Income Tax

Income Tax

A.     Individuals

1.     What is a Resident?

There are different income tax treatments depending on whether the individual is a resident or a non-resident.

A resident for income tax purpose is:

·         A green card holder (or other lawful permanent resident) who is present in the United States for at least one day of a calendar year[1].  There are special rules for the first and last year of lawful residence. 

o   For the first year, if the individual was not a resident in the prior calendar year, the individual is treated as a resident only for the portion of the year starting when the residence began.

o   For the final year, if (1) an individual turns in his green card and leaves the U.S., (2) is not a U.S. resident in the following year, and (3) has a closer connection to another tax jurisdiction, he or she will only be a U.S. income tax resident for the portion of the year that he or she was a card holder.

·         Under the “substantial presence” test, a person is a U.S. resident for a given calendar year if he or she either (a) is present in the U.S. for 183 days in that year, or (b) is present in the U.S. for at least 31 days of that year and has been present in the U.S. for an average of more than 121 days per year over that year and the two prior years.


·         A person holding a diplomatic visa or a full-time student, teacher or trainee visa, or an employee of an international organization, is not an U.S. resident, regardless of the number of days spent in the U.S.[2]

·         A person who is present in the U.S. for less than 183 days in the calendar year, but whose 3-year average is greater than 121 days, can avoid U.S. resident status by demonstrating that he or she has a tax home in and a “closer connection” to a foreign country.

·         Treaties with some countries contain “tie-breaker” provisions to resolve the issue of residence for a person who would otherwise be treated as a resident of both of the treaty countries.

2.     Income Tax for U.S. Residents

U.S. residents are under the same income tax laws as U.S. citizens.  They have to report their worldwide income to the IRS by filing Form 1040.  Because of international treaties limiting the double taxation, the individual who receives income from oversea will have to file an income tax declaration in the U.S. and another one in the other country.  The income tax paid to the other country is reported as a tax credit.  For instance, an individual who received income from a French real estate property will have to report the income on the U.S. income tax return and deduction the tax paid in France.  Because all of the French tax information may not be available by Aril 15 since the French income tax returns are filed by June, the individual will usually have to file an extension in the U.S. and wait to collect all of the French tax information in order to complete the U.S. tax return. 

     3.   Income Tax for Non-U.S. Residents

Non residents have to only report income on U.S. source of income by filing Form 1040NR.  Under limited circumstances, certain foreign source income is subject to U.S. tax.  Below is an IRS table summarizing what kind of income qualifies for U.S. source of income: 


Item of income

Factor determining source

Salaries, wages, other compensation

Where services performed

Business income:


Personal services

Where services performed

Sale of inventory—purchased

Where sold

Sale of inventory—produced



Residence of payer


Whether a U.S. or foreign corporation*


Location of property



Natural resources

Location of property

Patents, copyrights, etc.

Where property is used

Sale of real property

Location of property

Sale of personal property

Seller's tax home (but see Personal Property, later, for exceptions)


Where services were performed that earned the pension

Sale of natural resources

Allocation based on fair market value of product at export terminal. For more information, see section 1.863-1(b) of the regulations.

*Exceptions include: 
a) Dividends paid by a U.S. corporation are foreign source if the corporation elects the American Samoa economic development credit. 
b) Part of a dividend paid by a foreign corporation is U.S. source if at least 25% of the corporation's gross income is effectively connected with a U.S. trade or business for the 3 tax years before the year in which the dividends are declared.


4.     International Treaties Limiting Double Taxation

One of the first steps is to search for the International Treaties on taxation, their amendments and their protocols.  See IRS Publication 901, U.S. Tax Treaties. 

Related real estate property matters are often part of international agreements on double taxation, the country where the real estate property is located will usually be the main actor in tax collection.

International treaties often set rules for pensions and retirement accounts.  Because of the complexity of tax deduction and incentive, tax deferred, and general public policies, it is not un-common to have an agreement which sets that retirement income will be taxed by the country where the retirement accounts or pensions are located. 

5.     Covered Expatriates

The American Jobs Creation Act of 2004 made substantial changes to the tax information and reporting rules, that apply to U.S. citizens and long-term residents who lose their citizenship or terminate their long-term resident status after June 3, 2004.  An individual is called “covered expatriate” and is subject of tax under IRC Section 877, if (1) she/he has an average annual net income tax liability, for the five preceding years ending before the date of the loss of U.S. citizenship or residency termination, that exceeds $124,000 (as adjusted for inflation after 2004 - $139,000 in 2008); (2) she/he has a net worth of $2 million or more on such date; or (3) she/he fails to certify under penalties of perjury that he/she has complied with all U.S. federal tax obligations for the preceding five years or fails to submit such evidence of compliance as the Secretary may require.  They are some exceptions of these rules.     

The covered expatriate has to file Form 8854, Initial and Annual expatriation Information Statement, for 10 years.  The covered expatriate is no longer taxed as a citizen or resident on his/her worldwide income.  It will be a similar tax as a nonresident in accordance with the special rules of IRC Section 877.  

However, if during the 10-year period the covered expatriate is present in the United States for more than 30 days in a calendar year, he/she will be treated as a U.S. citizen or resident for that tax year.