Originally posted on December 13, 2022
U.S. Residency Starting and Termination Dates and the No Lapse Rule
Many foreign nationals dream of moving to the United States. Yet, for those who earn U.S. residency, the “American Dream” comes with tax consequences. This article relates to residency “starting and termination dates” for those who hold a U.S. permanent resident card, (“green card”), or have been in the country for a qualifying period of residency, which subjects them to U.S. tax filing requirements. This article does not apply to U.S. citizens.
For U.S. tax residents who are non-citizens, the initial and final U.S. tax filings must be based on the residency start and termination dates set forth under Internal Revenue Code (IRC) Section 7701(b) and Treasury Regulation 301.7701(b)-4. With respect to the residency starting dates in the initial year, there are separate rules for those, who:
- Meet the permanent resident “green card” test,
- Meet the “substantial presence test”, as per IRC Section 7701(b)(3); or
- Make the “first-year election” provided in IRC Section 7701(b)(4).
The Substantial Presence Test
Under the “substantial presence test,” the Internal Revenue Service (IRS) considers an individual a U.S. resident alien for tax purposes if they were physically present in the U.S. for at least 31 days during the current year, and 183 days during the three-year period. The three-year computation counts all the days in the current year, one-third of the days in the year immediately before the current year, and one-sixth of the days in the year before that. The IRS explains the substantial presence rules here. There are various exceptions that apply.
Residency Starting Dates
Green Card holder who does not meet the Substantial Presence Test
In the initial year the green card is obtained, if an individual fails to meet the substantial presence test, his/her residency start date is considered the first day of physical presence in the U.S. as a lawful permanent resident. For those who received the green card while abroad, their residency start date is the first day of physical presence in the U.S. after its receipt. Treasury Regulation Section 301.7701(b)-4(e)(3) provides a special rule, where, if an individual meets the green card test but is not physically present in the U.S. in that year, the individual’s residency starting date is the first day of the following year.
Green Card holder who meets the Substantial Presence Test
Those who meet both the green card and substantial presence tests in the same year, their residency starting date is the earlier of, the first day they are present in the U.S. for the year the substantial presence test is met, or the first day they are present in the U.S. as a green card holder.
Meet the Substantial Presence Test but does not hold a Green Card
The residency starting date for those who meet the substantial presence test is the first day of physical presence in the U.S. Note that in certain cases, up to 10 days of presence in the U.S. may be disregarded for the purposes of the residency starting date.
First-Year Election
In some instances, individuals who do not meet either the green card or the substantial presence test for the current or prior year, and did not choose to be treated as a U.S. resident for part of the prior year, but meet the substantial presence test in the following year, can elect residency starting date under what’s called the “first-year choice” By making the “first-year election”. The IRS has provided brief instructions on how to make the election here.
Residency Termination Dates
Similar to the rules that determine residency starting dates, there are various tests that determine the residency termination dates.
Green Card holder ceasing U.S. Permanent Resident status
An individual is considered a U.S. tax resident until he/she formally abandons the green card, or the green card is either administratively revoked by the immigration authorities, or judicially revoked by U.S. federal court.
(Although beyond the scope of this article, note that an “expatriation tax” may apply for to a “long-term resident”, i.e., an individual who was a green card holder for 8 of the last 15 years, and terminates U.S. permanent resident status. please see our article entitled “U.S. Expatriation Tax Implications of Renouncing U.S. Citizenship or Surrendering a Green Card”).
The residency ending date is normally December 31st of the year in which permanent resident status is revoked. In order to claim a residency date earlier than December 31st, the individual may choose the residency ending date as the last day of physical presence in the U.S. provided that it is followed by a period he/she is not present in the U.S., has a closer connection to a foreign country than to the U.S. (see “Closer Connection to a Foreign Country” below), and is not a resident of the U.S. anytime during the following year (see “No Lapse Rule” below).
Meet the Substantial Presence Test
The residency ending dates for an individual who does not hold a green card but meets the substantial presence test in the year they depart the U.S. are similar to the green card rules discussed above.
Closer Connection to a Foreign Country
Once an individual has ceased to be present in the U.S. following the two tests discussed above, that date can be used to establish his/her residency ending date, if for the remainder of the calendar year, his/her tax home is another country, he/she maintained a closer connection to that country, and attaches the “residency termination statement” to his/her tax U.S. tax return.
No Lapse Rule
IRC Code Section 7701(b)(2)(B)(iii) and Treasury Regulation Section 301.7701(b)-4(e) provide for “no lapse” residence rules. If an individual terminates residency in one year, then returns to the U.S. to resume residency at any time in the following year, then the individual will be considered a U.S. resident through the end of the current year. I.e., residency will be considered as never having lapsed between the two residency periods regardless of whether that individual has a closer connection to a foreign country than the U.S. during that period (however, see “Coordination with Income Tax Treaties” below).
Coordination with Income Tax Treaties
In certain cases, an individual may be considered a resident of the U.S. under the domestic rules of the U.S., and a resident of his/her home country under the domestic rules of the home country, and therefore is considered a “dual resident”. Certain treaties provided “treaty tie-breaker” rules to determine which country the individual is considered resident of during the dual resident period.
How Abitos Can Help
If you are a foreign national who has recently immigrated to the U.S. or are a U.S. resident who is considering emigrating, and are unclear of your residency starting and ending dates for tax purposes, please contact your cross-border tax advisor for further guidance.
AbitOs specializes in the unique tax needs of high net-worth individuals with international lifestyles, LATAM, Canadian, and other non-US entities doing business in the US, as well as US entities doing business in those countries and across the globe. If you would like to benefit from our expertise in these areas or if you have further questions on this Alert, do not hesitate to contact us.
