Residence may seem to be a relatively simple thing to determine. It’s where you live, right? Well, leave it to the Internal Revenue Code to complicate this question. There are different tests for residency when it comes to the federal income tax, the federal gift tax, and the federal estate tax. And each of these taxes applies differently depending on whether you’re a resident or not.
Residency Under Federal Estate Tax and Gift Tax
Of these taxes, the rules for residency are most complicated for the federal estate tax and gift tax.
First, what’s at stake? The federal estate tax applies to:
- every decedent who is a citizen or resident of the United States with respect to all the decedent’s property, wherever situated, at the time of their death;[1] and
- non-citizen nonresidents to the extent that they have property situated in the United States at the time of their death.[2]
The federal gift tax likewise applies to:
- citizens and residents of the United States with respect to transfers of property wherever situated;[3] and
- noncitizen nonresidents with respect to transfers of property situated in the United States.[4]
So, if you’re not a U.S. citizen, a lot rides on whether you’re a resident or nonresident of the United States.
The federal estate tax and gift tax define a “resident” as an individual whose domicile is in the United States on the date of their death (for estate tax purposes) or on the date of the gift (for gift tax purposes).[5] An individual acquires a domicile by living in a place with no definite present intention of leaving.[6] Once acquired, a domicile is presumed to continue until it is shown to have been changed.[7]
Courts have looked at several factors to determine domicile, such as:
- whether the individual has a visa or green card,
- where the individual’s assets are located,
- where the individual’s social and economic contacts or located,
- the frequency and duration of the individual’s travel to United States, and
- and the individual’s stated motivations for being in the United States.
So, unfortunately, residency for purposes of the federal estate tax and gift tax depends on facts and circumstances that must be carefully evaluated to determine whether an individual will be subject to these taxes.
Residency Under the Federal Income Tax
Determining residency under the federal income tax is, in a way, more straightforward. A person is a resident for federal income tax purposes if the person is:
- a lawful permanent resident in the United States during a given year;[8]
- meets a substantial presence test under which the individual is physically present in the United States for at least 31 days during a given year and at least 183 days during that year and the immediately two years after counting all days of physical presence during that year, 1/3 of the days that the individual was physically present during the first preceding year, and 1/6 of the days that the individual was physically present during the second preceding year;[9] and
- certain individuals who elect to be treated as a resident.[10]
Certain days of physical presence are excluded from the substantial presence test above.[11] Moreover, with some exceptions, the substantial presence test isn’t met if the individual is physically present in the United States for less than 183 days during the year in question and has a tax home in a foreign country and a closer connection to that country than to the United States.[12]
The consequences under the federal income tax of being a resident or nonresident are:
- S. citizens and residents are subject to federal income tax on all income wherever derived;[13] and
- Nonresidents are subject to federal income tax on U.S. source income and income that is effectively connected with the conduct of a U.S. trade or business.[14]
[3] Treas. Reg. 25.2501-1(a)(1).
[6] Id.
[7] Est. of Nienhuys v. Comm’r, 17 T.C. 1149, 1159 (1952) (citing Mitchell v. United States, 88 U. S. 350, 352 (1874)).
[8] I.R.C. § 7701(b)(1)(A)(i).
[9] Id. § 7701(b)(1)(A)(ii), (3)(A).
[10] See id. §§ 6013(h), 7701(b)(1)(A)(iii).
[11] Treas. Reg. § 301.7701(b)-3.
[12] I.R.C. § 7701(b)(3)(B).
