If you are a US person, you must pay federal income tax on your worldwide income. This means that even if you earn income outside or stay outside the United States, it is still subject to US tax and must be reported on your U.S. tax return.
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So, who is a US person?
You are considered a US person for tax purposes if you are:
- An individual who is a U.S. citizen or
- You are an individual and a U.S. resident alien;
- A partnership, corporation, company, or association created or organized in the United States or under the laws of the United States;
- An estate (other than a foreign estate); or
- A domestic trust (as defined in Regulations Section 301.7701-7).
Let’s take an example of a U.S. person.
John is a U.S. citizen living in New York and working for a domestic company. He is considered a U.S. person for tax purposes. He must report his entire income to the IRS, irrespective of where it is earned. John will continue to be a U.S. person for tax purposes even if his company transfers him to their Paris office, and he will still be required to report his worldwide income to the IRS.
Who is a resident alien?
As the definition of a US person includes an individual who is a “resident alien”, let me explain when an individual becomes a resident alien. You are a resident alien of the United States for tax purposes if you meet either the green card test or the substantial presence test for the calendar year.
You pass the green card test, which means you are a lawful permanent resident of the United States at any time during the calendar year. Please watch our separate video on the “Substantial Presence” test, which means you are physically present in the United States on at least 31 days during the current year, and 183 days during the current year and two preceding years.
Also note that in certain conditions, U.S. tax laws allow certain persons to choose a year from which they can be considered a resident-align.If you’re an alien and leave the U.S., you must get a compliance certificate proving you’ve paid your U.S. taxes. If you don’t, you must file and pay at your point of departure. Before you leave, download or look at Form 1040-C or Form 2063 to find out what you need to report.
Let’s take an example of a Resident Alien person who is also considered a U.S. person.
Richard is a citizen of the U.K.He is living in New York and working for a domestic company. If he satisfies Greed Card or Substantial Presence Test, he is considered a U.S. person for tax purposes. He must report his entire income to the IRS, irrespective of where it is earned.
Who is a foreign person for tax purposes?
A foreign person is a nonresident alien individual or foreign corporation that has not made an election under Section 897(i) of the Internal Revenue Code to be treated as a domestic corporation, foreign partnership, foreign trust, or foreign estate. It does not include a resident alien individual. A foreign person can be US person if he is a resident alien.
Who is a Nonresident Alien?
Nonresident aliens are individuals who are not US citizens or residents. They typically include people who do not pass or are exempt from the Green Card or Substantial Presence tests.
Nonresident aliens are generally taxed only on their US-source income. They are subject to U.S. tax only on income earned within the United States or connected with a U.S. trade or business.
Example: Maria, a citizen of Germany, comes to the U.S. on a temporary visa for a three-month project with a U.S. company. She does not pass the Green Card or Substantial Presence test and is considered a nonresident alien for tax purposes. Maria will be subject to U.S. income tax only on her income while working on the U.S. project.
While the information on this site - Internal Revenue Code Simplified-is about legal issues, it is not legal advice or legal representation. Because of the rapidly changing nature of the law and our reliance upon outside sources, we make no warranty or guarantee of the accuracy or reliability of information contained herein.