26 USC Section 7701(b): Who Is a Resident Alien?

An individual’s status for U.S. income tax purposes is a foundational element of their financial obligations. For non-U.S. citizens, Section 7701(b) of the Internal Revenue Code establishes the rules that classify individuals as either a “resident alien” or a “nonresident alien.” This distinction fundamentally alters how a person is taxed.

The classification dictates the scope of income subject to U.S. taxation. A resident alien is taxed in the same manner as a U.S. citizen, meaning their worldwide income is subject to U.S. income tax. In contrast, a nonresident alien is taxed only on income from U.S. sources. The term “alien,” as used in this tax context, refers to any individual who is not a U.S. citizen. Understanding this framework is the first step for any foreign national navigating the U.S. tax system.

The Green Card Test

The Green Card Test is met if an individual is a lawful permanent resident of the United States at any time during a calendar year. Being a lawful permanent resident means having been granted the privilege of residing permanently in the U.S. as an immigrant under the nation’s immigration laws, a status commonly associated with holding a “Green Card.”

Under this test, tax residency begins on the first day the individual is physically present in the U.S. after being granted lawful permanent resident status. This status is considered ongoing unless it is formally rescinded or judicially determined to have been abandoned. Residency can also cease if the individual claims tax treaty benefits as a resident of a foreign country and notifies the Secretary of the Treasury.

The Substantial Presence Test

For individuals who are not lawful permanent residents, tax residency is determined by the Substantial Presence Test. An individual who is physically present in the U.S. for 183 days or more during the current calendar year will automatically meet the test.

A more intricate calculation applies if the 183-day threshold in the current year is not met. This part of the test requires the individual to have been present in the U.S. for at least 31 days in the current year. If that condition is satisfied, a three-year look-back formula is used which counts all the days of presence in the current year, one-third of the days in the first preceding year, and one-sixth of the days in the second preceding year. If the sum of these days equals or exceeds 183, the individual meets the Substantial Presence Test.

To illustrate, consider an individual present in the U.S. for 120 days in the current year, 150 days in the first preceding year, and 180 days in the second preceding year. The calculation would be (1 x 120) + (1/3 x 150) + (1/6 x 180). This equals 120 + 50 + 30, for a total of 200 days. Since this total exceeds 183 days, the individual would be considered a resident alien for tax purposes in the current year.

Days Excluded from the Substantial Presence Test

The calculation for the Substantial Presence Test does not count every day an individual is physically present in the United States. Certain categories of individuals, known as “exempt individuals,” can exclude their days of presence. This means their time in the U.S. does not count toward the 183-day formula, which may allow them to remain nonresident aliens for tax purposes.

Days of presence can be excluded for:

• Foreign government-related individuals, such as diplomats, consular officers, and employees of international organizations, who are present in the U.S. on an A or G visa.
• Teachers or trainees on a J or Q visa, who can exclude their days of presence for two of the last six prior calendar years.
• Students on an F, J, M, or Q visa, who can exclude days for the first five calendar years of their presence.
• Professional athletes in the U.S. temporarily to compete in a charitable sporting event.
• Individuals who are unable to leave the U.S. because of a medical condition that developed while they were present.

These specific exclusions have distinct rules and time limitations.

The Closer Connection Exception

An individual who meets the Substantial Presence Test may still be treated as a nonresident alien by qualifying for the Closer Connection Exception. This exception is designed for individuals whose lives and connections remain centered in a foreign country despite their physical presence in the United States.

The primary requirements are that the individual must be present in the U.S. for fewer than 183 days in the current year, maintain a “tax home” in a foreign country for the entire year, and have a “closer connection” to that country than to the U.S. A tax home is the location of one’s principal place of business. The IRS evaluates the “closer connection” claim by examining factors, including the location of the individual’s:

• Permanent home
• Family
• Personal belongings
• Business activities
• Social or political affiliations

To formally claim this exception, the individual must file Form 8840, Closer Connection Exception Statement for Aliens. This form requires providing detailed information to substantiate the claim, including the foreign country to which they have a closer connection, details about their foreign tax home, and facts that support their significant ties to that country. The form must be filed by the due date for a U.S. nonresident alien income tax return.

First and Last Year of Residency

The transition into or out of U.S. tax residency often results in a “dual-status” tax year. This occurs in the first year an individual becomes a resident alien or the last year they hold that status. During a dual-status year, the individual is treated as a nonresident alien for one part of the year and a resident alien for the other.

For an individual meeting the Substantial Presence Test, the residency starting date is the first day they are physically present in the U.S. during the year they meet the test. For someone meeting the Green Card Test, residency starts on the first day they are present in the U.S. as a lawful permanent resident. An individual’s last year of residency ends on the last day of the calendar year, but rules allow for an earlier termination date if the individual establishes a closer connection to a foreign country for the remainder of the year.

For the period they are considered a resident, they are taxed on worldwide income. For the part of the year they are a nonresident, they are taxed only on U.S. source income.