How Does U.S. Residency Affect Income Taxes and Transfer Taxes?

 Posted on June 20, 2025 in Taxation Law

Citizens of the United States have a number of tax obligations. Residents of the United States who are not citizens also have a number of tax obligations, but in some cases, confusion may arise regarding whether a non-U.S. citizen is considered to be a resident for tax purposes. The way residency is determined is different for income taxes than for transfer taxes, which include gift taxes and estate taxes. It is crucial to understand these differences so that taxes are correctly paid while avoiding penalties imposed by the IRS.

Because of the complexity of U.S. tax laws, foreign citizens who spend time in the United States or own property in the United States can easily become involved in tax disputes that could lead to penalties or even criminal charges for tax evasion. Working with an attorney who has a strong understanding of the applicable U.S. tax laws can ensure that the right approach is taken when filing tax returns and when responding to IRS queries or tax audits and resolving tax disputes.

The Substantial Presence Test for Income Taxes

To determine whether income taxes apply to a person who has spent time in the United States, the IRS uses what is known as the "substantial presence" test. This test will look at the amount of time a person has been physically present in the United States within the past 3 years. A person will be considered a resident if they have spent at least 31 days in the United States during the current tax year and a total of at least 183 days during the previous 3 years.

When calculating the number of days a person has been present in the United States, the IRS will consider 100% of the days in the current year, but only one third of the days in the previous year and one sixth of the days in the year before the previous year will be counted. For example, if a person was physically present in the United States for 31 days in the current year, 180 days in the previous year, and 240 days in the year before the previous year, the total number of days would be 131 (31+60+40). Since the total figure is less than 183 days, that person would not be considered a resident of the United States in the current tax year.

There are a few exceptions to these rules. If a person is a lawful permanent resident of the United States, they will be taxed as a resident, regardless of the amount of time they were physically present in the country during a tax year. A "closer connection" exception may apply if a person can demonstrate that they have more significant contacts with a foreign country based on the forms and documents they have filed and the location of the residence where they and their family primarily live, where they carry out most of their business and social activities, and other factors. The closer connection exception is not available to lawful permanent residents or people who have applied for a Green Card.

The Domicile Test for Transfer Taxes

To determine whether gift taxes or estate taxes will apply to a non-U.S. resident, the IRS uses what is known as a "domicile" test. This test looks at whether a person resided in the United States with the intent to stay in the country permanently, regardless of the total number of days of physical presence in the country. The IRS may look at where a person lived most of the time, where they worked, and other factors to determine whether they are considered to be a resident.

Even if a non-U.S. citizen relocates overseas and does not maintain a domicile in the United States, certain property they own in the United States may be subject to estate taxes. In these cases, the standard estate tax exemption will not apply. Instead, the exemption will be $60,000.

Contact Our San Jose Tax Law Attorney

Both U.S. citizens and non-citizen residents will need to understand their tax obligations. For those who are uncertain about what taxes they may owe or who are concerned about the possibility of tax debts, penalties, and interest, an experienced San Jose, CA tax lawyer can provide guidance. At John D. Teter Law Offices, we can help determine how the substantial presence test and domicile test will apply in specific situations, and we can provide representation during tax audits or other proceedings involving the IRS, working to help avoid penalties and minimize the taxes a person will be required to pay. To get help with your tax-related concerns, contact us at 408-866-1810 and set up a consultation.