Navigating U.S. Tax Residency: Rules, Exceptions & Elections You Must Know.
- Viktoriya Barsukova, EA, MBA
- 2 days ago
- 13 min read
Determining whether an individual is considered a U.S. tax resident is one of the most important steps in cross-border tax planning. Residency status dictates which forms must be filed, whether worldwide income is subject to U.S. taxation, which credits and deductions are available, and whether treaty benefits can be claimed. Unlike immigration law, which distinguishes between immigrants, nonimmigrants, and undocumented individuals, U.S. tax law relies on its own categories of residents, nonresidents, and dual-status taxpayers. These classifications can diverge sharply from immigration status, and misunderstanding the rules can lead to double taxation, lost treaty protection, or compliance failures.
This article brings together all of the key residency rules and elections under the Internal Revenue Code, Treasury regulations, IRS guidance, and income tax treaties. It examines how residency begins and ends, how exceptions apply, what elections can be made by newcomers and married couples, and how treaties resolve conflicts.
Categories of Individuals Under Tax Law
Under U.S. tax law, an individual may fall into one of three categories. A resident alien is anyone who holds lawful permanent resident status (a green card), meets the Substantial Presence Test, or makes a First-Year Election under IRC §7701(b)(4). A nonresident alien is someone who does not meet any of these conditions and is taxed only on income from U.S. sources. A dual-status alien is an individual who is treated as both resident and nonresident in the same year, most often when arriving in or departing from the United States mid-year.
The distinction matters because U.S. citizens and residents are subject to tax on their worldwide income, while nonresidents are taxed only on certain U.S.-source income. Dual-status aliens must carefully separate their income between the resident and nonresident periods of the year.
The Green Card Test and the Substantial Presence Test
The first and most straightforward way to become a tax resident is to hold a green card. A green card holder remains a tax resident until the status is formally abandoned or rescinded. Simply cutting up the card or staying abroad for an extended time does not terminate residency. Formal abandonment requires filing USCIS Form I-407 or receiving an official determination that status has been lost.
The second test is the Substantial Presence Test (SPT). An individual is a resident if they are physically present in the United States for 183 days or more in the current year, or if they meet a three-year weighted formula: all 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. Certain individuals are treated as “exempt” and may exclude days, including qualifying students, teachers, trainees, diplomats, and commuters, as well as individuals unable to leave due to medical emergencies. To claim the exemption, Form 8843 must be filed.
Residency Start and End Dates
Residency under the SPT begins on the first day of presence in the United States. However, the De Minimis Rule allows up to 10 days of presence to be disregarded for purposes of determining the start or termination date of residency, provided the individual maintained a tax home and closer connection abroad during those days. These days still count toward the SPT total, but they do not trigger residency. To claim this treatment, the taxpayer must file a statement with the IRS.
Residency generally ends on December 31 of the year in which the individual departs the United States. It can end earlier if the taxpayer establishes a tax home and closer connection abroad after departure. For green card holders, residency continues until the card is officially surrendered or revoked.
The Closer Connection Exception
Even if an individual meets the Substantial Presence Test, they may still be treated as a nonresident by claiming the Closer Connection Exception. To qualify, the individual must have been present in the United States for fewer than 183 days during the year, maintained a tax home in a foreign country for the entire year, demonstrated stronger ties to that foreign country than to the United States, and not applied for or taken steps toward obtaining a green card.
Stronger ties—or “closer connection”—are evaluated using many factors: where the permanent home is located, where family members reside, the location of vehicles and personal property, memberships in organizations, bank accounts, driver’s license, voter registration, and business activities. To claim this exception, Form 8840 must be filed by the tax return deadline. If no return is otherwise required, the form must still be filed on its own.
The First-Year Election
New arrivals to the United States sometimes cannot qualify as residents under the SPT or Green Card Test in the year of arrival. IRC §7701(b)(4) provides a remedy through the First-Year Election. To make this election, five conditions must be met: the individual was not a resident under either test in the current year or the prior year; the individual meets the SPT in the following year; the individual is present in the United States for at least 31 consecutive days in the current year; and the individual is present for at least 75% of the days from the beginning of that 31-day period through December 31.
The effect of this election is to create a dual-status year: nonresident before the arrival date and resident after. Because the SPT must be met in the following year, the return for the year of arrival often requires an extension. Taxes computed as a nonresident must be paid by the original deadline, and the final return filed once the SPT requirement is satisfied.
The No Lapse Rule
The law also provides that residency cannot “switch off” between years. Under the No Lapse Rule, if an individual is a resident in part of both the preceding and current year, they are treated as resident from the beginning of the current year. Likewise, if they are a resident in part of the current year and also in part of the following year, they are treated as resident through the end of the current year. This rule ensures continuity in residency classification.
Treaty Tie-Breaker Rules
Conflicts arise when both the United States and another country claim an individual as a resident. Income tax treaties provide tie-breaker rules that assign a single country of residence for treaty purposes. These rules are applied in order:
Permanent home: where an individual has a permanent place to live.
Center of vital interests: the country with stronger personal and economic ties.
Habitual abode: the country where the individual spends more time.
Nationality: the country of citizenship.
Competent authority: if none of the above resolve the issue, the tax authorities of both countries negotiate a decision.
Most treaties follow this sequence, though each treaty must be consulted for its specific language. Some treaties impose additional conditions. For example, under the U.S.–U.K. treaty, a U.S. citizen or green card holder is not automatically treated as a U.S. resident for treaty purposes unless they also have substantial presence, a permanent home, or habitual abode in the United States, and they are not treated as a resident of a third country under that country’s treaty with the U.K. Importantly, the term “substantial presence” in a treaty is distinct from the statutory Substantial Presence Test.
Dual-Resident Taxpayers
When treaty rules assign residency to the foreign country, the taxpayer has two choices. They may file as a nonresident using Form 1040-NR and attach Form 8833, Treaty-Based Return Position Disclosure, to disclose their position. Alternatively, they may elect to disregard the treaty outcome and file as a U.S. resident using Form 1040. This choice is particularly significant for green card holders, who may prefer to remain classified as U.S. residents for tax purposes even if the treaty assigns residency elsewhere.
Joint Return Elections for Married Couples
Nonresidents married to U.S. citizens or residents have special options under the Internal Revenue Code.
Section 6013(g) Election: A nonresident married to a U.S. citizen or resident may elect with their spouse to file a joint return. In doing so, both spouses’ worldwide income is subject to U.S. taxation for the entire year. Once made, this election applies not only for the election year but also for all subsequent years, unless revoked or terminated.
Section 6013(h) Election: If a nonresident becomes a resident during the year and is married to a U.S. citizen or resident, the couple may elect to file jointly and be taxed as residents for the entire year. This election applies even if both spouses began the year as nonresidents but both became residents before year-end.
Both elections differ from the First-Year Election. While the First-Year Election subjects worldwide income to tax only from the residency start date onward, the §6013(g) and §6013(h) elections make worldwide income taxable for the entire year. In fact, a taxpayer who makes a First-Year Election may also make a §6013(h) election to be treated as a resident for the entire year, provided the conditions are met.
Dual-Status Taxpayers
Dual-status years carry their own set of rules and restrictions. Income during the resident period is taxed on a worldwide basis, while income during the nonresident period is limited to U.S.-source income. Effectively connected income is taxed at graduated rates and allows deductions; other U.S.-source income is taxed at a flat 30% (or reduced treaty rate) with no deductions.
Dual-status taxpayers face several restrictions. They may not claim the standard deduction, file as Head of Household, or file jointly unless making a §6013(g) or §6013(h) election. Married individuals who do not elect must use Married Filing Separately status. Credits are limited: Earned Income Tax Credit, education credits, and the credit for the elderly or disabled are not available.
Filing depends on residency at year-end. If a taxpayer is a resident on December 31, they file Form 1040 as a Dual-Status Return and attach Form 1040-NR as a statement. If a taxpayer is a nonresident on December 31, they file Form 1040-NR as the Dual-Status Return and attach Form 1040 as a statement.
Conclusion
The U.S. rules on tax residency form a layered system of domestic law tests, exceptions, elections, and treaty provisions. Citizenship and green card status often overlap with residency, but they are not the same. Dual-status taxpayers face limitations on filing status and credits, while elections and treaty tie-breakers provide opportunities for planning and relief from double taxation.
For anyone moving to or from the United States, or living across borders, understanding these rules is essential. Failure to do so can create unnecessary tax burdens, but careful planning—using the First-Year Election, the joint return elections, the Closer Connection Exception, and treaty protections—can achieve fair and efficient results.
Resources:
IRS International Taxpayers Portal (irs.gov/Individuals/International-Taxpayers)
U.S. Income Tax Treaties – A to Z (irs.gov/Businesses/International-Businesses/United-States-Income-Tax-Treaties-A-to-Z)
Complete Q&A
Note: This Q&A reflects responses given by an IRS employee during an official IRS educational platform presentation.
Ready-to-share PDF handout:
F-1 visa + OPT — exempt individual for SPT
Q: How long can a student on an F-1 visa who is in Optional Practical Training (OPT) remain an exempt individual, meaning exempt from counting days of presence under the Substantial Presence Test?
A: An F-1 student in OPT remains in valid F-1 non-immigrant status and is treated as an exempt individual for this purpose for one year during OPT. OPT typically follows graduation and allows full-time, off-campus work while not taking classes, yet the student remains in F-1 status and does not count days toward the Substantial Presence Test during that year. After that one year ends, their U.S. days generally begin to count for the Substantial Presence Test.
Dual-status individuals — examples
Q: Can you give an example of dual-status individuals?
A: Dual-status usually happens in a year of arrival or departure. Example: someone arrives on April 8 and later meets the 183-day test. Their residency starts on April 8 (the arrival date). Days before April 8 are nonresident; days on/after April 8 are resident. Conversely, if someone turns in their green card and leaves mid-year, establishes their home and ties abroad, their residency can terminate before year-end—resident for part of the year, nonresident for the rest.
Undocumented individual as U.S. tax resident
Q: Can an undocumented individual be considered a U.S. resident for U.S. income tax purposes?
A: Yes. U.S. tax residency and U.S. immigration status are not the same. An undocumented person can still be a U.S. tax resident if they meet the Substantial Presence Test (or otherwise qualify). The concepts overlap but are not synonymous.
Where to find the list of countries with U.S. tax treaties
Q: Where did you find a list of countries with treaties?
A: On irs.gov there is a page titled “Treaties A to Z.” It lists all countries alphabetically; click a country to go directly to that treaty. (You also referenced a link to this page in your slides.)
Temporary Protected Status (TPS) — how to file
Q: How does an individual in Temporary Protected Status file?
A: A person in TPS counts days like anyone else. Whether they file as resident or nonresident depends on whether they meet the Substantial Presence Test for that year. TPS itself doesn’t change how days are counted.
U.S. citizen using treaty “tiebreaker” to file as nonresident
Q: Can a U.S. citizen file as a non-resident under the tiebreaker rules of an income tax treaty?
A: No. A U.S. citizen files Form 1040 reporting worldwide income. Treaty tiebreakers may apply to green card holders, but not to U.S. citizens. Most treaties also have a saving clause preserving the U.S. right to tax its citizens and residents as if the treaty didn’t exist, with limited exceptions.
Filing when treaty reduces U.S. tax to zero
Q: Do you still have to file a U.S. tax return even if you believe you owe no U.S. tax because of a tax treaty?
A: Yes. File Form 1040-NR and attach Form 8833 to disclose the treaty provision you’re relying on. This is per IRC §6114 and the Form 8833 instructions. Even if the treaty reduces your U.S. tax to zero, you still file and disclose.
New U.S. citizen with foreign retirement income/property, no U.S. wages
Q: If someone recently became a U.S. citizen and also holds citizenship in another country (e.g., Brazil), receives retirement benefits and owns property there (no rental income), and has no earned income in the U.S., do they still need to file U.S. taxes even though they filed abroad?
A: Yes. As a U.S. citizen, they are taxed on worldwide income and must file a U.S. return reporting all income regardless of source. Filing a foreign return does not eliminate the U.S. filing obligation.
Why someone would want to file as a nonresident
Q: What is the reason for an individual wanting to file a U.S. income tax return as a non-resident?
A: Because a nonresident is taxed only on U.S.-source income (and certain items), not on worldwide income. Compared to a U.S. resident, this can mean less U.S. tax if most of their income is foreign. (Status is determined by law, not choice.)
Dual-status — which form is the “main” return
Q: Which form does a dual-status person file — 1040 or 1040-NR?
A: It depends on December 31 status:
• Resident at year-end: file Form 1040 and attach Form 1040-NR as a statement.
• Nonresident at year-end: file Form 1040-NR and attach Form 1040 as a statement.
Your presentation also noted there’s a required statement across the top indicating it’s a dual-status filing.
Service member from Puerto Rico temporarily stationed in the U.S.; Form 8840? PR sourcing?
Q: How is a service member whose residency is Puerto Rico treated when their duty station is temporarily in the U.S.? Is Form 8840 required? Are they exempt from U.S. tax due to being sourced to Puerto Rico?
A: If they are a bona fide resident of Puerto Rico, they generally remain so even when temporarily stationed in the U.S. They file with Puerto Rico’s tax authority (Hacienda). For U.S. tax, if they have income from sources outside Puerto Rico, they file a U.S. Form 1040 reporting worldwide income, and exclude Puerto Rico-source income—except amounts received for services as a U.S. government employee (e.g., military pay), which are taxable federally. Form 8840 (closer-connection) is not relevant here.
“Cutting up” the green card
Q: What does cutting up the green card mean?
A: Even if a green card is cut up, destroyed, lost, or expired, the person is still a lawful permanent resident for U.S. tax purposes. To end that status, they must turn in the card and renounce U.S. immigrant status by filing USCIS Form I-407. Physically destroying or letting the card expire does not change tax residency by itself.
Puerto Rico residents’ returns; citizenship and who files where
Q: Don’t residents of Puerto Rico file their own special returns? Also, they are U.S. citizens, right?
A: Yes, Puerto Rico residents file with the Hacienda. People born in Puerto Rico are U.S. citizens. (People born in American Samoa are U.S. nationals—you noted they are taxed similarly for these purposes.) Not every bona fide resident of Puerto Rico is necessarily a U.S. citizen (some moved there from elsewhere). If a Puerto Rico resident has only Puerto Rico-source income, they file only with Hacienda. If they have income from outside Puerto Rico, they must also file a U.S. Form 1040 reporting worldwide income and exclude Puerto Rico-source income, except U.S. government wages, which are taxable federally.
Exempt individuals and SPT day-count choice
Q: When looking at days as an exempt individual, can they choose to count or not count those days toward the Substantial Presence Test?
A: No. If the person is an exempt individual (based on visa type or other qualifying category), those days do not count toward the Substantial Presence Test. There is no election—it’s black and white: exempt means those days don’t count.
Exams/litigation — jurisdiction to tax first
Q: How do you approach these cases in audit or litigation?
A: The threshold question is always: Do we have jurisdiction to tax? If the answer is no, the case does not proceed. For U.S. citizens or lawful permanent residents (green card holders), the U.S. has jurisdiction to tax worldwide income. It becomes more complex if someone appears to be a nonresident—then the analysis turns to whether they tripped the Substantial Presence Test, with a deep dive into exempt days, visas, treaties, and special circumstances. The stakes often involve worldwide income, which can be significant for high-wealth individuals. You noted a recent criminal sentencing of an attorney who aided high-wealth clients in filing false returns to hide worldwide income after they became U.S. residents—illustrating why this is critical.
“Accidental Americans”
Q: Do accidental Americans—born in the U.S., left as children, lived abroad since—have to file U.S. returns?
A: Yes. If you were born in the United States, you are a U.S. citizen, and citizens must file Form 1040 reporting worldwide income, regardless of where they live. There are mechanisms to mitigate double taxation (e.g., foreign tax credits, treaty provisions). Alternatively, one may formally expatriate (renounce citizenship) to end the ongoing filing obligation.
Reasonable cause — penalties vs. tax
Q: If someone didn’t file because they didn’t know (e.g., an accidental American), can they avoid the tax?
A: A reasonable cause defense may help with penalties (for example, failure-to-file), but it does not remove the underlying tax. The tax is still owed; reasonable cause goes to penalties, not the tax itself.
Residency — why it matters; core points
Q: Why is residency so important and how is it determined?
A: Residency determines your filing status, how much of your income is subject to U.S. tax, which deductions/credits/exemptions you may claim, and your rates. The United States generally taxes its citizens and residents on worldwide income; employment taxes may also apply. Tax residency and immigration status are not the same—someone can be a non-immigrant or undocumented under immigration law yet be a resident, nonresident, or dual-status individual under tax law. A U.S. resident for tax purposes is someone who is a lawful permanent resident, meets the Substantial Presence Test, or makes a first-year election under Section 7701(b)(4). Cutting up or destroying the green card, or remaining outside the U.S. for a long time, does not changetax residency by itself. To end LPR tax residency, one must file Form I-407 and formally abandon the status.
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