First Year Choice for tax residency under US Tax Law Simplified !
First-year choice is a great option for a nonresident alien! The tax residency law under the Internal Revenue Code ( US Code 26 ) is provided in I.R.C. § 7701(b). A non-US citizen is called alien. Every alien will have to take substantial presence test in order to determine if he/she is tax resident of USA . Suppose, in a particular year, yous passes the substantial presence test, but somehow you find that the tax resident status is not as beneficial as it would have been in a different year. US tax law provides you first-year choice benefits under certain condition. Following FAQs on that subject will clarify the issue
What is First Year Choice?
In simple terms, a first-year choice is for a person to chose another year as tax residency than the year in which he actually passed Substantial Presence Test. So , if you passed substantial presence test for Calendar Year 2015, if it benefits you and you fulfil the conditions, you can actually become tax residence in the calendar year 2014 .
What are the criteria for First Year Choice?
Criteria are :
- You must pass substantial Presence Test for a year . Say you want to test for tax year 2015.
- Then , just before that year i.e 2015 , you must be physically present in USA for 31 days at a stretch.
- After the first day when the 31st day starts, you must be present for at least 75% of al the days between the first date and the last date of the calendar.
For example , your 31st day starts on 01/09/2014, you are supposed to stay in USA for at least 75 % of days between ( 31st Dec 2014 and 01/09/2014) which may include that 31 days block. If you fulfill the conditions, you can opt for the calendar year 2014 as tax residency year instead of year 2015, if that is what suits you.
What is the 5 days Relaxation?
For first year choice , the counting of 75% of the number of days beginning with the first day of the 31-day period and ending with the last day of 2014( example year) is done. For purposes of this 75% requirement, you can treat up to 5 days of absence from the United States as days of presence in the United States. In other words, even if you were not in USA , upto 5 days you can actually count as present.
I was in USA for two 31 days block – one starts from 05/01/2014 to 06/10/2014 and then 11/01/2014 to 5th Dec. 2014. Which block can I adopt?
Anyone you can take. But counting of 75% of days will start from that date.
In the above example, which will be the first date from when my tax residency start if I desire to opt for First Year Choice?
The first day of any block you desire can be chosen, provided you pass the 75% presence test.
What else is required If I opt for a Calendar Year as First Year Choice tax residency?
You must attach a statement to Form 1040 to make the first-year choice say , for 2014. The statement must contain your name and address and specify the following.
If I desire to have Calendar Year 2014 as First Year Choice, is there a time limit within which I must pass Substantial Presence Test for Calendar Year 2015?
The general rule is that you must pass Substantial Presence Test by 15th April . But you can apply for the extension of filing Form 1040. Please talk to you tax lawyer in this regard.
you can read Publication 519 on this