How Aliens Who Meet the Presence Test Can STILL file as Nonresident Aliens

By ftsig-admin | August 25, 2024

SOURCE:

Publication 519 (2023), U.S. Tax Guide for Aliens | Internal Revenue Service (irs.gov);
https://www.irs.gov/publications/p519

REFERENCES:

EDITORIAL:

The geographical “United States” in 26 U.S.C. §7701(a)(9) and (a)(10) and that in 26 C.F.R. § 301.7701(b)-1(c)(2)(ii) are two completely different things. An alien can satisfy the “presence test” in 26 U.S.C. §7701(b) and yet live and work in a “foreign country” under 26 C.F.R. §301.7701(b)-2(b) AT THE SAME TIME. This is because 26 U.S.C. §7701(a)(10) uses the UPPER CASE “State” described in 4 U.S.C. §110(d), which is a territory or possession, while 26 C.F.R. § 301.7701(b)-1(c)(2)(ii) uses the lower case “state” for the presence test to refer to states of the Union.

Note that the typical alien (foreign national) living in a constitutional state:

Is a nonimmigrant and not a permanent resident with a green card.
Satisfies the presence test in in 26 C.F.R. § 301.7701(b)-1(c)(2)(ii), which refers to the “states” of the Union as being part of the presence test, but excludes the territories and possessions.
Has a CLOSER connection to a foreign country 26 C.F.R. §301.7701(b)-2(b) because territories, possessions, and states of the union are “foreign countries”.
According to 26 C.F.R. §301.7701(b)-2(c), has a “tax home” at the place of their physical abode if they take no “trade or business deductions” under 26 U.S.C. §162. The domicile of the “taxpayer” office is in the District of Columbia and not the state the alien lives in.
If the alien’s tax home is in a state of the Union, which is a “foreign country” under 26 C.F.R. §301.7701(b)-2(c), they can file as a nonresident alien, but only if they were physically present somewhere in the “states or the District of Columbia” in 26 C.F.R. §301.7701(b)-1 less than 183 days.
Can file as a DUAL STATUS alien by filing a 1040 for part of the year and a 1040-NR for the other part of the year.

The BIG escape hatch: File as a nonresident alien because your spouse is filing as one.

If an resident alien is married to a nonresident alien, the resident alien can make an election to file as a nonresident alien just like nonresident aliens can election to file as a U.S. person under 26 U.S.C. §6013(g) and (h). Under 26 U.S.C. §6013(g) and (h), a married couple can elect to file jointly as resident aliens. However, if one spouse is a nonresident alien, the other spouse can elect to file as a nonresident alien, even if they meet the substantial presence test.

This is known as the “nonresident alien spouse election” and allows the couple to file separate returns as nonresident aliens. This election is made by attaching a statement to the tax return, including the required information and signing it.

Here are the details:

The election is made by the spouse who is a resident alien under the substantial presence test.
The election allows the spouse to be treated as a nonresident alien for tax purposes.
The couple must file separate returns (Form 1040-NR) and claim the nonresident alien spouse election on each return.
The election applies to the tax year and all subsequent years unless revoked.
Please note that this election has tax implications, such as affecting the tax rates, deductions, and credits available. It’s crucial to consult the IRS instructions and/or a tax professional to ensure accurate filing procedures and to understand the tax consequences.

IRS Publication 519, “U.S. Tax Guide for Aliens,” specifically discusses this election in Chapter 1, “Determining Alien Status”:

Section “Choices you make affect your tax status” explains the nonresident alien spouse election.
Section “Nonresident Alien Spouse” provides details on making the election, including the required statement and signature.

IRS Publication 519 (2003)

Closer Connection to a Foreign Country

Even if you meet the substantial presence test, you can be treated as a nonresident alien if you:

Are present in the United States for less than 183 days during the year,
Maintain a tax home in a foreign country during the year, and
Have a closer connection during the year to one foreign country in which you have a tax home than to the United States (unless you have a closer connection to two foreign countries, discussed next).

Closer connection to two foreign countries.

You can demonstrate that you have a closer connection to two foreign countries (but not more than two) if you meet all of the following conditions.

You maintained a tax home beginning on the first day of the year in one foreign country.
You changed your tax home during the year to a second foreign country.
You continued to maintain your tax home in the second foreign country for the rest of the year.
You had a closer connection to each foreign country than to the United States for the period during which you maintained a tax home in that foreign country.
You are subject to tax as a resident under the tax laws of either foreign country for the entire year or subject to tax as a resident in both foreign countries for the period during which you maintained a tax home in each foreign country.

Tax home.

Your tax home is the general area of your main place of business, employment, or post of duty, regardless of where you maintain your family home. Your tax home is the place where you permanently or indefinitely work as an employee or a self-employed individual. If you do not have a regular or main place of business because of the nature of your work, then your tax home is the place where you regularly live. If you do not fit either of these categories, you are considered an itinerant and your tax home is wherever you work.

For determining whether you have a closer connection to a foreign country, your tax home must also be in existence for the entire current year and must be located in the same foreign country to which you are claiming to have a closer connection.

Foreign country.

In determining whether you have a closer connection to a foreign country, the term “foreign country” means:

Any territory under the sovereignty of the United Nations or a government other than that of the United States,
The territorial waters of the foreign country (determined under U.S. law),
The seabed and subsoil of those submarine areas that are adjacent to the territorial waters of the foreign country and over which the foreign country has exclusive rights under international law to explore and exploit natural resources, and
Territories of the United States.

Establishing a closer connection.

You will be considered to have a closer connection to a foreign country than the United States if you or the IRS establishes that you have maintained more significant contacts with the foreign country than with the United States. 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 following.

The country of residence you designate on forms and documents.
The types of official forms and documents you file, such as Form W-9, Form W-8BEN, or Form W-8ECI.
The location of:
- Your permanent home;
- Your family;
- Your personal belongings, such as cars, furniture, clothing, and jewelry;
- Your current social, political, cultural, professional, or religious affiliations;
- Your business activities (other than those that constitute your tax home);
- The jurisdiction in which you hold a driver’s license;
- The jurisdiction in which you vote; and
- Charitable organizations to which you contribute.

It does not matter whether your permanent home is a house, an apartment, or a furnished room. It also does not matter whether you rent or own it. It is important, however, that your home be available at all times, continuously, and not solely for short stays.

When you cannot have a closer connection.

You cannot claim you have a closer connection to a foreign country if either of the following applies.

You personally applied, or took other steps during the year, to change your status to that of a permanent resident.
You had an application pending for adjustment of status during the current year.

Steps to change your status to that of a permanent resident include, but are not limited to, the filing of the following forms.

Form I-508, Request for Waiver of Certain 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 Workers.
Form ETA-9089, Application for Permanent Employment Certification.
Form ETA-9089, Appendix A.
Form DS-230, Application for Immigrant Visa and Alien Registration.

Form 8840.

You must attach a fully completed Form 8840 to your income tax return to claim you have a closer connection to a foreign country or countries.

If you do not have to file a return, send the form to:

Department of the Treasury
Internal Revenue Service Center
Austin, TX 73301-0215

You must file Form 8840 by the due date for filing Form 1040-NR. The due date for filing is discussed later in chapter 7.

If you do not timely file Form 8840, you cannot claim a closer connection to a foreign country or countries. This does not apply if you can show by clear and convincing evidence that you took reasonable actions to become aware of the filing requirements and significant steps to comply with those requirements.

Posted in How to File Returns and tagged resident alien