Federal Tax Laws
Basic Facts About U.S. Immigration Law and Visas
A very basic knowledge about U.S. immigration laws is essential in understanding the taxation of aliens in the United States. The treatment of aliens under the internal revenue and social security laws of the United States is based, in part, on the status of such aliens under the immigration laws of the United States.
An alien is any person who is not a citizen of the United States. The immigration laws of the United States are administered by the Department of Homeland Security (DHS). The U.S. Department of State in its embassies and consulates abroad issues visas to apply for entry with the DHS. The immigration laws classify all aliens into three basic categories: (1) immigrants, (2) nonimmigrants, and (3) illegal aliens. Immigrants have the right to reside permanently in the United States, and sooner or later will come into possession of that most coveted of documents known as the green card (DHS form I-551). The green card is the tangible evidence of a person's immigrant status. It allows the alien who possesses it to reside permanently in the United States, to enter and leave the United States at will without having visas or re-entry permits, and to earn self-employment and employment income in the United States under the same conditions as would apply to a U.S. citizen.
A nonimmigrant is an alien who is allowed to reside temporarily in the United States. A nonimmigrant has represented to the U.S. Department of State and to the DHS that he/she is a permanent resident of a foreign country to which he/she fully intends to return after his/her temporary stay in the United States has come to an end. Most nonimmigrants apply to enter the United States with the permission of the U.S. Department of State, and they bear written evidence of this fact in their passports in the form of a visa which is usually stamped by a U.S. embassy or consulate abroad on one of the pages in the nonimmigrant's passport. A nonimmigrant visa allows a nonimmigrant to enter the United States in one of several different categories which correspond to the purpose for which the nonimmigrant is being admitted to the United States. For example, a foreign student will usually enter the United States on an F-1 visa, an exchange visitor on a J-1 visa. The categories of nonimmigrant visas correspond exactly to the nonimmigrant status assigned to each nonimmigrant upon arrival, based on the purpose for which the nonimmigrant was admitted to the United States. For example, a foreign student who enters the United States on an F-1 visa is considered to be in F-1 student status after he/she enters the United States; and he/she will remain in that status until he/she violates the conditions prescribed for that status, or until he/she changes to another nonimmigrant or immigrant status with DHS permission, or until he/she leaves the United States.
An illegal alien is an alien who entered the United States illegally without the proper authorization and documents, or is an alien who once entered the United States legally and has since violated the terms of the status in which he/she entered the United States.
Visa and Immigration Status
A student visa issued by a U.S. consulate abroad does not allow the student to enter the United States. Rather, it means that the Department of State is convinced (via a consular officer) of the bona fides of the alien's intentions to pursue the stated purpose of admission to the U.S. as detailed by a schools issuance of a form I-20 or DS-2019.
Once the alien arrives at a U.S. port-of-entry (land border, airport, etc.), the jurisdiction of the DHS takes over, a DHS inspector admits the alien into the U.S. and confers status. Of course, it is relevant and significant that an alien has a consular visa, but not determinative if the inspector determines that for some reason the alien is inadmissible. An inspector interviews the alien personally, occasionally questions him/her, and may ask to search his/her belongings. Once the alien is determined to be admissible, he/she is issued a Form I-94, which is stamped or endorsed with the immigration classification (e.g. F-1, J-1, etc.) and the period of time during which the alien is initially permitted to remain in the U.S. in that classification. An exception is foreign students and exchange visitors, whose are F-1 and J-1 respectively, typically aren't given specific durations of stay but rather D/S meaning that such an alien is entitled to remain in the U.S. for the duration of his/her approved program.
Resident Aliens and Non-Resident Aliens
Although the immigration laws of the United States speak of immigrants, nonimmigrants, and illegal aliens, the tax laws of the United States speak only as RESIDENT ALIENS and NONRESIDENT ALIENS. The general controlling principle is that RESIDENT ALIENS are taxed in the same manner as U.S. citizens, and NONRESIDENT ALIENS are taxed according to special rules contained in certain parts of the Internal Revenue Code (hereinafter referred to as the Code). The tax residency rules are found in section 7701(b) of the Code. Although the tax residency rules are based on the immigration laws about immigrants and nonimmigrants, they define residency for tax purposes in a way very different from the immigration laws. Under the tax residency rules of the Code, any alien who is not a RESIDENT ALIEN must be a NONRESIDENT ALIEN. An Alien will become a RESIDENT ALIEN in one of three ways: (1) by being lawfully admitted to the United States for permanent residence under the immigration laws (the Green Card test); (2) by passing the Substantial Presence Test (which is a numerical formula which measures days of presence in the United States; or (3) by making what is called the First Year Election (a numerical formula under which an alien may pass the substantial presence test one year earlier than under the normal rules). Under these rules, even an illegal alien under the immigrations laws who passes the Substantial Presence Test of the tax code will be treated for tax purposes as an RESIDENT ALIEN.
International Students who arrive in the U.S. on F-1 and J-1 student status are considered to be exempt individuals (i.e. exempt from counting days of presence in the U.S. under the Substantial Presence Test) during the first five calendars of physical presence in the U.S.
Generally, residents and nonresidents for tax purposes can be defined as follows:
- Student in U.S. less than 5 years (F-1 visa).
- Scholar in U.S. less than 2 years (J-1 visa).
- Student spouses and visits on F-2 or J-2 (receive no tax benefits).
- Anyone under the 183 days Substantial Presence Test.
- Green card holder.
- Student in U.S. more than 5 years.
- Scholar in U.S. more than 2 years.
- Anyone meeting the 183 days Substantial Presence Test.
Substantial Presence Test
F, J and M students are not permitted to use the Substantial Presence Test until their sixth year in the U.S. J scholars (professors, research scholars, etc.) can not use the Substantial Presence Test until at least their third year in the U.S. After that, determining whether an alien has met the substantial presence test can be difficult. The formula is as follows:
- 31 days during the current year, and
- 183 days during the 3-year period that includes the current year and the 2 years immediately before the current year.
The Substantial Presence Test Formula
Has the student (or the dependent) been in the U.S. in F, J, or M visa status for more than five calendar years?
If they were present in the U.S. for any part of a calendar year, they must count that year.
Has the J-1 scholar (or the dependent of a scholar) or a Q visa holder been in the U.S. in F, J, M, or Q visa status for any part of three or more calendar years?
If they were present in the U.S for any part of a calendar year, even for one day, they must count that year.
If no, they are a nonresident alien for tax purposes.
If yes, go on.
Were they physically present in the U.S. for at least 31 days during 2010?
If no, you are a nonresident alien for tax purposes.
If yes, go on.
If they are an F, J, or M student (or dependent of a student) is their total number of days 183 or greater when you apply the formula below to only those days in calendar years after their fifth year in the U.S.?
If they are a J scholar (or dependent of a scholar) or a Q visa holder is their total number of days 183 or greater when you apply the formula below to their days of presence in the U.S. EXCLUDING the days in the first two calendar years during which they held an F, J, M, or Q visa?
- # of days present in 2010+ = x 1
- # of days present in 2009+ = x 1/3
- # of days present in 2008+ = x 1/6
- Note: do not round the results of this calculation
If no, they are a nonresident alien for tax purposes.
If yes, they pass the Substantial Presence Test and must file their taxes as a resident of the U.S. for all or part of 2010