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 an alien. Every alien will have to take substantial presence test in order to determine if he/she is tax resident of USA . In general, a nonresident alien individual who do not meet either the Substantial Presence Test or the Green Card Test, is ordinarily not considered U.S. resident. However, by an election under IRC
§ 7701(b)(4), commonly referred to as the “First-Year Election”. however, an individual can be considered U.S. tax resident aliens for at least part of the tax year, as opposed to being considered a nonresident alien for the entire taxable year.
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 2019, if it benefits you and you fulfill the conditions, you can actually become tax residence in the calendar year 2018 .
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 2020.
- Then , just before that year i.e 2020 , 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 all the days between the first date and the last date of the calendar year 2019 .
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 2018 ( 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.
What Days of Presence in USA Not Counted for First Year Choice?
While computing 31 days or second conditions of 75% (conditions for making first year choice ) ,you should not count the following as days of presence in the United States .
- Days you commute to work in the United States from a residence in Canada or Mexico if you regularly commute from Canada or Mexico.
- Days you are in the United States for less than 24 hours when you are in transit between two places outside the United States.
- Days you are in the United States as a crew member of a foreign vessel.
- Days you are unable to leave the United States because of a medical condition that arose while you are in the United States.
- Days you are in the United States under a NATO visa as a member of a force or civilian component to NATO. However, this exception does not apply to an immediate family member who is present in the United States under a NATO visa. A dependent family member must count every day of presence for purposes of the substantial presence test.
- Days you are an exempt individual.
What is the starting day of tax residency in case of first year choice?
Your residency starting date for 2019 is the
- First day of the earliest 31-day period that you use to qualify for the choice. You are treated as a U.S. resident for the rest of the year.
- If you are present for more than one 31-day period blocks and you satisfy condition of 75% of presence as described above, your residency starting date is the first day of the first 31-day period.
- If you are present for more than one 31-day period blocks but you satisfy condition of 75 % above only for a later 31-day period, your residency starting date is the first day of the later 31-day period
Examples for First Year Choice
I was in USA for two 31 days block – one starts from 05/01/2019 to 06/10/2019 and then 11/01/2019 to 5th Dec. 2019. 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 2018. The statement must contain your name and address and specify the following.
If I desire to have Calendar Year 2018 as First Year Choice, is there a time limit within which I must pass Substantial Presence Test for Calendar Year 2019?
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
If you fulfill the conditions, you can opt for the calendar year 2019 as tax residency year instead of year 2020, if that is what suits you.
First year choice statement
You must attach a first year choice statement to tax Form 1040 to declare the first-year choice for the current year. The statement must contain the following:
- Your Name and address
- That you are making the first-year choice for the current year.
- That you were not a U.S. resident in the prior year.
- That you are a U.S. resident under the substantial presence test in the following year.
- The number of days of presence in the U.S. during the following year.
- The date or dates of your 31-day period of presence and the period of continuous presence in the U.S. during the current year.
- The date or dates of absence from the U.S. during the current year (that you are treating as days of presence under the first-year choice – see (2), above).
Once you make the first-year choice, you may not revoke it without the approval of the Internal Revenue Service.