American taxpayers going abroad have tax responsibilities here in the U.S. This is because our country taxes Americans based on their citizenship and even those with “green card” residency, according to ExpatExchange.com. Tax residency is determined by circumstance tests combined with the determination of residency facts, as well as tax ties to other countries.
Worldwide income is the extent of income taxes in most countries where one is a resident or citizen, according to ExpatExchange.com. Non-residents are only taxed on income earned concurrent with the basic premise of taxation that states the country of income source maintains first right of taxation over income earned in that country.
The Substantial Presence Test (SPT) is used to determine if you are a resident alien to U.S. tax authorities. ExpatExchange.com reports that if you have been in the U.S. for at least 31 days in the current year and the result of the following formula must result in 183 days or greater to be considered a U.S. resident alien. For the purpose of the formula, partial days are counted as full days. Fractional days also add, while any remaining fractional days are not rounded up or down but dropped instead.
[100 percent of the physical days of U.S. presence (current year)] + [1/3 of the days of U.S. presence (year before)] + [1/6 of the days of U.S. presence (two years before)]
In order to remain a U.S. resident alien, your SPT must continue to be greater than 183 days on an annual U.S. tax period basis each year, according to ExpatExchange.com.
Aliens can change out of U.S. tax residency, according to ExpatExchange.com. The fractional lookback rule is not effectual when a U.S. resident alien has a SPT of less than 183 days in the current year but exceeding 183 days with an excesss of days using the rule, according to U.S. domestic law.
These resident aliens must complete an Internal Revenue Service (IRS) Form 8840, Closer Connection Exception Statement for Aliens. The IRS recommends you review the conditions for the completion of IRS Form 8840 to ensure conformity, according to the IRS.
Those meeting their SPT using days in the current year alone do not have relief using the fractional lookback rule. ExpatExchange.com reports that articles covering residency in federally negotiated income tax treaties or a “treaty tiebreaker” would be sought to find relief in this case.
Income connected with U.S. trade or business to U.S. nonresident aliens is fully taxable, according to ExpatExchange.com. These people must complete an IRS Form 1040NR, U.S. Nonresident Alien Income Tax Return Claiming exemptions or deductions is more tightly controlled in this form. Conversion to calendar year reporting may be necessary.
Those achieving U.S. non-resident and resident status in the same tax year should complete either an IRS Form 1040 or 1040NR, according to ExpatExchange.com. They should clearly write “Dual Status Return” on the top the form used though, according to the IRS.
Additional forms, security clearances and more information intensive visa applications are now required since September 11, 2001, according to the The U.S. State Department. Review current visa processing procedures in planning your business trip.