well as that exception. Also, if an
individual who is either a Green Card holder or met the substantial presence test is also a
resident of a foreign country with which the United States has an income tax treaty, then they
may be eligible to be treated as a nonresident alien for U.S. income tax purposes as far as
computing their U.S. income tax liability. And we will talk more about that exception as well in
a little bit. OK. Now that we have defined resident alien, it's easy to define nonresident alien.
A nonresident is an individual who is not a U.S. citizen, not a lawful permanent resident or
Green Card holder and did not meet the substantial presence test and also did not make a
First-Year Election under 7701(d)(4). And, finally, a dual-status alien is an individual who is
both a nonresident alien and a resident alien in the same tax year. And that's what usually
happens in the year of , their first year of residency or their final year of residency. Now
that we have defined the various categories of aliens for U.S. income tax purposes, let's talk
about the impact that they have on taxation. And that's much of what this entire webinar is
about. As mentioned earlier, resident aliens are taxed on their worldwide income. And that means
they have to report and pay applicable federal income taxes on all their income regardless of
the source, unless it is, specifically, exempt under the Internal Revenue Code or under a
provision in an income tax treaty. And they generally file a Form 1040. The taxing provisions
for nonresident aliens are found in Section 871 of the Internal Revenue Code. Nonresident aliens
are taxed on U.S.-sourced investment income. And they're also taxes on income that's effectively
connected with the conduct of a U.S. trade or business. Taxation of nonresident aliens is
something that we will cover more in greater detail later in this webinar as well. A nonresident
alien who is married to a U.S. citizen or resident has the ability to make a choice to be taxed
as a U.S. resident and file a joint return with their spouse under IRC 6013(g) or (h). And we
are going to talk more about that as well later in this presentation. But, for now, I think it
might be time for a polling question. Rich? FURLONG: Bethany, indeed it is. It's time for our
first polling question. So, here is the question. When deciding which form, 1040 or 1040NR, to
file, the determining factor is, A, the source of income, whether domestic or foreign; B, the
residency status for U.S. income tax purposes; C, the mailing address, domestic or foreign; or,
D, none of the above. So, let me read that question to you if you are still pondering the correct
answer. When deciding which form, either Form 1040 or 1040NR, to file, the determining factor is,
A, the source of income, domestic or foreign; B, residency status for U.S. income tax purposes;
C, the mailing address, domestic or foreign; or, D, none of the above. So, let me give you a few
more seconds while we capture all of your responses. OK. OK. Now, the correct response is B,
residency status for U.S. income tax purposes determines which form to file. And very good, very
good. Ninety-three percent of you got that correct. So, Bethany, they were paying attention. So,
let me turn it back over to you, Bethany, to move forward. KRAUSE : OK. Thank you, Rich. OK. As
I mentioned earlier, an individual who is both a nonresident alien and a resident alien in the
same tax year is referred to as a dual-status alien. And as I said, that usually occurs in the
year of arrival or departure from the United States. A dual-status alien may be taxed a both a
resident and nonresident alien in that year, as a resident alien for part of the year and a
nonresident alien for the part of the year that they were a nonresident alien. And we are going
to go into further detail on that later in the presentation. Now that we have defined these
various categories of aliens for U.S. income tax purposes and talked just a little bit about the
impact that that has on taxation, let's go into greater detail on how residency status is
determined. So, Tracy is going to explain how to approach that now. Tracy? MCFEE: Thank you,
Bethany. OK. If you are not a U.S. citizen, then the starting point in determining residency
status for U.S. tax purposes is to first consider Internal Revenue Code Section 7701(b), which
defines the terms, resident alien, and, nonresident alien. You'd also need to look at the
associated regulation. Then, if you're from a country with which the United States has an income
tax treaty, you would consider the resident's article of the applicable tax treaty. So, sometimes
an individual who is a resident for U.S. tax purposes under IRC Section 7701(b) may also be
treated as a resident of a foreign with which the United States has an income tax treaty under
that country's domestic law. Such an individual is referred to as a dual resident. And this is
not to be confused with dual-status aliens, which Bethany just mentioned a minute ago. Please be
aware that except for very limited circumstances, only residences of, residents of a contracting
state or party to treaty may claim tax treaty benefit, in other words, claim that a treaty
reduces or eliminates the tax that otherwise would be due under a country's domestic law. Whether
you're a resident of a contracting state for treaty purposes is key to knowing whether you are
eligible to claim treaty benefit. Now, income tax treaties typically have tiebreaker rules that
determine the resident for purposes of the treaty of individuals. Generally, the resident's
tiebreaker provisions are located in Article Four of most treaties. A U.S. resident alien who
is claiming residency in a foreign country under the tiebreaker rules of a tax treaty must timely
file Form 1040NR with an attached Form 8833, Treaty-Based Return Position Disclosure. If the
tiebreaker rules of the treaty do not resolve the issue, then the resident's articles of most
income tax treaties provide that the Competent Authority will try to reach an agreement on a
single country of residence. Each tax treaty is different. Therefore, if your client wants to
claim that they should be a nonresident alien for U.S. tax purposes under the terms of a tax
treaty, you should carefully review the resident's article and any other applicable treaty
articles of that treaty to determine whether your client meets the treaty definition of a
resident. In addition, you may want to look at the Treasury Department's technical explanation
to the applicable treaty as well as any other relevant document. If you have a Green Card, which
is USCIS Form I-551, then you are a U.S. resident for tax purposes. So, we are talking about
lawful permanent resident. A lawful permanent residency start date is generally the first day
that individual is physically present in the United States with their Green Card. However, if you
also met the substantial presence test, which we are going to cover in a few minutes, your
residency start date will be the earlier of the first day of physical presence in the United
States as either a Green Card holder or under the substantial presence test. So, we're going to
talk a little bit more about Green Card holders. So, if you are a lawful permanent resident, you
are subject to U.S. taxation on your worldwide income whether you are living in the United
States or abroad. And this is a really important point. The U.S. income tax responsibilities of
a Green Card holder do not change even if that individual is absent from the United States.
Cutting up a Green Card or remaining outside of the United States for an extended period of time
does not change your status from resident to nonresident alien for tax purposes. And Rich, I
think this is so important that I'm going to say it one more time. I want to emphasize that
simply cutting up your Green Card or staying outside the United States for an extended period of
time does not change your status for tax purposes. It does not cause you to be automatically
considered a nonresident alien rather than a resident alien if you have a Green Card. So, Rich,
I think it is time for a polling question. FURLONG: It is, indeed, Tracy. So, we are ready for
our second polling question. Now, this is a true-or-false question. And let me read it to you. A
lawful permanent resident who leaves the United States and shreds his or her Green Card is no
longer subject to U.S. taxation. This should be fresh in your mind from Tracy's recent comments.
So, please take a minute and click on the Radio button you believe most closely answers that
question that you are looking at now. Based on the information just shared, do you think the
correct answer is A, a lawful permanent resident who leaves the U.S. and shreds his or her Green
Card is no longer subject to U.S. taxation, is that true, A? Or B, is it false? Now, I'm going
to give you a few more minutes to make your selection because we want to make sure everybody has
the opportunity to answer. OK. We are going to stop the polling now, and we will share the
correct answer on our next slide. And the correct response, of course, is B, false. So, let's
have our computers tabulate, very, very good, 98 percent, Tracy. So, that's very good. I think
you made it very clear that simply by shredding one's Green Card that was received when you were
designated as an LPR, that does not mean you are no longer subject to U.S. taxation. So,
definitely false. So, let's continue with our discussion on LPR status. Tracy? MCFEE: OK. Let's
talk about how a Green Card is formally given up. So, a Green Card holder's U.S. tax status will
continue until their lawful permanent resident status is determined to have been rescinded or
abandoned under U.S. immigration law. So, as I mentioned previously, even if the Green Holder
lives outside the United States, they will remain a U.S. resident for tax purposes until they
voluntarily turn in their Green Card and renounce their U.S. immigration status. And how is that
done? It's done by signing Form I-407. And that's USCIS Form I-407, which is a Record of
Abandonment of Lawful Permanent Resident Status. Or it could be done by undertaking other acts
that USCIS or a federal court determine represent an intentional abandonment of their lawful
permanent resident status. Some acts that may trigger an administrative or judicial determination
of intentional abandonment include failing to renew an expired Green Card, remaining outside the
United States for an extended period of time, failing to file a U.S. tax return Form 1040 for any
period including while living outside the U.S. or filing U.S. tax returns as a nonresident alien
for any period, and that's Form 1040NR. And before we move on to the next slide, I do want to
mention that USCIS or a court has to make the final ruling as to whether a Green Card has been
abandoned. So, even though these acts that I just discussed may have been undertaken, it's not
until you get the final ruling from a court or from USCIS that it's been revoked or abandoned as
far as lawful permanent resident status is concerned that we would consider abandon or that
person no longer to be a lawful permanent resident of the U.S. for tax purposes. OK. So, moving
on. If an individual is neither a U.S. citizen nor a lawful permanent resident, then we need to
next look at whether that individual meets the substantial presence test. And the substantial
presence test involves counting days on which an individual is actually physically present in the
United States. And this generally starts with the first day they arrive in the United States.
Now, for purposes of this test, the term, United States, does not include U.S. territories or
U.S. airspace and certain days of presence in the United States may not be counted for the
purposes of this test. And we will talk more about that in just a little bit. So, under the
substantial presence test, which is found in IRC Section 7701(b)(3), an alien is considered a
U.S. resident for tax purposes if they're physically present in the United States during the day
on at least 31 days during the tax year in question and 183 days during the three-year period
that includes the tax year in question and the two years immediately before that. And there's
some math that's done to figure this out. So, you are trying to get to the number of 183 days or
find out if there are 183 days in the three-year period. So, to do this, first, you look at the
current year. You count all the days in the United States in the, in the current year and, then,
one-third of the days of presence in, presence in the United States in the first year before the
current year and one-sixth of the days of presence in the U.S. in the year before that. So, let
me give you an example And I am going to use some simple math so that we can all keep it
straight. So, in my example, say we have someone who is physically present in the United States
on 150 days is each of the years 2016, 2017 and 2018. So, to determine if that individual meets
the substantial presence test for 2018, we would count the full 150 days of presence in 2018,
one-third of the days of presence, which is 150, in 2017, so, 50 days in 2017, and one-sixth of
the days of presence in 2016. So, one-sixth of 150 is 25 days in 2016. So, I'm counting 150 days
in 2018, 50 days in 2017 and 25 days in 2016. So, I add those together and I get 225. Because the
total for the three-year period beginning with 2018 and looking back two years is 225 days, that
individual would be considered to be a resident alien under the substantial presence test and
would be a U.S. resident alien for U.S. tax purposes for 2018. Now, certain individuals are
exempt from counting U.S. days of presence for purposes of the substantial presence test. So,
next, I'm going to talk about the exempt individuals. So, you know how earlier I mentioned the
days, some days our presence in the United States are not counted for purposes of the
substantial presence test. Well, days as an exempt individual are not counted. So, who do I mean
by an exempt individual? An exempt individual does not mean, first of all, that they're exempt
from U.S. tax. It simply means that they're exempt from counting days of presence for purposes
of the substantial presence test. So, don't take this to mean that they're exempt from U.S.
taxation. An individual who is temporarily present in the United States as a foreign
government-related individual under an A or G visa other than individuals that hold an A3 or G5
class visa are considered exempt individuals. Individuals who are present in the United States
under an A3 or G5 visa are, as a personal employee, attendant or domestic worker for either a
foreign government or international organization official are not considered foreign
government-related individuals and are not exempt and must count all days of presence in the
United States for purposes of the substantial presence test. So, who do I mean by a foreign
government-related individual who is exempt from counting days of presence? That person is an A
or G visa holder or a member of that individual's immediate family who is temporarily present in
the United States as either a full-time employee of an international organization by reason of
diplomatic status or by reason of a visa other than a visa that grants lawful permanent residence
that the Secretary of the Treasury determines represent full-time diplomatic or counselor
status. An individual is considered to have full-time diplomatic or counselor status if he or she
has been accredited by a foreign government that is recognized by the United States and intends
to engage primarily in official activities for that foreign government while in the U.S. and has
been recognized by the president, secretary of state or a counselor, consular, or officer as
being entitled to that status. Members of the immediate family would include that individual's
spouse and unmarried children but only if the spouse's or unmarried children's visa statuses are
derived and dependent on the individual's visa classification. A teacher or trainee who is
temporarily present in the United States under a J or Q visa status, so, we are talking about
teachers or trainer and they have J or Q visas, and if they, and who substantially comply with
the requirements of their visas are also, are also exempt individuals. Also included in this
designation are the immediate family members of exempt teachers and trainees. Now, an individual
generally will not be considered an exempt individual as a teacher, trainee or student for any
part of two of the six preceding tax years, I'm sorry, six preceding calendar years which, tax
years and calendar years are usually equivalent in the U.S. However, there is an exception if
they were exempt as a teacher, trainee or student for any part of three of fewer of the six
preceding calendar years and all the compensation was and is paid by a foreign employer. Now, I
know that's pretty complex and it sounds complicated and there's a lot of rules. Well, there is a good resource for you on this. It's Publication 519, which is Tax Guide for Aliens. And it has
further information on exempt status. So, let's continue on with our discussion of exempt
individuals. A student who is temporarily present in the United Stated under a F, J, M or Q visa
and who substantially complies with the requirements of their visa are also considered exempt
individuals. Also included in this category are members of these people's families. An individual
who will not be exempt as a student if they have been exempt as a teacher, trainee or student for
any part of more than five calendar years unless they not only meet the criteria shown here on
this slide but are also able to establish that they do not intend to reside permanently in the
United States, meaning the facts and circumstances bear this out and that they have maintained a
closer connection to a foreign country and have not taken steps toward lawful permanent resident
status. So, we've talked about foreign government officials. We've talked about students under F,
J, M and Q visas. We've talked about teachers or trainees under J or Q visas. The next category
of exempt individual is a professional athlete. And a professional athlete will be considered
exempt if they're temporarily in the United States to compete in a charitable sports event. A
charitable sports event is one for which the main purpose is the benefit of a qualified
charitable organization and that the entire net proceeds of which go to charity and that event is
chaired, is done, and volunteers for that event do most of the work. In figuring days of
presence, you can only exclude days on which that foreign, the professional athlete actually
competed in the sports event. So, an athlete who is here on a charitable sports event, yet you
are only going to exempt the days from counting for purposes of the substantial presence test
those days that they're actually competing in that charitable sports event. Some other days that
don't count for purposes of the substantial presence test are days an individual was unable to
leave the U.S. because of a medical condition that developed while they were here in the U.S. or
periods of time in which the individual was in the United States for less than 24 hours in transit between two places outside the United States. So, if someone is just here on a layover
and they're here for less than 24 hours, that day is not going to count as a day of presence.
However, you need to be aware that a person is not going to be considered in transit if, while
they attended business meetings in the U.S. even if the meeting was held at an airport. Other
days that don't count for purposes of the substantial presence test are days an individual needed
to work in the United States from a residence in Canada or Mexico if they regularly do so, or
days an individual was in the U.S. as a crew member of a foreign vessel engaged in transportation
between the United States and a foreign country or a U.S. territory. However, if the individual
otherwise engaged in business in the United States on the days, on those days other than as a
crew member, then they, those days would not be exempt. So, if an individual excludes days of
presence in the United States because they were temporarily present in the United States as a
teacher or trainee or (on) a J or Q visa or temporarily in the U.S. as a student on a F, J, M or
Q visa or a professional athlete competing in a charitable sports event or were unable to leave
the United States due to a medical condition that arose while here, then they need to complete
Form 8843, which is a Statement for Exempt Individuals and Individuals with a Medical Condition.
And they need to attach that to the income tax return that they're filing for that tax year or,
if they're not required to file an Income tax return, then they need to file Form 8843 as a
standalone form. And it needs to be submitted by the due date for filing the Form 1040NR or Form
1040NR-EZ. So, let's move on to talk about the residency start and termination dates. And we're
going to start off this discussion by talking about the de minimis rule. And that's found in
Treasury Regulation Section 301.7701(b)(4)d. The de minimis rule is a rule that says, namely,
that an individual must be in the United States or can be up in, may be in the United States for
less than, for up to 10 days without triggering the residency start date or extending their
residency termination date. So, it basically causes us to disregard up to 10 days of presence.
And that's if the individual is able to establish that during the period, his or her, or tax home
during that 10-day period, his or her tax home was in a foreign country and he or she maintained
a closer connection to that foreign country than to the United States. So, what do I mean by
closer connection? This means that the taxpayer has stronger ties and has maintained more
significant contacts to a foreign country than to the United States. Any days excluded under
this de minimis rule still count for purposes of determining total days of presence. So, even
those days, those days may be disregarded in terms of determining for individual's residency
start date, they're still counted for purposes of determining whether the substantial presence
test was met. An individual who wishes to exclude dates under this rule must file a statement
with the IRS for more information, and provide information to us. And that statement has to
include certain elements that I'm not going to take the time to discuss here. But, you can go to
page nine of IRS Publication 519, which is our Tax Guide for Aliens, for more information on what
that statement needs to cover. Now, I have a few more important points about the de minimis
rule. In order to disregard days for purposes of determining the residency start date under this
rule, an individual must be able to establish that on those days, he or she had a closer
connection to a foreign country and had a tax home in that foreign country. And if so, then they
can disregard days from more than one period as long as the total days in all periods are not
more than 10. Another important point about the de minimis rule is that an individual cannot
disregard any days in a period of consecutive days of presence unless all days in that period can
be excluded. Now, I want you to note that disregarded days still count as days of presence for
purposes of determining whether the substantial presence test was met. OK. So, let's move on to
talk about the residency ending date under the substantial presence test. Generally, it's going
to be the last day of the calendar year in which the individual left the United States.
However, if after leaving the United States that individual can show that for the rest of the
year their tax home was in a foreign country and that they maintained a closer connection to
that foreign country than to the United States, the residency ending date will then be the last
day that they were present in the U.S. For an individual who satisfied the substantial presence
test for a year and was also a lawful permanent resident, it's going to be, the residency ending
date is going to be the later of the residency ending date under the substantial presence test or
the first day that the individual is no longer a permanent resident. So, next, Bethany is going
to discuss the Closer Connection Exception, which I have mentioned a couple of times already in
the substantial presence test, and she is going to give you the ins and outs of that. Bethany?
KRAUSE: OK Thank you, Tracy. Thank you OK Under the Closer Connection Exception, even if (the
individual) will meet the substantial presence test, they can be treated as a nonresident alien
if during the year in question all of the following are true, they were present in the United
States for less than 183 days and they maintained a tax home in a foreign country during the
year, and they had a closer connection during the year to that foreign country than they had to
the United States and they had not taken any steps toward and did not have any application
pending for lawful permanent residency status or a Green Card. Now, the definition of the Closer
Connection Exception, as you see at these points, include the word, closer connection. So, what
do we mean by closer connection? Well, there are a number of factors that need to be considered
in determining whether an individual has a closer connection to a foreign country than to the
U.S. And some of these are listed here on the slide. Do they have a permanent home? If so, where
is that permanent home located? Where does their family live? What about their vehicles or other
personal belongings? Where do they keep those? What about any social, political, cultural or
religious organizations that they may belong to or be involved in? Where are those located?
Other factors to consider in determining whether someone has a closer connection to a foreign
country than to the United States would include where they bank. Where do they do their banking?
In which country do they hold a driver's license? Where are they registered to vote? Where do
they conduct business activities other than those that they're obviously doing for their job,
their primary job in the tax home? So, these are all factors that needs to be considered. An
individual who meets all the requirements, meaning they were in the U.S. less than 183 days
during the year, their tax home was in a foreign country during the entire year, they had a
closer connection to that country than they had to the U.S. and they had not taken steps toward
becoming a lawful permanent resident, such an individual, if they're claiming a closer connection
to a foreign country, has to file Form 8840, Closer Connection Exception Statement for Aliens,
on or before the due date for filing an income tax return including any extension. And this is
true even if they're not required to file a return, in which case they must file it as a
standalone form. So, in other words, if the fact that they meet this Closer Connection Exception
means that they're eligible then to file as a nonresident alien, then if they're income was
foreign-sources, let's say all their income was foreign-sourced during the year. Well, now
they're not subject to worldwide reporting requirements because they're filing as a nonresident
alien. And that's why we mean even if they're not required to file a return or if it was under
the threshold. So, there may be cases where they would otherwise not be required to file a return
but they do have to file this Form 8840, Close Exception Connection Statement for Aliens, as a
standalone form to let the IRS know why they're not required to file or to show us that they did
consider it and that they're claiming this Closer Connection Exception. And that does have to be
done timely This seems like a good time for our third polling question. Rich, what do you
think? FURLONG: I would agree wholeheartedly, particularly since this question addresses the
content you just discussed. So, my expectations are high, Bethany, that we are going to get a
very high correct response rate. So, let me read the question. You must file Form 8840, which is
entitled, Closer Connection Exception Statement for Aliens, as a standalone form if you are
claiming a Closer Connection Exception and you are not required to file a United States Federal
Income Tax Return. So, let's think about whether that is a true statement or a false statement.
And I'll read it one more time. You must file Form 8840, Closer Connection Exception Statement
for Aliens, as a standalone form if you are claiming the Closer Connection Exception and you are
not required to file a U.S. Federal Income Tax Return. So, please take a minute. Click on the
Radio button you believe most closely answers this question. And let me give you a couple more
seconds. OK. We will stop the polling now and we will record our answers. OK. Very good. The
class got an A. Ninety-three percent of you got that correct, that the answer is, true, the form
should be filed as a standalone form even if you are not required to file a Federal Income Tax
Return. And when I think about the Closer Connection Exception and all of that detail that
Bethany just discussed, I find that resource that Tracy mentioned earlier, Publication 519, U.S.
Tax Guide for Aliens, to be a wonderful resource. And specifically, on the closer connection
closer connection to a foreign country, I would point you to page 6 and 7 of that publication.
So, Bethany, let me turn it back over to you to continue. KRAUSE: OK. Thank you, Rich. Now we're
going to talk about the First-Year Election. This is that First-Year Election under 7701(b)(4),
which we've mentioned earlier in the presentation. An individual, an alien individual who arrives
in the U.S. after the midpoint of the year isn't going to be here for 183 days because 183 plus
183 is 366. So, if they get here beyond the midpoint of the year, they would not be qualifying
under the substantial presence test. If they don't have a Green Card either, then they would not
qualify under either of those tests, the Green Card test or the substantial presence test.
However, they might qualify as a U.S. resident for part of the calendar year of their arrival by
making what is known as the First-Year Election under 7701(b)(4). And in order to make that
election, they would have to meet all five of the following requirements. They must not have been
a U.S. resident under either the Green Card or substantial presence test during the year in
question, which we also refer to sometimes as the current year. I saw a question about that in
the questions that have been coming in. And someone said, When you guys say the current year,
what do you mean? Do you mean the year in question? And yes, we do. We mean the year in
question. And in this case, because they're making an election, sometimes it is referred to as
the election year, meaning the year in question, the year that we are talking about where they
want to make that First-Year Election. So, they cannot have been a U.S. resident under either
the Green Card or substantial presence test during this current year, election year, year in
question. They cannot have been a U.S. resident under either tests in a calendar year
immediately before this current year or this year in question. They also have to satisfy the
substantial presence test for the calendar year that immediately follows the year in which they
want to make this First-Year Election. And they also must have been present in the U.S. for at
least 31 consecutive days during the election year, also known as the year in question here. And
they have to have been present in the U.S. for at least 75 percent of the days beginning with the
first day of this 31-day period just mentioned. So, that's the last requirement there, to have
been present in the U.S. for at least 75 percent of the days beginning with the first day of the
31-day period and ending with the last day of the election year. So, if a person who didn't have
a Green Card and did not meet the substantial presence test for the year arrived in the United
States on, let's say, September 3 of 2018 and then they stayed in the U.S. for 31 consecutive
days and then they were in the U.S. for at least 75 percent of the days from September 3 through
the end of 2018 and then later met the substantial presence test in 2019, they would be eligible
to make a First-Year Election to be treated as a dual-status alien for 2019, which means that
they would be treated as a nonresident alien before arriving in the U.S., so, through September
2, and as a resident alien for the last part of the year from September 3 and onward. OK. Again,
an individual electing to be treated as a dual-status alien, in other words, someone who elects
to be treated as a resident alien for the latter part of the year, has to wait until, as I just
mentioned, until they meet the substantial presence test in that following year. And sometimes
they might not know that. They're not going to maybe know that by the due date for an Income tax
return. So, they may need to file an extension and then submit the return later in the year once
the substantial presence test is met and include on there a statement that they're making the
election under 7701(b)(4). Now, as we know, an extension extends the time to file but not to
pay tax. So, they would still have to pay their tax computed as a nonresident alien by the
original due date of the return, which generally would be April 15. For additional information on
the election procedure requirements, there is a Treasury Regulation cited here on the slide
And, also, as Rich mentioned, Publication 519 is a very handy resource for many of the topics
that we're covering today. Next, I want to talk about what's known as the no-lapse rule. This
rule applies to an alien who was a U.S. resident during any part of two tax years in a row. And,
again, this is a new topic. This is not, it may be related to you but not that much to the one I
just talked about. And I know this is a ton of information. So, much of it is mainly awareness.
And, then, you'd probably want to dig deeper in Publication 519 because I realize it's a lot to
take in. But, this no-lapse rule applies to an alien who was U.S. resident during any part of two
tax years in a row. And it usually applies in situations where an individual terminates their
residency in one year and then becomes a U.S. resident again in the next year. So, under this
rule, an individual who was a U.S. resident during any part of the preceding calendar year and
was a U.S. resident for any part of the current year or the year in question will continue to be
taxed as a resident at the beginning of the current year. So, they would be taxed as a resident
for both of those years. Similarly, an individual who was a U.S. resident for any part of the
current year and was also a U.S. resident for any part of the following year is taxed as a
resident through the end of the current year even if they have a closer connection to a foreign
country than to the United States during the current year. OK. Changing gears yet again. Again, I
know it's a lot of information to take in. Let's talk about the dual-resident taxpayer. What
about an individual who is a tax resident of both the United States and a foreign country under
the domestic law of each country? We refer to such an individual as a dual-resident taxpayer.
Now, if there is a treaty between the United States and the foreign country, that could offer
relief from double taxation because the resident or resident article in income tax treaties
typically has tiebreaker rules that determine residency for purposes of the treaty of such
individuals. And I also want to mention I had seen some questions coming in. Quite a few of you
were wondering, Where can we access the tax treaties? Well, irs.gov has a webpage. The name on
the webpage is A to Z Tax Treaties. So, if you google, irs.gov, and, tax treaties, that would
probably lead you to that page. OK. Generally, the resident or resident article of the United
States income tax treaties consider these factors shown here in the slide in the order that
they're listed here when determining a taxpayer's country of residence. And the first
consideration is permanent home. Where does the individual have a permanent home? OK. What if
they have a permanent home in both countries? Well, then, we move to the next step. We consider
the location of what is known as their center of vital interest. And I know that's a, that's
another term that maybe you haven't heard before. And, again, we have limited time in this
webinar. I wish I could expand on it further. But, it's where most of their interest lies, where
most of their connection and binds and ties are. I would have you look again to Publication 519
for that. And we also have a publication which I believe we'll list at the end of this on income
tax treaties. So, that would be a good place to get a better definition of what a center of
vital interest is. So, what if their center of vital interest is in both countries? Well, then,
we move down to the next one. We have to consider the location of their habitual abode. If they
have a habitual abode in both countries, then we move on to considering their nationality. Now,
in some cases, you can get that far and still not have resolved it. If all of those factors don't
resolve the issue, the residence articles of most income tax treaties provide that the competent
authorities will try to reach an agreement on a single country of residence. Now, what are the
competent authorities? Well, each country has generally got a taxing authority or some
governmental authority that can help with that determination. Competent authority is a division
here at the IRS. There are attorneys here that assist with that and serve and competent
authority. And, again, in the treaty's publication, you would find, I saw a question about that
too., How do we find the address to contact? That would be in the, in the treaty's publication
and possibly also some of our instructions. I also want to point out that each tax treaty is
different. So, it's very important to read the applicable treaty carefully when determining how
it applies in a particular case because these tiebreaker rules, as they call them, that I just
went through are pretty standard, but there are nuances in each treaty. Some treaties require
that U.S. citizens or lawful permanent residents satisfy additional requirements to be considered
residents of the United States for purposes of the treaty. So, this would be an example of where
treaties can differ. For example, a treaty might provide that U.S. citizens or a lawful
permanent resident will not be treated as U.S. residents for treaty purposes unless they have a
substantial presence, permanent home or habitual abode in the United States and are not treated
as a resident of a third country under a treaty between the other contracting state and that
third country. And the U.S.-U.K. Tax Treaty is an example of a treaty with this additional rule.
And I did see a question come in about that. I'm hoping that this shed light on that for that
person. They had a situation where they were a U.S. citizen living in the U.K. and were asking
about some income that they believe might be exempt under the treaty. So, I would suggest they
look carefully into the treaty. And sometimes it's not a bad idea to get a tax professional to
help you with that because these are complex. OK. I want to point out that the substantial
presence requirement in these treaties, as you see here on the, here on the slide, it says they
have a substantial presence, permanent home or habitual abode. The substantial presence
requirement listed in this bullet is not to be confused with the substantial presence test for
aliens that we talked about earlier, the 183-day situation that we brought up earlier. So, I
want to make it clear that this is different. This is something completely different. It's buried
within a treaty and it has a meaning within that treaty It is not part of the code. So, now,
let's talk about the actual taxation of dual-resident taxpayers. For any tax year or portion
thereof for which an individual determines that he or she is a resident of a foreign country for
treaty purposes under the tiebreaker rules of the treaty between that country and the United
States, the individual may choose to either, be treated as a resident of the other country and
file as a nonresident alien on Form 1040NR and Form 8833, Treaty-Based Return Position
Disclosure. Or they may choose to not be treated as a nonresident alien and, instead, file as a
resident alien on Form 1040. So, they have these two choices. Now, I am going to turn the mic
over to you, Tracy, to cover a few more topics. MCFEE: Thank you, Bethany OK So, next, we're
going to talk about Joint Return Election. And this would be an election where a nonresident
alien who is married to a U.S. citizen or resident alien wants to be treated as a U.S. resident
for tax purposes. Now, individuals may want to be treated as nonresident aliens for U.S. tax
purposes in order to avoid the broad reach of worldwide taxation. Sometimes, however,
nonresident aliens want to elect to be treated as a U.S. resident taxpayer. In particular, an
example that would be a nonresident alien with limited income who is married to a U.S. citizen
may want to choose to be treated as a U.S. resident for tax purposes in order to claim certain
refundable tax credit. Now, on this slide here, we are comparing and contrasting two types of
Joint Return Elections, the Joint Return Election under Internal Revenue Code Section 6013(g) and
that under 6013(h). And they're slightly different. IRC Section 6013(g) allows a nonresident
alien who is married to a U.S. citizen or a resident alien the ability to be treated as a U.S.
resident alien for income tax purposes for the entire tax year. By making this election,
nonresident aliens and their respective spouses may file a joint U.S. Income tax return for the
entire year. If the Joint Return Election is made under IRC Section 6013(g), then the worldwide
income of both spouses is, in general, subject to U.S. income taxation for the entire year of the
election. Now, this election is different than the first-year election under 7701(b)(4) that
Bethany discussed earlier. And that's because the worldwide income of the individual making the
First-Year Election is only subject to U.S. taxation for part of the election year under the
First-Year Election rule. However, under 6013(g), individuals who elect a 6013(g) election are
subject to U.S. taxation for the entire election year. Additionally, if there was a previous
Joint Return Election in place that was made by either spouse that was terminated, then a new
election under Section 6013(g) can never be made. So, the important thing to bear in mind about
6013(g) is that the rule of thumb one election per individual per life. So, next, let's talk
about the Joint Return Election under 6013(h). This election affords a nonresident alien who is
married to a U.S. citizen or resident alien and that nonresident alien spouse becomes a U.S.
resident by the end of the tax year this election will allow them the ability to be treated as
a U.S. resident alien for income tax purposes. If this election is made, then the worldwide
income of both spouses will generally be subject to U.S. income taxation for the entire taxable
year. Additionally, if both spouses begin the year as nonresident aliens and then both become
resident aliens by the end of the year, they can still make an election under 6013(h) provided
that other requirements are met. And if that happens, then they would both be treated as
resident aliens for the entire tax year. One of the major differences between the joint return
election under 6013(g) and that under 6013(h) is that under the 6013(h) election, that
nonresident alien spouse actually becomes a U.S. resident alien during the tax year. And that
is a significant difference because under 6013(g), the nonresident alien spouses only considered
a resident alien for purposes of, for most income tax and filing requirement purposes after the
election is made. So, under 6013(g), the nonresident alien spouse never actually becomes a
resident alien under the substantial presence test or the Green Card test. Under 6013(h), the
nonresident alien spouse actually becomes either a lawful permanent resident under the Green
Card gets a Green Card or meets the substantial presence test later in that year. So, unlike
so, we are talking again about 6013(h). So, like the election under 6013(g), the 6013(h) election
is also different from First-Year Election because, again, the worldwide income of both spouses
will be subject to U.S. taxation for the entire year. However, individuals who make a First-Year
Election that Bethany talked about earlier can also make the Joint Return Election under 6013(h)
to be considered resident aliens for the entire tax year rather than just part of the year This
is so because the requirement that one spouse must be a U.S. citizen or resident alien to make
this election can be satisfied by making the First-Year Election that previously talked about.
Finally, just as in the case with the Joint Return Election under Section 6013(g), there is only
one 6013(h) election available per individual per life. Thus, neither spouse may, upon
remarriage, ever make another Joint Return Election under 6013(h) with a new spouse. Basically,
again, an election under 6013(g) or 6013(h) is a once-in-a-lifetime election. And, Rich, I think
this is a perfect time for another, our final polling question. FURLONG: I certainly agree with
that, Tracy. And let me ask the audience, do you agree that it's now that we'll have our fourth
and final polling question? And I do see some yeses coming in, Tracy. So, let me go ahead and
read the question, which relates to the topic that Tracy just discussed. So, the question is,
Mary, who is a U.S. citizen, is married to John and John is a nonresident alien. John was not a
U.S. resident alien at any time during 2018. Can Mary and John together make an election to
treat John as a resident alien and then file a joint U.S. income tax return Form 1040 for 2018?
So, let's think about that question because it relates to the elections just discussed by Tracy.
And I'll read it again. Mary is a U.S. citizen. She is married to John, a nonresident alien.
John was not a U.S. resident alien at any time during 2018. Can Mary and John make an election to
treat John as a resident alien and then file a joint U.S. income tax return for 2018? Is the
answer, Yes, they can make that election, or No, that they cannot? So, let's wait for those
answers to come in. OK. And we will stop the polling now and we'll tabulate our answers. And the
correct answer will be on the next slide. The answer is, yes, John and Mary or Mary and John can
make the election to treat John as a resident alien for the entire year. And that would give them
the benefit of filing a joint U.S. income tax return for 2018. So, 91 percent of you got that
correct. And, Tracy, if I'm not mistaken, and this is a test for me if I was following along,
this election that John and Mary can make is election under Internal Revenue Code 6013(g)? I
think this is the 6013(g) election. MCFEE: So, Rich, looking at the fact pattern, so, Mary is a
U.S. citizen and John is a nonresident alien. So, the question is can they make a Joint Return
Election. And the answer is yes. And, remember, the fact pattern is that John did not become a
U.S. resident alien. So, this is a 6013(g) election we're talking about in this polling
question. So, you are correct. FURLONG: OK. Very good. Well, I'm glad I got it correct. All
right. Tracy, let me turn it back to you. MCFEE: OK. We're going to next talk about dual-status
aliens and how they're taxed. So, a dual-status alien, not a dual resident, we are talking about
dual status, someone who was a nonresident alien during part of the tax year and was a resident
alien during part of the tax year. So, a dual-status alien is going to be subject to different
rules. And those different rules are going to be dependent on apply to the part of the year
that the, that they spent as a resident alien and the part of the year that they spend as a
nonresident alien. So, they're, they're, they're a, they've got a combo tax return, if we want
to think of it that way where they're, part of the year, they're a resident alien and part of the
year they're a nonresident alien. So, for the period of time that they're a resident alien, all
worldwide income for that period of residence and all income effectively connected with the U.S.
trader or period, trade or business for the period that are nonresident as, after allowing all
allowable deduction is going to be combined so that (they will) take the part of the year that
they were a resident alien and be taxed on worldwide income and, for that part of the year, and
the part of the year that they were nonresident alien and they're going to be only taxed on
U.S.-sourced income for that part of the year and they're going to combine that into one return.
So, they're going to, they're going to do their tax return figuring part of the year as a resident alien and part of the year as a nonresident alien. So, they will combine that income.
And the portion of the year that they're a resident alien, they're going to use the graduated,
after figuring allowable deductions, let me, let me clarify. So, I'm going to slow down and back
up a step. So, what's going to happen is all worldwide income for the period of residence and all
income effectively connected with the U.S. trade or business for the non-period, areas of
non-residence, after you subtract out any allowable deductions, is going to be combined and it's
going to be taxed at graduated rates applied to U.S. businesses and residents. So, U.S.-sourced
income that is not connected with the U.S. trade or business for the period of non-residence will
be subject to the flat 30-percent rate or a lower treaty rate if one applies, and no deductions
will be allowed against this income. So, there's special rules that apply to dual-status aliens.
A dual-status alien cannot claim a standard deduction, is not allowed to file as head of
household and cannot file a joint return unless they're married to a U.S. citizen or resident
alien and with his or her spouse elect, file a joint return. Also, a dual-status alien who is a
nonresident alien at the end of the tax year and who is married to a U.S. citizen or resident
alien for all or part of the tax year and who did not file jointly with his or her spouse
generally must file as married filing separately and use that tax rate and cannot claim an
earned income credit, a credit for elderly or disabled individuals or an education tax credit.
So, how do you know what type of return to file? Well, the type of U.S. income tax return filed
by dual-status alien will depend on whether that individual is a resident alien or a nonresident
alien at the end of the tax year. An alien whose status changes from nonresident alien to U.S.
resident alien during the tax year and who is a U.S. resident on the last day of the tax year
files a Form 1040 and writes, Dual-status return, across the top of that return and attaches a
statement, which is usually Form 1040NR, with the words, Dual-status statement, across the top,
showing the income for the part of the year that he or she was a nonresident. So, in the case
where an individual is a resident alien at the end of the tax year in a dual status year, the top
portion, the front, the first return they're filing is a 1040 with, Dual status, written across
the top of it. And, then, they attach the 1040NR, write, Dual status statement, on that, and
that's their, that comprises their return and they're filed as one package. Now, a resident alien
who gives up their residency in the United States during the year and who is a nonresident alien
as of the last day of the tax year, they file a Form 1040NR and write, Dual-resident status
return, across the top of the return. And they attach a statement, which is usually the Form
1040, with the words, Dual-status statement, across the top to the Form 1040NR, showing the
income for the part of the year that he or she was a U.S. resident. So, the dual-status return is
going to be based on 1040 or 1040NR. It's going to be determined based on that individual's
status as of the end of the year. So, if they're a resident alien, they're going to have the 1040
as the dual-status return. If they're a nonresident alien as of the end of the year, then they
file the 1040NR as the dual-status return with the appropriate 1040 or 1040NR attached, depending
on the status. OK. We provided you with a lot of information today. And Bethany pointed that
out, and it's really true. So, to summarize what we covered, we're going to talk, we covered the
following types of resident status for U.S. tax purposes. We covered the U.S. citizen, and that's
an individual who is going to be taxed on worldwide income, a resident alien who either meets
the lawful permanent resident test or as a Green Card holder or met the substantial presence test
or who made a First-Year Election those are also individuals who are going to be taxed on
worldwide income. We also discussed nonresident aliens. And these are people who are neither a
U.S. citizen nor a resident alien and, therefore, will only be taxed on U.S.-sourced income but
who could choose to be treated as a resident alien if they're eligible and, but, and that, and
they'd be eligible by filing a joint return with a U.S. citizen, a resident alien spouse and
making a 6013(g) or (h) election. And if that's so, then they would be taxed on worldwide income.
Otherwise, if they're a nonresident alien who does not make a Joint Return Election, they would
be filing a Form 1040NR and be taxed only on U.S.-sourced income. And, then, we talked about
dual-status aliens just a moment ago. And that's someone who is both a resident alien and
nonresident alien during the same tax year. And they're taxed on worldwide income for the
portion of the year in which they were a resident alien and taxed only on U.S.-sourced income for
the portion of the year in which they were a nonresident alien. Finally, listed here on this
slide are some resources that you might find helpful and several one we referred to throughout
this presentation. That would include IRS Publication 519, which is the Tax Guide for Aliens,
the no-lapse rule. It also talks about the Closer Connection Exception. We also have links to which is a great resource. It covers topics like exempt individuals and the de minimis rule and
pages for individual tax payers with international aspects on their returns, the link and the Web
address for that citation that cite the, Bethany mentioned where we have the U.S. income tax
treaties posted on irs.gov. And we have the taxpayer assistance numbers. We also have technical
writeups on various topics that we discussed today. And those writeups are call practice units,
and they're posted on irs.gov. And shown here on this slide is a link to the page where you can
find various practices units that pertain to the topic of residency status. These practice units
are written by IRS staff people and, in fact, Bethany and I have written some of them. And they
provide explanations of general tax concepts and information about specific types of
transactions And we have those on such topics as determining residency status, for lawful
permanent residence, and we have one on the First-Year Election and we have one on each of the
6013(g) 6013(h) election. So, Rich, I think that concludes our presentation. Have we reached the
question-and-answer segment now? FURLONG: Well, we have indeed, Tracy And I to thank you and
Bethany for a great presentation. So, again, my name is Richard Furlong, and I will be moderating
the Q&;A session this afternoon. Now, before we start our question-and-answer session, I want to
thank each and every one of you for attending today's very detailed presentation on Determining
Tax Residency Status. We are fortunate that Tracy and Bethany, Tracy McFee and Bethany Krause
have agreed to stay with us. And they will be answering as many of your questions as possible.
If you haven't already inputted your questions, and do we have a lot of questions in the queue,
there is still time. So, please, go ahead, click on the Ask Question button, type in your
question, and click Submit. But, one reminder before we start. We certainly are not going to have
time to answer all of the questions coming in from the attendees around the country today. But,
let me assure you we'll answer as many as time allows. And, also, if you're participating to earn
a certificate and relation continuing education credit, you will qualify for two credits by
participating at least 100 minutes from the official start time of the webinar. That means the
first eight to nine minutes of chatting we engaged in before the top of the hour do not account towards that 100 minutes. Sorry about that. It's only from the top of the hour when we started.
If you stayed on for at least 50 minutes from the official start time of the webinar, you will qualify for one credit. Again, the time we spent chatting, you and me, between the webinar, when
we started at the top of the hour does not count towards the 50 minutes. All right. Tracy and
said, hundreds of questions. So, the first couple I'm going to toss to you, Bethany, because I Bethany, let's get rolling. I hope you're ready. I'm sure that you are. We've received, as I
do believe they touch on topics that you discussed. So, our first question for your Bethany, is
how would you handle a person who is a partial-year a resident of their country and then a
partial-year resident of the U.S. with only foreign-earned income? are looking at, for tax
purposes, obviously, how would you handle that when they were partial-year resident of their, of
their home country and then a partial-year resident in the U.S. and their only income was income
earned abroad? We call foreign-earned income. Bethany? KRAUSE: OK, To answer that question,
during the time that they're a resident alien, they're taxable on worldwide income. And during
their period of non-residency, they would be taxed only on U.S.-sourced income which, in this case, they're stating they do not have. So, they would be filing a dual-status return. And for
the portion of the year that they were a U.S. individual, and Tracy just talked about the
dual-status return. And it isn't clear to me in this case exactly which half of the year is
which. But, for the portion of the year that they were not a U.S. individual and, they would not
have to report U.S.-sourced income for that portion. So, it would probably just have a zero on it
whether it's the statement, whether the 1040NR for that portion of the year is the statement or
is the actual return because, remember, if they started the year as a nonresident alien and ended
as a resident alien, they would file the 1040 with the 1040NR behind it as a statement. So, the
1040NR in that case wouldn't have income on it and the 1040 would have foreign-sourced income
that was received while they were a U.S. person potentially. And, of course, the question isn't
clear on which half of the year they received it or if it was throughout the year. And, then, it
would be vice versa if it was the other way around. If they were a U.S. person for the first half
of the year and a nonresident alien for the last half or the latter part of the year, then the
opposite would be true. They would file the form 1040NR with the 1040 attached as a statement.
And on the 1040 would appear the foreign-source income that they received while they were a
resident alien. FURLONG. OK. Thank you, Bethany. Does that answer the question? I think it does.
You mentioned treaty. You said a couple of points in your discussion, where, again, can one find
a list of all of the countries that have tax treaties with the United States? KRAUSE: A to Z , A
to Z Tax Treaties at irs.gov I think it's A-Z Tax Treaties or Tax Treaties A to Z. I think if
you google, irs.gov, and, treaties, you would be able to find them there. FURLONG:: And I also
believe we have a publication that summarizes the treaties. I think it's Publication 901 on U.S.
tax treaties. The last time I checked, it's posted on irs.gov. KRAUSE: Yes. That would be another
good resource. And it might help explain a few things as well. Thank you. FURLONG: And one other
question before. for your, Bethany, before I turn to Tracy. An undocumented alien who actually
physically lives in the United States for the entire year, can that individual file a tax return
as a resident alien for U.S. tax purposes, Bethany? KRAUSE Yes. They not only can, but they
should because they would have met the substantial presence test If they were here all year,
there is no question that they met that test. And, therefore, they would owe the IRS a tax
return. Thank you. FURLONG: OK. Very good. And they'd be subject to the same rules as a, as a
U.S. citizen or a permanent resident, legal permanent resident if they meet that substantial
presence test as an undocumented alien. KRAUSE: Yes. FURLONG: OK. Tracy, let me turn to you. And
let me, this is the first question that came in. It's a little bit involved. Can a nonresident
alien who was on a G visa at the start of the year who then marries a United States citizen in
the middle of the year file the 6013(g) election that you discussed? And let me read the rest of
it because I'm not sure I understand it. If the nonresident alien was tax-exempt, will she now be
taxed on her previous tax-exempt income after making such an election? So, if I parse this
question, Tracy, we have a nonresident alien who was here on a G visa at the beginning of the
year and then married a U.S. citizen. Does that meet the substantial presence test at the end of
the year? Can that individual make, can that couple who are married at the end of the year make
the 6013(g) election? And how will that impact the income that that nonresident alien or that
spouse received prior to making the election for the year? MCFEE: OK. That is an excellent
question. And I actually think it's going to help clarify an understanding for a good part of
our audience. So, we have a situation where we have someone who marries a U.S. citizen spouse
during the year and that person was a nonresident alien under the rules for counting, exempt from
counting days of presence for U.S., for the purposes of the substantial presence test. And I'm
assuming that they also did not obtain a Green Card. So, under the tax rules, they would be
considered a nonresident alien for that tax year. However, there's two things we have to look
at. What is their marital status as of the last day of the year? Because we determine, when
looking at marital status for U.S. tax purposes, you look at the last day of the tax year. So, we
are assuming they got married during the year and they're still married at the end of the year,
December 31. And that person, that nonresident alien individual married a U.S. citizen. So, they
can make a 6013(g) election, that nonresident alien spouse can make a 6013(g) election and elect
to file a joint return with his or her U.S. citizen spouse. However, the impact of that will be
that the nonresident alien spouse will be taxed on their worldwide income for the entire year,
so, both the U.S. citizen spouse and the nonresident alien spouse, by making that Joint Return
Election under 6013(g), the impact is that the nonresident alien spouse's income, along with the
U.S. citizens' spouse's income, is going to be subject to U.S. tax for the entire tax year. So,
in effect, they're, they're not only going to be taxed on their U.S.-sourced income. They're
going to be taxed on their worldwide income. And, remember, we mentioned earlier that, when we
were talking about exempt individuals, we were talking about the fact that they were exempt from
counting days of presence for purposes of the substantial presence test. That doesn't necessarily
mean that someone who is an exempt individual for purposes of counting days for the substantial
presence test that does not mean that they're exempt from U.S. tax. It simply means that they're exempt from counting days for determining whether or not they're a resident alien under
the substantial presence test. Hopefully, that clarifies things. FURLONG: It does. And I'm happy
that you mentioned the importance of understanding the term, exempt. I've, I know a number of
students here, let's say under F visas, who can be in the United States while, let's say,
attending undergraduate school and be exempt while they're under their current F visa for a
period of time in the counting days towards the substantial presence test. And, again, that's
discussed in Publication 519. And speaking of the substantial presence test, Bethany, let me
come back to the, what I call the math portion of your presentation, the 183-day test. So, the
first question, short question, can the 183 days be all in one calendar year or does it have to
be during, for this calculation, during the three-year period, the current year and the two
years previously to reach that 183 days, 183-day threshold of counting days in the current year,
Tracy? KRAUSE: I think you meant Bethany. But maybe you meant Tracy. FURLONG: Well. KRAUSE: I
guess I'll answer part of it and, then, if Tracy wants to jump in, the 183 days could happen all
in one year. I mean if a person was here, as the one that I mentioned earlier, they were asking
about the undocumented alien who had been here all year. Well, clearly, one wouldn't need to look
any further to know that that person did meet the substantial presence test. But, if they were
here less than 183 days in the year in question, also known as the current year, they look back
to one-third of the days in the year before that and one-sixth of the days in the year before
that and add those together to arrive at potentially the 183 days in that method So, and that,
I think that was, I think that question was for me and I think it was a clarification question.
Am I correct? FURLONG: Yes, it was. And I think that does clarify it. Now, let me. KRAUSE: Now,
I think, I think that that one was, I think where that confusion was when I talked about the
dual-status alien and I said that if a person was here for, yes, they came in after the midpoint
of the year. And I was talking about the fact that for that first part of the year, they would
be a nonresident alien and, then, the second part of the year a resident alien provided, yes,
that they met the substantial presence test, I guess. FURLONG: OK. KRAUSE : And that would have
to be right on the 183-day mark. It might be the middle of the year. I'm trying to think of what
exactly I had said that triggered that question. And having a hard time remembering that right
now Something triggered that question. And I think it was an example that I was giving about an
individual, I think it was the First-Year Election. Yes. If they got here after the midpoint of
the year and they wanted to be taxed as a resident alien, and I had said, now I was assuming the
person had never been here before. That's what I needed to clarify. If they had never been here
before, unless they got here on August 1, well, they're not going to have the 183 days. And
because they hadn't, and I should have specified that. Because they had not been here in the
prior years, there are no other days for them to count in some instances. And, therefore, they
can't meet that substantial presence test. But, if they did want to be taxed as resident alien
for that part of the year, for example, say, from August 1 onward, they may be able to make that
First-Year Election provided, of course, that in the following year they met the substantial
presence test and all of the other requirements are met. I hope that clarifies it. FURLONG: I
think it, think it does. Right after that, a very interesting question came in sort of on the
same area having to do with a Canadian citizen who spent about 180 days a year in Arizona. I
guess that's what we call a snowbird. And they do that every year. So, let's say for argument's
sake, Bethany and Tracy, every year the Canadian escapes the Canadian winters, goes to Arizona
for 180 days, doesn't work, they have, but, they have retirement income from the Canadian
retirement plan and that income is taxed in Canada. In that fact pattern where they're in any one
year they're spending 183 days but, presumably, they would meet the substantial presence test
when you calculate over the three years. Are they required, A, to file a tax return in the U.S.?
And is that a Form 1040NR, or do they need to file the Form 8840, the Closer Connection
Exception; I think it is, each year? I've seen variations of that question. So, I think the
audience might benefit from your perspective. MCFEE: OK. So, the understanding that I have is we
are looking at, they're here about 180 days every year. Right? So. FURLONG: Yes. MCFEE: We look
back three years. And assuming it's 180 each year, we take 180 plus one-third of that, of that
in the previous year. One-third of 180 is 60. And, then, we take one-sixth of that the day
before, that's another, the year before. That's another 30. So, it's clear that they would meet
the substantial presence test. I mean the math just bears that out. So, they would be considered
a resident alien for U.S. tax purposes under the substantial presence test unless some other
exception apply. But, generally speaking, they're going to meet that substantial presence test.
If they have income that is subject to U.S. taxation, which would be worldwide income unless it's
specifically exempted from U.S. tax under the U.S, the U.S. Internal Revenue Code or under the
terms of the treaty, then they would file an income tax return with the United States. And that
income tax return would be a Form 1040 because they're a resident alien for U.S. tax purposes,
not a nonresident alien because they meet the substantial presence test. So, that individual
would file the Form 1040 and report their worldwide income. And if any income was exempt under a
treaty, they should disclose that typically on a Form 8843, which is a Treaty-Based Return
Position Statement, to help clarify that. But, that would be the rules. Bethany, did you want to
tag in anything about that or do you think I covered it? KRAUSE: I think you did. Thank you,
Tracy. FURLONG: Yes. And I do know in addition to the Publication 901 on U.S. Tax Treaties we
have a separate publication just on the U.S.-Canadian Tax Treaty And it's Publication 597, which
you can find on our website because it does go into detail on the provisions of the U.S. and
Canadian Tax Treaty. OK. So, let me scroll back through here and get a couple of quick ones. Is
this, is an individual American citizen living in a foreign country, how long do they have to
file a U.S. tax return? So, that's a pretty simple question. They're subject, a U.S. citizen,
as you have explained, is subject to tax on worldwide income. And if they meet the normal filing
requirements based on income and filing status, they have to file a 1040 irrespective of where
they're, Bethany? KRAUSE: Yes, that's correct. And even if there is some provision that they can
find to escape taxation on some or even all of their income, let's just say you only have one
stream of income at that point and that it's somehow, has a provision in a treaty, they still
need to file that return. And/or if they're, we did a webinar just a few weeks ago on the
foreign-earned income exclusion. Let's say they're living indefinitely in a foreign country and
all of their income is foreign-earned income and that's all they have and it's below the
threshold so that they can exclude it each year, that doesn't preclude them from having a filing
requirement. They still have to file and let us know why the income is exempt in this case or excluded. So, the answer is, as you stated, that they do have to continue to file. FURLONG:
Well, thank you, Bethany, and thank you, Tracy. It's hard to believe how quickly the time has
flown by But, that's all the time we have today for the questions. So, I want to extend a
sincere thanks to Bethany and to Tracy for sharing their expertise and their knowledge and
answering the questions and providing the resources. But, before we close out today's session,
Tracy, I'd like to have you provide to the audience the key points that you and Bethany want the
attendees to remember from your webinar today. MCFEE: Yes. Thanks, Rich. I know we covered a lot
of ground today. The audience have a lot of excellent questions and I wish we could have gotten
to all of them, but we just don't have time. But, there are some key points we'd like you to take
away from today's session. First of all, the most important point is that the residency status
for U.S. tax purposes is very important and affects how an individual is taxed. It determined
the individual's filing status, what type of form they have to file, the amount of their income
that's subject to U.S. income tax and which deductions, credits and exemptions they can claim.
And it also impacts the applicable tax rates that apply to them. Now, as we've emphasized
throughout today's session, the U.S. generally taxes both its citizens and its residents on
worldwide income and that they can also be subject to employment taxes. Residency status
residency concepts under U.S. tax law and U.S. immigration law, as we talked about at the
beginning of this session, are not the same. A non-immigrant or an undocumented alien under U.S.
immigration law could, depending on the circumstances, be a resident alien, dual-status alien or
nonresident alien under U.S. tax law. And we talked about the resident alien. And the resident
alien is an individual who meets either the lawful permanent residence test that means they're
a Green Card holder, or meets the substantial presence test or, or makes the First-Year Election,
as Bethany discussed, under IRC Section 7701(b)(4). And for those individuals who do have a Green
Card, cutting up the Green Card or remaining outside the United States for extended period of
time does not change an individual's status from resident alien to nonresident alien for U.S. tax
purposes. A determination actually has to be given by USCIS that that Green Card has been
administratively or judicially, administratively revoked or abandoned or judicially revoked or abandoned. And Rich, back to you. FURLONG: Well, thank you, Tracy. So, I want to remind
everyone that we here at the IRS are planning additional webinars throughout the year. To
register for any of the upcoming IRS webinars, please visit IRS.gov and use the keyword,
webinars, Select either webinars for tax practitioners or webinars for small businesses. And,
yes, we will be offering certificates and CE credit for many of our other upcoming webinars. You
may visit the IRS video portal. And, again, that address is www.irsvideos, one word . gov The
IRS video portal contains video and audio presentations on many topic of interest to either
small businesses, individuals and tax professionals. There, you will also find video clips of tax
topics. And you will also find archived versions of our live webinars. Again, I want to give a
truly sincere and big thank you to both Bethany and to Tracy for not only a great webinar today
but great webinars throughout the month of June on topics involving foreign taxation.
Certainly, by sharing your expertise and answering questions both today and at the earlier
webinars, you have provided a great benefit to our audiences around the country. And I also want
to thank you, the attendees, for attending today's webinar on Determining Tax Residency Status.