- 1 Definition of US Person for Tax & Reporting Purposes
- 2 US Citizens living in the United States
- 3 US Citizen Living Abroad
- 4 US Lawful Permanent Resident Living in the United States
- 5 US Lawful Permanent Resident Living Abroad
- 6 Substantial Presence Test
- 7 International Tax Lawyers: We Specialize in IRS Offshore Disclosure & Compliance
Definition of US Person for Tax & Reporting Purposes
One of the most complicated aspects of US tax law is oftentimes just determining whether or not a person is considered a US person and therefore subject to US tax on worldwide income. Unlike other countries, the United States follows a Citizenship-Based Taxation model. That means that if a person is considered a US person, then they are required to include their global income on their US tax return— as well as disclose their foreign accounts, assets, and investments on various international information reporting forms. It is important to note that a US person is not limited to just a US citizen. It also includes Lawful Permanent Residents and foreign nationals who meet the Substantial Presence Test. Here are five examples of those who are considered a “US person” for tax and reporting purposes (examples are limited to individuals and not domestic entities and certain expatriates).
US Citizens living in the United States
Felicia is a US citizen who lives in the United States. She has several sources of income from both the United States and abroad. Some of the income that is generated abroad is tax-exempt in the foreign country of source. Since Felicia is a US citizen, she is considered a US person for tax purposes — and therefore has to report both her foreign income and her domestic income on her US tax return.
US Citizen Living Abroad
Denise is a US citizen who lives overseas. She lives outside of the United States for 340 days a year and earns all of her income from overseas. Despite the fact that Denise resides outside of the United States and all of her income is foreign-sourced, Denise still needs to report all of her income on her US tax return – even though she has no US-sourced income. Since Denise has resided outside of the United States for more than 11 months out of the year, she will probably qualify for the Foreign Earned Income Exclusion and for the housing exclusion which can exclude about $125,000 combined.
US Lawful Permanent Resident Living in the United States
Brian is a Lawful Permanent Resident who resides in the United States. He is a citizen of a foreign country and is tax-compliant in that foreign country. Brian earns income both in the United States and overseas from passive investments in his country of citizenship. Since Brian is not a resident of the foreign country, he is only taxed on income sourced from that foreign country — but for US tax purposes, he still has to pay US tax on his worldwide income.
US Lawful Permanent Resident Living Abroad
Peter is a Lawful Permanent Resident who resides outside of the United States and earns all of his income from foreign sources. Peter resides in a treaty country — so while he is still considered a US person for tax purposes, he may be able to make a treaty election to be treated as a foreign person instead of a US person for tax purposes, which in this situation may significantly reduce his income tax in the US since he resides in a lower-tax jurisdiction — and only has minimal foreign tax credits. It is important for Peter to know that if he is already considered a long-term Lawful Permanent Resident making this type of treaty election may result in (unintentional) expatriation.
Substantial Presence Test
The Substantial Presence Test (SPT) is the catchall provision in the Internal Revenue Code that allows United States to tax non-permanent residents and non-US citizens on their global income. To calculate SPT, there is a specific ‘counting days test’ that is used over a three-year period in which if a non-permanent resident/non-US citizen resides in the United States for a significant amount of time during those three years, then they are considered a US person and subject to US tax on their worldwide income. There are various exceptions, exclusions, and limitations, including meeting the Closer Connection Exception.
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