“U.S. law treats U.S. persons and foreign persons differently for tax purposes. Therefore, it is important to be able to distinguish between these two types of taxpayers.”
Classification of Taxpayers for U.S. Tax Purposes, IRS

The current tax environment, with its focus on increased efforts to pursue and prosecute US taxpayers with previously undisclosed bank accounts and unreported tax income, has brought the term “US person” into the limelight.

For tax purposes, all non-US citizens are referred to as “aliens”.  Resident aliens are considered US persons and are subject to the same tax rules as US citizens.  Therefore, resident aliens are subject to taxes on their “worldwide income”.  On the other hand, non-resident aliens are subject to US taxes only on their US source income.  Given the tax implications, the distinction between a US person and a foreign person can be significant.

X has US source income of $100,000 and foreign income of $150,000.  If X is deemed a US person then his US tax return should report income of $250,000.  However, if X is deemed a foreign person for US tax purposes then he only has to report income of $100,000.

A resident alien is one who meets either the “green card” or “substantial presence" test.  The green card test is met by an alien who has been accorded the right to reside permanently in the US by the US immigration service.  The substantial presence test is satisfied by an alien who is physically present in the US for at least 31 days during a year and for 183 days during the three year period that includes the current year and the preceding two years.

Z came to the US on January 1, 2012 with a green card.  Z meets the green card test and is considered to be a resident alien for 2102 tax purposes.

M, a foreign national, came to work in the US on March 31, 2012.  By December 31, 2012, M has lived in the US for over 183 days and, therefore, meets the substantial presence test.  For US tax purposes, M is considered a resident alien.

Domestic US partnerships, corporations, estates and certain trusts are also US persons, and are subject to taxes on their “worldwide income”.  Just as individuals, they have reporting requirements relating to foreign bank accounts, assets and income.

Disclaimer: Every individual’s tax situation is different and tax situations change over time. This article is intended to give general information to enable the reader to discuss their situation with a tax adviser.  It is not intended to be tax or legal advice and should not be construed as such.

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