Baker Tilly

Loading...

Subscribe to newsletters
About Us
Careers
Client Portals
Pay Invoice
Locations
Industries
Services
Professionals
Legal & Privacy
CCPA Privacy
Contact Us
Request a Proposal

© 2024-2026 Baker Tilly US, LLP / Baker Tilly Advisory Group, LP

Baker Tilly US, LLP and Baker Tilly Advisory Group, LP and its subsidiary entities provide professional services through an alternative practice structure in accordance with the AICPA Code of Professional Conduct and applicable laws, regulations and professional standards. Baker Tilly US, LLP is a licensed independent CPA firm that provides attest services to clients. Baker Tilly Advisory Group, LP and its subsidiary entities provide tax and business advisory services to their clients. Baker Tilly Advisory Group, LP and its subsidiary entities are not licensed CPA firms.

Baker Tilly Advisory Group, LP and Baker Tilly US, LLP are independent members of Baker Tilly International. Baker Tilly International Limited is an English company. Baker Tilly International provides no professional services to clients. Each member firm is a separate and independent legal entity and each describes itself as such. Baker Tilly Advisory Group, LP and Baker Tilly US, LLP are not Baker Tilly International’s agent and do not have the authority to bind Baker Tilly International or act on Baker Tilly International’s behalf. None of Baker Tilly International, Baker Tilly Advisory Group, LP, Baker Tilly US, LLP, nor any of the other member firms of Baker Tilly International has any liability for each other’s acts or omissions. The name Baker Tilly and its associated logo is used under license from Baker Tilly International Limited.

city buildings in the sunset

Article

How to determine your U.S. tax residency status

Authored by Stuart Myhill and Brittain Cunningham

Subscribe to newsletters

Share

Related sections

  • Individual Income Tax Planning & Compliance
  • International Tax
  • Private Wealth
  • Tax

It’s important to know whether you are a U.S. federal income tax resident.

U.S. income tax residents are required to report and pay tax to the United States on their worldwide income. They’re also responsible for preparing and submitting extensive annual disclosures of their non-U.S. investments. Not complying with these annual disclosures can leave U.S. income tax residents exposed to thousands of dollars in penalties, an indefinitely open statute of limitations for their tax returns, and even criminal prosecution.

Non-residents are only required to report and pay tax on U.S. sourced income. It’s common for non-U.S. business owners and children of family wealth who have moved to the U.S. to find that U.S. residency brings significant unexpected tax reporting challenges.

Graphic illustrating the difference between U.S. tax residency and non-residency

The following discussion will outline the basic rules for determining if you're an income tax resident and how to properly present your non-US income and investments to the U.S. government.

Why tax residency status is important

Residency status plays a significant role in determining an individual’s federal tax obligation and the amount of reporting required for non-U.S. investments. Understanding tax residency and how it can impact individual reporting needs, income calculations, and compliance requirements, can make navigating the U.S. tax landscape less complex.

Tax residency status is complex and can easily be confused with other aspects of residency. Keep in mind tax residency is:

  • Unrelated to immigration or visa status.
  • Not the same as U.S. estate tax residency or U.S. domicile.
  • Not the same as resident of one of the 50 states. It’s possible to be a state income tax resident but not a federal income tax resident.
Stuart Myhill profile photo

Stuart Myhill

Principal

Baker Tilly Professional

Brittain Cunningham

Director

Related sections

  • Individual Income Tax Planning & Compliance
  • International Tax
  • Private Wealth
  • Tax
U.S. Capital Building reflection | Senate-approved tax reform bill

Next up

Tax policy update: Senate-approved tax reform bill key provisions and takeaways

Discover more

Working in the United States may bring additional complications. Even if you aren’t considered a U.S. income tax resident, income you earn while physically in the U.S. is likely to be subject to federal tax.

If you perform work in the United States for a non-U.S. company, you may create a taxable income base for that company in the United States. It’s important to consider the broader consequences of working from the U.S. even if you don’t meet the residency requirements.

U.S. residency can add additional complications such as:

  • Deemed current taxation of passive investment income resulting in lost deferral opportunities.
  • U.S. tax owed today on cash never received.
  • Tax-favored investments in your home country that are no longer tax favorable because they’re subject to U.S. tax.

Complications with worldwide income taxation

If you’re a U.S. tax resident, the foreign tax credit may be available to address taxation by both the United States and another country. However, timing of income recognition and other nuances in the calculation may render the foreign tax credit ineffective in mitigating double taxation. U.S. income tax treaties include language that helps avoid taxation of the same income by both countries. However, the United States doesn’t have an income tax treaty with every country.

Reporting for U.S. residents

U.S. federal income tax residents file Form 1040, U.S. Individual Income Tax Return, annually and report their worldwide income. The due date is typically April 15. An extension is allowed to October 15. Some exceptions apply.

U.S. residents follow the calendar year when reporting income and determining residency. If the individual has foreign investments additional disclosures may be required, such as:

  • FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR)
  • Form 8938, Statement of Specified Foreign Financial Assets
  • Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund
  • Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b)
  • Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts
  • Form 3520-A, Annual Information Return of Foreign Trust with a U.S. Owner
  • Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations
  • Form 8992, U.S. Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI)
  • Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships
  • Form 8858, Information Return of U.S. Persons With Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs)
  • Form 1116, Foreign Tax Credit (Individual, Estate, or Trust)

Reporting for non-residents

Non-residents file Form 1040-NR, Nonresident Alien Income Tax Return, and report only U.S. sourced income. Depending on the type of income there may be no filing requirement at all.

As a non-resident you are not subject to extensive reporting requirements for your non-U.S. investments unless you meet the U.S. domestic law residency tests but are making a treaty-based claim that you are a non-resident.

How to determine U.S. federal income tax residency

Determining U.S. federal income tax residency primarily involves counting days in the United States—the substantial presence test—with two exceptions:

  • The closer connection exception under U.S. domestic tax law
  • A treaty-based claim available if two countries treat you as a tax resident under each country’s domestic tax law

The substantial presence test is formulaic based on the number of days in the U.S. whereas the closer connection exception and treaty-based claim apply a facts and circumstances analysis which require you to build up a case and factual support for a non-residency claim.

Graphic delineating the tests used to determine U.S. tax residency

Substantial presence test: Days physically present in U.S.

To determine if you are a U.S. federal income tax resident for the calendar year, start by determining if you meet the substantial presence test.

You meet the substantial presence test if you were physically present in the United States:

  • At least 31 days during the current calendar year, and
  • A total of 183 days over a three-calendar-year period

The 183 days include:

  • All days in the current year
  • One-third of the days in the previous year
  • One-sixth of the days in the second preceding year

Example

You want to determine if you meet the substantial presence test for the 2024 tax year. You were physically present in the U.S. as follows:

  • 150 days between January 1, 2024, and December 31, 2024
  • 90 days between January 1, 2023, and December 31, 2023
  • 30 days between January 1, 2022, and December 31, 2022

You’re considered to be a U.S. tax resident under the substantial presence test because you were physically present for greater than 31 days between January 1, 2024, and December 31, 2024—at least 31 days—and the days in in the three-calendar-year period test is 183 days or more. 

Table showing how the substantial presence test’s days present works over three years

Closer connection exception to the substantial presence test: Days physically present in U.S. and facts and circumstances assessment

If you meet the substantial presence test for the current calendar year but you were physically present in the United States for less than 183 days in the current calendar year, you may be able to claim the closer connection exception. This exception is only available for a calendar year if you spent less than 183 days physically present in the United States during that calendar year.

If it’s established that you maintained more significant contacts with the foreign country than with the U.S., you have a closer connection to a foreign country. In determining whether you have maintained more significant contacts with the foreign country than with the United States, the facts and circumstances to be considered include, but are not limited to:

  • The country of residence designated on forms and documents
  • The types of official U.S. tax forms you have submitted, such as Form W-9, Form W-8 BEN, or Form W-8 ECI
  • The location of the following:

Table with examples of the type of personal information used in the closer connection test

You claim the closer connection exception by filing Form 8840, Closer Connection Exception Statement for Aliens, with your Form 1040-NR if you are required to file one for the calendar year.

If you aren’t required to file a Form 1040-NR the Form 8840 is sent to the IRS by itself. The form includes a long list of factual questions that you can use to help determine if your facts are substantial enough to support your closer connection exception position.

Additional requirements include:

  • A closer connection during the calendar year to one foreign country where you have a tax home. Additional requirements apply if you had a closer connection to two foreign countries.
  • A tax home in that foreign country during the entire calendar year.
  • You haven’t applied, or taken steps during the year, to change your status to Lawful Permanent Resident—Green Card—or have a pending application for adjustment of status to Lawful Permanent Resident during the year.

Filing any of the following forms during or before the current calendar year suggest intent to become a Lawful Permanent Resident of the United States.

  • Form I-508, Waiver of Rights, Privileges, Exemptions and Immunities
  • Form I-485, Application to Register Permanent Residence or Adjust Status
  • Form I-130, Petition for Alien Relative
  • Form I-140, Immigrant Petition for Alien Worker
  • Form ETA-750, Application for Alien Employment Certification
  • Form OF-230, Application for Immigrant Visa and Alien Registration

Treaty tiebreaker

If you’re considered a resident of both the U.S. and a foreign country that has an income tax treaty with the United States, you may be able to make a claim under that tax treaty that the foreign country is your true tax home.

Treaty tie-breaker rules help resolve the issue of an individual being considered a tax resident in two countries. Not all U.S. tax treaties are the same and it’s important to work with your tax advisor to review the relevant tax treaty in your case.

Most U.S. tax treaty tie-breaker rules follow the following logic.

Table illustrating the logic of the treaty tiebreaker test

There are four factual tests:

  • Permanent Home. A residence must always be available and not occupied by a third party. It doesn’t matter whether it’s a single-family house, an apartment, or a furnished room. It also doesn’t matter whether you rent or own it or whether a company rents or owns it for you. However, the home must be always available, continuously, and not solely for short stays.
  • Closer Economic Relations and Center of Vital Interests. These tests are like the factual tests discussed above in the closer connection exception.
  • Habitual Abode. Determining habitual abode involves collecting evidence demonstrating how much time you spend in each country. Typical factors tax authorities and courts look at include the number of days in each country, patterns of stay, length of visits, travel and lodging records, and lifestyle indicators.
  • Citizenship. If none of the above tests breaks the tie you are considered a tax resident of the country of which you are a citizen.
  • Evaluate each of these in order beginning with Permanent Home. Once the tie is broken, you don’t proceed to the next test.

Example 1

You lease an apartment in the United States and you own a flat in the UK. Both residences are available to you the entire year—no sub-lease or short-term rental. In this case you’re considered to have a permanent home in both countries and the Permanent Home test wouldn’t break the tie. Therefore, you’d move to the next test.

Example 2

You own a flat in the U.K. that’s available to you for the entire year. Your company leases a corporate apartment for you in the United States and the apartment availability is managed by your employer and also available to other employees. Therefore, the U.S. apartment isn’t always available for your use. This would break the tie and the UK would be viewed as your true tax home. You wouldn’t proceed to the remaining tests.

It’s important to remember that if you meet the substantial presence test and are unable to meet the closer connection exception—for example, you’re physically present in the United States for 183 days or more—but you rely on a treaty tiebreaker to claim non-residency you aren’t absolved from filing the international disclosures discussed above.

Additional considerations for tax residency

As you determine your tax residency status, consider:

  • A treaty-based claim for federal income tax purposes doesn’t eliminate state income tax residency or taxation.
  • Many states, for example New York and California, apply only a facts and circumstances test for residency similar to the closer connection exception analysis. Because the federal test is based on counting days, it’s possible to be a factual resident under state law but not meet the federal substantial presence—day count—test.
Contact us