How is Tax Residency Status Determined (Common Situations)

How Is Tax Residency Status for Individuals Determined 

The United States is one of the only countries in the world that follows a worldwide income tax model, which means US persons (not just US citizens) are taxed on their worldwide income. When a person is considered to have income tax residency in the United States (either because they reside in the US or are a US Citizen or Lawful Permanent Resident), they become subject to US taxation on their worldwide income. For taxpayers who have a majority of their income sourced from outside of the United States, this may result in an unforeseen (and significant) tax liability, amplified more so for taxpayers who do not have foreign tax credits and/or do not qualify for the Foreign Earned Income Exclusion to offset their US tax liability. In order to determine whether or not a person is considered to be a US person for income tax purposes, there are various different tests and analyses to consider. Let’s go through some of the more common situations in which an individual is considered to be taxed on their worldwide income.

Dual-Citizen

When a person is a dual citizen of both the United States and a foreign country, the US will tax them on their worldwide income. In other words, if a person is considered a dual citizen of the United States and a foreign country (even if they reside abroad), then they are considered to be a US Person and taxed by the United States on their global income. And, while the taxpayer may even consider the foreign country to be their tax home, the United States will still tax the individual on their worldwide income. This is true, even if the person resides overseas with all of their income sourced from overseas.

Residing in Puerto Rico

If a US citizen or other US person resides in Puerto Rico, they are still considered a US person for tax purposes. In other words, just residing in Puerto Rico does not eliminate the US tax filing and reporting requirements. Depending on the different sources of income a taxpayer may have, they may be able to avoid US income tax on certain Puerto Rico-sourced income. But, there are various filing requirements the person must meet in order to qualify as a Puerto Rico resident. Moreover, income sourced from outside of Puerto Rico would still be taxable in the United States (some exceptions, exclusions, and limitations may apply).

Green Card Holder

If a non-US citizen obtains a green card (aka Lawful Permanent Resident status), they are still subject to US tax on their worldwide income — even though they are a citizen of a foreign country. Thus Green Card Holders should be aware that when they obtain permanent resident status, the US will consider them to be a US person for tax purposes — even if the permanent resident considers their tax residency to be in the foreign country where they reside. Nevertheless, the taxpayer may be able to avoid taxation on their worldwide income if for example the taxpayer resides in a foreign treaty country and can successfully make a treaty election to be treated as a foreign person for tax purposes. Still, even if the treaty election is successful, they are still required to complete certain international information reporting forms.

Partial Year US Person

If a taxpayer is a non-US Person for part of the year and a US Person for the other part of the year, they may be able to file a dual-status tax return, in which a portion of their taxes will be taxed as if they are a US Person — and the other portion will be taxed as if they are a non-resident alien.

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