Steven Weiser is a tax lawyer with a practice focusing on international tax matters. His contact information and information on his practice can be found on his web site at http://www.lw-law.com/.

Now that 2003 has ended many of us are getting ready for the 2004 tax season and the approach of the April 15 tax return filing deadline.  Some of us can expect to see significant tax refunds as a result of changes in the tax laws that occurred during 2003.

Aliens residing in the US are often subject to a different system of taxation from US citizens.  This is particularly true of those individuals deemed “non-resident aliens” for US tax purposes.  The following chart will help you to determine your status as a “resident” or “non-resident” alien for US income tax purposes:[1]

* You can also use the following formula:  Number of days = x+(y/3)+(z/6), where x is the number of days present in 2003, y is the number of days present in 2002, and z is the number of days present in 2001.  This calculation is known as the “substantial presence test.”

If you are a resident alien, you will need to file Form 1040, US Individual Income Tax Return, by April 15^th, unless you file a valid tax return extension by that date (keep in mind that an extension only extends the time period for filing a return and is not an extension of time to pay).

Generally, resident aliens are subject to US taxation on their worldwide earnings; however, several exceptions exist.  For example, under a “closer connection exception” if a resident alien is actually present in the US less than 183 days during 2003, maintains a home in another country and can prove a “closer connection” with that country than with the United States, the alien will be treated as a non-resident.  Additionally, if a tax treaty exists between the United States and a taxpayer’s home country, the treaty may provide that only income from US sources is subject to US taxation.

In limited circumstances days of presence in the United States are disregarded in applying the above substantial presence test.  For example, certain aliens, including foreign government related individuals, certain teachers, trainees or students, and professional athletes in the US to compete in charitable sporting events, are treated as “exempt individuals”.

A foreign government-related individual is someone present in the US (1) due to his or her diplomatic status; (2) by reason of a visa representing full-time diplomatic or consular status; or (3) as a full-time employee of any public international organization that the President of the United States has designated as being entitled to enjoy certain privileges.  Immediate family members of foreign government-related individuals are also treated as foreign government-related individuals.

A teacher, trainee or student is an individual admitted temporarily in the US as a nonimmigrant under specified provisions of the Immigration and Naturalization Act, more particularly, “F,” “J,” “M,” and “Q” visa holders.  The individual must substantially comply with the terms of such visas.  Failure to comply with the terms of these visas, or engaging in activities considered prohibited by the Immigration and Naturalization Act can result in the loss of exempt individual status.  Unauthorized employment or not being engaged in a course of full-time study may be treated as a failure to comply with the individual’s visa requirements. Family members of individuals qualifying as teachers, trainees and students temporarily present in the US are themselves treated as teachers, trainees and students.

An individual may not exclude days of presence as an exempt teacher or trainee if the individual has been exempt as a teacher, trainee or student for any part of two of the prior six calendar years.  In the case of a temporary “F,” “J” or “Q” visa-holder whose compensation is paid by a foreign employer, the preceding sentence is modified by providing that the individual may not exclude days of presence if the individual has been exempt as a teacher, trainee or student for any part of four of the prior six calendar years.

Y is temporarily present in the US during the calendar year as a teacher.  Y holds a “J” visa, and has not received compensation from a foreign employer.  Y was treated as an exempt student for two of the prior six calendar years.  Even if this is the first year that Y seeks exempt individual status as a teacher, Y will not be an exempt individual because Y was exempt as a student for at least two of the prior six years.

Finally, an individual cannot exclude days of presence as an exempt student if the individual has been exempt as a teacher, trainee or student for any part of more than five calendar years, unless the approval of the Internal Revenue Service is obtained.

Another example of an exception to the substantial presence test includes “exempt days.”  Exempt days include days during which an individual is prevented from leaving the US due to a medical condition, days on which a regular commuter residing in Canada or Mexico commutes to and from employment in the US, days on which an individual is in transit between two points outside the US, and days on which an individual is temporarily present in the US as a regular member of a crew of a foreign vessel engaged in transportation between the US and a foreign country.

Z, a Canadian citizen, owns a residence in Toronto.  On January 1, 2002, Z begins working in Niagra Falls, New York, commuting from home to his place of employment six days a week.  Although X is physically present in the US approximately 300 days during 2002, none of these days apply in calculating whether the substantial presence test is met.  Z is not a resident for US income tax purposes.

A regular commute exists if the individual must travel from her residence to the place of employment more than 80% of the workdays in the current year.  A “commute” is defined as travel to and from employment within a twenty-four hour period.

An individual is treated as not being present in the US if such individual is present in the US for less than twenty-four hours and is transit between two points outside the US  “In transit” includes activities related to completing travel to another location.  If an individual attends a business meeting while in the US the day is no longer exempt.  Similarly, a day present in the US as a member of a vessel engaged in transportation is not an exempt day if such individual conducts business in the US on such day.

It is possible for an individual to be both a resident and non-resident alien in the same year.   This generally occurs during an alien’s first year of residency or in the year in which the alien departs the US.  When this occurs the individual effectively divides the tax year into two portions and must determine whether income was received while a resident or non-resident alien to determine if regular US income taxes apply.

Where resident aliens are subject to the regular income tax imposed upon US citizens, nonresident aliens may find themselves subject to two very different US income tax regimes.  The first regime applies to certain limited types of US source income that are not effectively connected with a trade or business operated within the US.  The second regime applies to income that is effectively connected with the conduct of a US trade or business.  The rules regarding the taxation of nonresidents are often confusing, complex and subject to many exceptions.

Most types of non-business income from US sources received by a non-resident alien are subject to a tax regime that withholds 30% of all income to be paid as a tax to the non-resident.  The most significant type of income exempt from the withholding tax is capital gain derived from US sources.  Generally, a tax return need not be filed by a non-resident alien subject to the withholding tax.  A second tax regime applies to all income derived by a non-resident alien if such income is effectively connected with a United States trade or business.  Individuals should note that performing services in the US for a salary is often enough to give rise to a United States trade or business.  If a non-resident derives income effectively connected with a United States trade or business a US tax return should be filed.  Again, a tax treaty between the United States and the non-resident alien’s home country may alter the manner in which US income taxes are imposed.

Due to the complex nature of the US tax laws, particularly with respect to alien taxpayers a competent tax professional should always be consulted to help you determine your US tax liability, if any.