When are you “resident for US income tax purposes”?

If you are wondering about whether you are subject to US income tax you can give yourself a few quick tests.

1. Are you a US citizen?

This may seem a strange question, but you might be a US citizen and not realize it.

Were you born “in the US”? It is not uncommon for people to go to the US for medical treatment (particularly from Caribbean and Central American countries). Being born in the US or one of its territories automatically makes you a US citizen.

Were either of your parents US citizens when you were born? If so you are automatically a US citizen even if you have never taken any action or visited the US. People to whom these situations apply are sometimes referred to as “accidental Americans”.

If you are a US citizen, you are subject to US income tax on your worldwide income.

2. Do you have a “Green Card”?

If you are a lawful permanent resident (whether you spend anytime physically in the US) you are resident for US income tax purposes.

3. Do you meet the “substantial presence test”?

The Substantial Presence Test is based on the number of days a person spends in the US over a three-year period.

A person is resident for income tax for a year if they spend 183 or more days in the US that year.

If a person is not present in the US for 183 days in a year but is present for at least 31 days, then the number of days the person was present in the US in each of the prior two years is taken into account when calculating whether they are resident for income tax. To calculate whether a person is resident for income tax the number of days a person is present in the current year is added to one-third of the number of days a person was present the prior year and one-sixth of the number of days a person was present in the preceding year (i.e. the year before last year). If the total number of days (current year + 1/3 prior year + 1/6 two years prior) is 183 or more then the person is resident for income tax for the current year.

For example, a person visits the US each year. This year the person has been in the US for 82 days, so they might think that they can stay another 100 days. However, last year they spent a total of 120 days in the US, and the year before that they spent a total of 94 days in the US.

The formula is to count all of the current year’s days, one-third of the prior year, and one-sixth of the year before that.  So, in this example:

This year: 82

Last year: 1/3 x 120 = 40

Year before last year: 1/6 x 96 = 16

Total:  82 + 40 + 16 = 138 

The current total is 138 days.  This means the person can stay only 44 more days before becoming resident for US income tax on their worldwide income.

There are, as always, exceptions to this rule. The first exception is the Closer Connections test which looks at various facts and circumstances to establish a closer connection with another country.  Some examples are: location of the permanent home, location of immediate family, location of personal day-to-day bank account, personal effects, club memberships, social and religious affiliations, place of issuance of driver’s license, voting, answers to questions of official documents, etc.

If days in the US are below 183, and a closer connection can be clearly established, these rules may not apply. Naturally, applying for residence in the US or similar activity will negate such claims.

4. Are you subject to treaty provisions?

Tax treaties contain provisions to determine in which country you are resident. Tax treaties often contain “tie-breaker” rules when the treaty’s own basic provisions leave doubt in an individual case.

It is important to know if you are US resident for tax purposes.  If you are unaware of your ‘deemed residency’ (or citizenship even), you can make some serious mistakes in your financial planning.  Failure to pay US income tax can bring serious legal and financial consequences that could have been easily avoided with proactive attention and planning. Please do not hesitate to contact us if you would like to discuss your personal situation.

Please note this does not constitute legal or tax advice and is for general information purposes only. Please see our full disclaimer for more information.

Financial Planning for Americans in the UK book cover

Financial Planning for Americans in the United Kingdom

Complete the form to download our book. You will join our email list and receive other useful information from us in the future.

Thanks for downloading the book. A link will be emailed to you.