U.S. Income Tax Concerns with Regard to Foreign Investment in the U.S.: Qualifying as a U.S. Person

Braverman Sachs Group Real Newsletter, Market Report/Summer 2011

1) Introduction

My article in the May 2011 Newsletter provided an overview of the U.S.’s income tax jurisdiction over the foreign investor.  I mentioned that the U.S. may tax a U.S. Person on his worldwide income.  Nevertheless, the U.S. generally will tax the nonresident alien (an individual who is neither a U.S. Citizen nor U.S. Resident) only on certain of his U.S. source income.  In order to assist the foreign investor in determining his status for U.S. federal tax purposes, this article examines the criteria for qualifying as a U.S. Person for U.S. federal tax purposes.

2) Overview of Scope of Article

This article examines U.S. federal income tax issues with regard to individuals.  It neither addresses any other taxes, nor does it address the effects of treaties or foreign laws, which may affect the foreign investor’s tax liability either in the U.S. or in another country. In addition, this article does not address tax issues with regard to former U.S. citizens who have renounced their U.S. citizenship.

3) Who Qualifies as a U.S. Person?

Any individual who is a U.S. citizen, a U.S. resident, or both, is a U.S. Person.

4) Who Qualifies as a U.S. Citizen?

Every individual born or naturalized in the United States and subject to its jurisdiction is a citizen.

5)Who Qualifies as a U.S. Resident?

In general, an individual who is not a citizen will qualify as a U.S. resident, and thus as a U.S. Person, if he meets at least one of the following:

a)    Lawfully Admitted for Permanent Residence Test / Green Card Test.

A person meets this test if the individual is a lawful permanent resident of the U.S.  An individual is a lawful permanent resident of the U.S. if he is accorded the privilege of residing permanently in the U.S. as an immigrant under the immigration laws and if this status has not been revoked.

b)    Substantial Presence Test.

A person meets this test if he is present in the U.S. for 183 days or more during the current calendar year.  If he is present for less than 183 days during the current calendar year, he may still satisfy this test if he meets certain conditions.  First, the person must be present in the United States on at least 31 days during the current calendar year.  Second, the number of days a person was present in the U.S. during this calendar year multiplied by 1, the number of days a person is present in the U.S. last calendar year multiplied by 1/3, and the number of days a person is present in the U.S. during the calendar year before last calendar year multiplied by 1/6, equals or exceeds 183.

c)     First Year Election.

Certain nonresidents may elect to be taxed as U.S. residents.

* This article provides legal and tax information, but neither tax nor legal advice.  I encourage the foreign investor to discuss his specific issues with Florida attorneys and accountants and with attorneys and accountants in any jurisdiction to which the foreign investor is connected.

** To ensure compliance with requirements imposed by the IRS under Circular 230, Rumbak Law, P.A., informs you that any U.S. federal tax advice contained in this document, if any, unless otherwise specifically stated, was not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing, or recommending to another party any matters addressed herein.

Neil Rumbak and Rumbak Law, P.A., are not affiliated with Better Homes and Gardens Real Estate.