• India
  • February 27, 2019

US tax residence rules for natural persons

There has been an increase in the movement of high net worth individuals from India to the U.S. Having covered the residence rules under Indian tax law, it is important to shed some light on the residence rules under the U.S. tax law. In this blog, the readers will find that the residence test under the U.S. tax law is as objective under the Indian tax law.

The U.S. taxes a U.S. person on his worldwide basis and non-residents on his U.S. sourced income. A U.S. person means a U.S. citizen or a U.S. resident. A natural person is considered as a U.S. resident if he is a green card holder or meets the requirements of the substantial purpose test (SPT) or elects to be taxed as a U.S. person.

An individual meeting all requirements under SPT is a U.S. person, i.e. such individual must be in the US for at least:

  1. 31 days of the current tax year; and
  2. 183 days during the three years including the current year and immediately preceding two tax years determined as below:
    • 1/3rd of days in the year before the current tax year; and
    • 1/6th of days in the two years before the current tax year.

For ease, the above SPT requirements have been presented in a time graph below:

2 years before 1 year before Current tax year
Condition 1: 31 days 31 days
Condition 2: 183 days 1/6th days 1/3rd days all days

There are exceptions and exemptions from the above SPT rule. Few examples of exceptions to count the number of days to determine SPT are: days a person commutes to work in the US from a residence in Canada or Mexico (if a regular commute from Canada or Mexico), days a person who is in the U.S. for less than 24 hours (when in transit between two places outside the US), days a person is in the U.S. as a crew member of a foreign vessel, and days a person who is unable to leave the US because of a medical condition that develops while you are in the US.

Few examples of exemptions to calculate the day count to determine SPT include following individuals who are temporarily present in the US:

  • a foreign government-related individual under an “A” or “G” visa, other than individuals holding “A-3” or “G-5” class visas;
  • a teacher or trainee under a “J” or “Q” visa, who substantially complies with the requirements of the visa;
  • a student under an “F,” “J,” “M,” or “Q” visa, who substantially complies with the requirements of the visa;
  • a professional athlete competing in a charitable sports event.

Please note that the above exemption list may not rule out the requirement of not filing tax return in the US.

The rules clarify the first day of residence and may be useful in determining residence start day in certain cases. For example, when a person is granted green card, the first day is the date such person enters the US.

The interaction between the tax residencyrules of two countries like U.S. and India clearly show how two democracies cover the taxpayers under its tax territory with the day count test. However, the U.S. steps ahead to tax its citizens irrespective of their stay in the U.S. This implies that once a high net worth individual moves from India to the U.S. and receives U.S. citizenship after surrendering Indian citizenship, then such individual is taxable in the U.S. irrespective of the fact that he wants to move anywhere in the world. Our whitepaper titled Interaction of Indian and U.S. Tax Laws covers important tax implications that high net worth individuals and global entrepreneurs need to note on becoming U.S. tax residents.