Alien Manual, Section B Residency for Tax Purposes

The following flowchart (from IRS publication 519, U.S. Tax Guide for Aliens, p. 5) can be used to determine residency for tax purposes:

Prior to paying a visiting individual, United States tax residency must be determined. The determination of tax residency impacts other decisions. Some of these decisions include: what income to report, what forms are required to report the income, what taxes the visitor is liable for, and what tax returns the visitor should file. Please note -- residency for tax purposes is different from residency determined for immigration purposes. Categories of individuals considered when determining residency for tax purposes are defined in the chart below.

CATEGORY	DEFINITION
U.S. Citizen	an individual who is a citizen of the United States by birth right or by the naturalization process
Permanent Resident	an individual who has been granted lawful permanent residence in the United States
Resident Alien	an individual who becomes a resident for tax purposes based upon their physical presence in the U.S. See Substantial Presence Test.
Non-Resident Alien	an individual who is not a citizen, permanent resident or resident for tax purposes.

There are two tests used to determine the tax residency of a non-U. S. citizen: the green card test and the "Substantial Presence Test." At UCLA, residency for tax purposes is determined at initial employment, whenever a change in information affecting residency occurs, and on an annual basis.

A non-U.S. Citizen will be treated as a U.S. resident for tax purposes if he is a lawful permanent resident at any time during the calendar year. The individual will be able to show documentation that grants the permanent resident status. The proof is generally an alien registration card (a.k.a. green card). In some cases, the I-94 or stamp in the visa indicates the approval. The resident status continues until the status is rescinded or abandoned.

A non-U. S. citizen will be treated as a U.S. resident for tax purposes if he is physically present in the U.S. for at least 31 days during the current calendar year, and a total of 183 days during a 3 year period, which includes the current year and two years preceding the current year. In calculating the 183 days, count as follows:

The Substantial Presence Test is included on the UC W-8BEN form aka University of California Certificate of Foreign Status for Tax Withholding and must be completed for all non-immigrant visa holders.

REMEMBER: this form must be filled out and reviewed each year to re-examine residency for tax purposes.

An alien visitor was in the United States the following days: 129 in 2005, 99 in 2004, and 150 in 2003. The Substantial Presence Test for 2005 would be calculated as follows:
Days Present in the U.S.	Calculation Factor	Days towards Residency
2005 - count all days (129)	x 1	129
2004 - count 1/3 days (99)	x 1/3	33
2003 - count 1/6 days (150)	x 1/6	25
Total Days		187

In the above example, the alien visitor would be a resident for tax purposes because the visitor is in the U.S. for at least 31 days in the current year (2005) and the total number of days for all 3 years is 187 days.

IRS regulations provide that a visitor who meets the Substantial Presence Test can still be treated as a nonresident alien if he meets the following tests:

The IRS defines a "tax home" as the individual’s regular place of abode in a real and substantial sense. It must be in existence for the entire current year and located in the country in which the individual is claiming to have a closer connection to. The term "closer connection" means the individual has maintained significant contacts with the foreign country. Facts to be considered but not limited to: location of the individual’s permanent home; location of family; location of personal belongings; location of social, political, cultural, or religious organizations; location of bank, location where the individual has a drivers license, and location where the individual votes. Please note that if a visitor claims this exception, a favorable determination letter must be sent to Payroll Services and also included with the 1042NR tax return.

This Closer Connection Test is included on the UC Certificate of Foreign Status for Federal Tax Withholding (UC W-8BEN) form, Section F.

Generally, a visitor will be treated as physically present in the U.S. for each day that he is in the U.S. at any time during a 24 hour day. Exception to this rule !!!! Do not count the following as "days of presence" in the U.S. when applying the substantial presence test:

The term "exempt individual" does not imply exemption from federal income tax. The term applies to individuals who are exempt from "completing" the Substantial Presence Test. These individuals would remain non-residents for tax purposes for a specific period of time. Exempt individuals may include a teacher/trainee; a student; a foreign government official; and a professional athlete. At UCLA, "exempt individuals" tend to be teacher/trainees or students. In order to qualify, the individual must be in the U.S. temporary, in compliance with their visa status, and meet the following requirement:

The IRS uses the calendar year to determine the 2 year and 5 year limitation. A calendar year is January 1 - December 31. If the visitor is in the U.S. as an exempt individual for any part of the calendar year, that year counts as 1 full year toward the time limitation.

A visitor has received an appointment as a visiting teacher beginning on February 3, 20005. The individual arrived in the U.S. for the first time with a J-1 visa on Dec. 9, 2004. Was this person an "exempt individual" for 2005? How do you count the years? What about 2006? To determine if the individual is an "exempt individual", calculate as follows:
	Exempt Year	Years Present
Dec. 9 - Dec. 31, 2004 (23 days)	2004	1
Jan. 1 - Dec. 31, 2005 (365 days)	2005	2
For 2005: This visitor would be an "exempt individual" (and therefore, a nonresident for tax purposes) because a J-1 Research/Scholar is allowed 2 years exemption from the Substantial Presence Test. The look back period would be years 1999- 2004. The employee would have 1 exempt year - 2004. Don’t count the test year (2005) as an exempt year. Therefore, the visitor would be exempt from the Substantial Presence Test for 2005 & 2004. Note the Year Concept: even though the visitor was only in the country for 23 days in 2004, we count the time as one whole exempt year. For 2006: The look back period would be 2000 - 2005. The exempt individual years would be 2004 and 2005. The employee has used up the 2 years of exempt status and must take the Substantial Presence Test for 2006. The count would start on January 1, 2006. If he is in the U.S. longer than 183 days, he will be a resident for tax purposes for the entire year. If he leaves prior to 183 days (by July 2), he will remain a nonresident for the portion of 2006 that he is present in the U.S.

A F1 student begins a job on Sept. 15, 2005. The student arrived in the U.S. for the first time with a F1 visa on Dec. 9, 2001 and planned to leave February 2, 2006. Is this person an "exempt individual" for 2005? What about 2006? To determine if the individual is an "exempt individual", calculate as follows:
	Exempt Years	Years Present
Dec. 9 - Dec. 31, 2001	2001	1st exempt year
Jan. 1 - Dec. 31, 2002	2002	2nd exempt year
Jan. 1 - Dec. 31, 2003	2003	3rd exempt year
Jan. 1 - Dec. 31, 2004	2004	4th exempt year
Jan. 1 - Dec. 31, 2005	2005	5th exempt year
For 2005: This employee would be a non-resident for 2005 as an "exempt individual" because an F1/J1 student is allowed 5 years of exemption from the substantial presence test. For 2006: Since all 5 years of exemption (from the substantial presence test) have been used, the student would begin counting days of presence effective Jan. 1, 2006. In this example, the student would still be a non-resident for tax purposes because there are only 33 days of presence in 2006.

A student arrived in the U.S. for the first time with a F1 visa on Jan 3, 2002. After completing his education, he received a J-1 scholar status (in 2/05) and has an appointment until June 06. What is his residency for tax purposes status for 2005?
Presence in U.S.	Exempt Years - F1	Year #	Exempt Years - J1	Year #
Jan 3. 2002 - Dec. 31, 2002	2002	1	2002	1
Jan 1, 2003 - Jan. 31, 2003	2003	2	2003	2
Jan 1, 2004 - Jan. 31, 2004	2004	3
Jan 1, 2005 - Jan. 31, 2005	2005	4	now subject SPT	3 (no longer exempt)
Jan 1, 2006 - Jan. 31, 2006	2006	5
For 2005: This employee would be a resident for tax purposes for 2005. When applying the "exempt individual" rule, may sure that you follow the appropriate time limitation for the current visa status. For a J1 scholar, it is 2 of the preceding 6 years and you count any time the individual was in the U.S. as a teacher, student, or trainee on an F, J, M, or Q visa. While the years of exemption for the student F1 would go from 2002 - 2006, (due to the approval of the J1 scholar) the look back period becomes 1999 - 2004 and you must count any 2 years of presence. This would be 2002 and 2003.

Treasury regulations state that an individual’s treatment of U.S. resident for tax purposes will begin on the residency start date and will end on the residency termination date. The dates are defined in the following table.

	Residency Start Date	Residency Ending Date
Green Card Test	1st day during the calendar year on which the alien was physically present in the U.S. as a lawful permanent resident.	The day of the year in which the person is no longer a lawful permanent resident.
Substantial Presence Test	1st day during the calendar year on which the person is present in the U.S.	The last day of the calendar year in which the alien ceases to be a U.S. resident for tax purposes.

Substantial Presence Test - Example: A visitor enters the U.S. (H1B status) on February 2, 2005 and plans to remain until December 31, 2005. This individual would have to complete the Substantial Presence test. It is determined that he is a resident for tax purposes because he will be in the US for 332 days. The residency start date would be February 2, 2005. The date he leaves the country on 12/31/05 (in this case) whichever is greater is the residency end date.

Green Card Test - Example: An individual is granted legal permanent residency on 3/15/04. The start date of residency due to the Green Card Test is 3/15/04. If he chose to revoke his permanent residency on 5/6/04, the residency end date would be 5/6/04.

Overview of Visa Statuses and the Substantial Presence Test
VISA TYPE	Description of Visa Type	**Most likely meets the Substantial Presence Test***
F1	Student visa	in the 6th year of U.S. presence
H1	Worker in specialty occupation	in the 1st year of U.S. presence
J1	Exchange Research/Scholar	in the 3rd year of U.S. presence
	Exchange Student/Doctorate	in the 6th year of U.S. presence
	Exchange Specialist	in the 3rd year of U.S. presence
J2	Dependent of J1 visa holder	depends on J1 visa holders visa type (3rd or 6th year)
O1	Extraordinary ability	in the 1st year of U.S. presence
PR	Permanent Resident	automatic resident for tax purposes
RF	Refugee/Asylee	in the 1st year of U.S. presence
TN	Trade NAFTA	in the 1st year of U.S. presence
B1**	Visitor on Business	should never meet the SPT test
WT**	Waiver Tourist	should never meet the SPT test
SPT (Substantial Presence Test) - days counted after all exempt years have been exhausted *Immigration grants status up to 90 days - Note: Due to a provision in the "American Competitiveness and Workforce Improvement Act of 1998," service period for the B1 & WT can never be greater than 9 days for payment. E.g. Honorarium or Independent Personal Services

The state of California defines a resident for tax purposes to be any individual who is in California for other than a temporary or transitory purpose and, any individual domiciled in California who is absent for a temporary or transitory purpose.

An individual who comes to California for a purpose which will extend over a long or indefinite period will be considered a resident. An individual who comes to California to perform a service for a short duration will be considered a nonresident.

	Type of Visa	Time Limitation in the U.S.
Teacher/Trainee	J or Q	less than 2 of the preceding 6 years
Student	F,J,M,Q	less than 5 years