Tax Residency, the Substantial Presence Test,

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Tax Residency, the Substantial Presence Test,
the Tax Residency Information Form
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Tax Services

• Ann Page
• Steve Gednalske
• http//www.financialreporting.mnscu.edu/

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Tax Residency

• Under U.S. tax laws, all non-U.S. citizens are
  considered to be either
• Permanent resident aliens
• Resident aliens for tax purposes, or
• Nonresident aliens.

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Taxation Residency

• Permanent resident aliens and resident aliens for
  tax purposes are taxed the same as U.S. citizens
• Resident aliens generally are taxed on their
  worldwide income, the same as US Citizens
• Nonresident aliens are taxed under special laws
• Nonresident aliens are taxed only on their income
  from sources within the US on certain income
  connected with the conduct of trade or business
  in the US.

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Tax Residency - Why We Care

• Knowing an individuals tax residency status prior
  to payment is essential to accurately report the
  individuals tax liability and to be in
  compliance with IRS tax laws.

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Tax Residency - Why We Care
MnSCU Pays

• If MnSCU incorrectly reports a nonresident
  aliens tax withholding liability, MnSCU may be
  held responsible for the tax not withheld, in
  addition to any penalties for failure to
  withhold, plus the interest from the time the tax
  was not withheld.

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Nonresident Aliens and MnSCU

• Students
• Wages
• Scholarships
• Vendors Honorarium payments to foreign
  Academics, Payments to foreign Speakers
  Entertainers
• Employees

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Determining Tax Residency

• Withholding agent must review the individuals
  U.S. citizenship status and/or visa and
  immigration documentation

• I-9 Form Section 1. If employee indicates they
  are an alien authorized to work until
  ___/___/___, ask for
• Immigration documentation to verify work
  eligibility

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Tax Residency Information Form

• Employees who indicate on their I-9 that they
  are other alien authorized to work until
  xx/xx/xxxx must fill out Tax Residency
  Information Form.
• The information collected on this form will aid
  the institution in determining an employees tax
  residency status.

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Tax Residency Information Form
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Tax Residency Information Form
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Tax Residency Form

• When the employee has completed the form, ask the
  following questions
• If the employee did not fill out Section B Prior
  Visits, ask Prior to arriving in the country
  under your current visa type, had you ever
  visited the U.S. before?
• If the employee has filled out Section B Prior
  Visits, ask Have you listed every visit to the
  U.S. in your lifetime, even visits made as a
  child?
• Let the employee know By signing this form you
  are agreeing to notify HR/Payroll, should your
  immigration status change.

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Documentation Requirements

• Verify immigration status and employment
  eligibility
• Copy Immigration Documentation
• Passport
• I-94, arrival/departure record, stamped
• I-20, F-1 student on OPT
• DS-2019, J-1 (student or scholar)
• H-1B Approval Letter
• Invitation and Employment Letters
• Employment Authorization Cards (front and back)
• Any other immigration documentation presented by
  the employee

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Tax Residency Form Summary

• All employees who indicate on their I-9 that they
  are other aliens authorized to work until
  xx/xx/xxxx, must fill out the Tax Residency Form
• Employees must complete Sections A and C. If
  they have been in the U.S. prior to their current
  visit, they must also complete Section B.
• Send a copy Tax Residency form to Tax Services
  along with copies of the employees immigration
  documents.
• The institution must complete Sections D E,
  with the assistance of Tax Services.
• Keep the Tax Residency form with the employees
  I-9 form
• Set up a process for tracking NRA employees tax
  residency start year so when that year is
  reached, the employees are taxed appropriately.

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Tax Residency Tests

• There are two tests used to determine whether a
  non U.S. citizen should be treated as a U.S.
  resident for tax purposes
• The Green Card test, and the
• Substantial Presence Test

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The Green Card Test

• The individual is a lawful permanent resident
  alien if he/she
• Has been granted lawful permanent resident status
  in the U.S., and
• Has been issued or will receive an alien
  registration card (a.k.a.green card) by U.S.
  Immigration.

Tax as a Resident
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The Substantial Presence Test

• The substantial presence test (SPT) is a
  mathematical calculation of days present in the
  U.S. used to determine tax residency.
• An alien individual will be considered a U.S.
  resident for tax purposes if they meet the SPT
  for the calendar year.

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Substantial Presence Test Data

• Information needed to calculate the SPT includes
• Current immigration status
• Primary purpose for being in the U.S.
• Date of arrival for purposes of this visit
• Information about prior visits, including the
  above facts.

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Substantial Presence Test

• An alien individual will be treated as a resident
  alien for tax purposes if they are physically
  present in the United States on at least

• 31 days during the current year, and
• 183 days during the 3-year period that includes
  the current year and the 2 years immediately
  preceding, calculated as follows

• All the days present in the current year, plus
• 1/3 of the days present in the first year before
  the current year, plus
• 1/6 of the days present in the second year before
  the current year.

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SPT Example A

• Lorena was physically present in the U.S. for
• 138 days in 2003,
• 129 days in 2004, and
• 120 days in 2005,

• Q Does Lorena meet the substantial presence
  test for 2005?

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SPT Example A

• Q Does Lorena meet the substantial presence
  test for 2005?
• In the U.S. for over 31 days in the current year
• Apply the 183 day test as follows
• 2005 120 days
• 2004 (129 x1/3) 43 days
• 2003 (138 x 1/6) 23 days
• Total days present in U.S. 120 43 23 186
  days

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SPT Example A

• A Yes, Lorena is considered a resident alien for
  tax purposes because
• She has been present in the U.S. for over 31 days
  in current calendar year, and
• Her total number of days in the U.S. for the
  three-year period as calculated by the
  substantial presence test was over 183 days.

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SPT Days Not Counted

• Exceptions to counting days towards substantial
  presence
• Any days the individual regularly commutes to
  work in the U.S. from a residence in Canada or
  Mexico
• Any days the individual is in the U.S. for less
  than 24 hours when in transit between two places
  outside of the U.S.
• Any days the individual was unable to leave the
  U.S. due to a medical condition that developed
  while he was in the U.S., and
• Any days the individual was present in the U.S.
  as an exempt individual.

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Exempt Individuals
Exempt individuals are present in the U.S. for
the primary purpose of being

• a teacher or trainee
• generally present under a J or Q visa
  includes all J non-student categories
• a student
• generally present under a F, J, M or Q
  visa

• a foreign government-related individual
• generally a foreign diplomat or consular officer
  present under an A or G visa
• a professional athlete
• generally present under a P visa

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Exempt Individual Rules

• F, J, M or Q student visa holders will not
  qualify for exempt individual status if they
  have had that status for any part of more than
  five calendar years.
• J or Q non-student visa holders will not qualify
  for exempt individual status if they were
  exempt as a teacher, trainee, non-student or
  student for any 2 of the last 6 calendar years.

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Exempt Individual Example B

• Mei Lee, a Chinese citizen, has never been to the
  United States before. She arrives in the U.S.
  under a J-1 visa on December 15, 2004 to work as
  an exchange professor at Minnesota State
  University, Mankato.
• As a J-1 scholar, Mei Lee is an exempt individual
  in calendar year 2004 calendar year 2005.
• Mei is a nonresident alien for tax purposes.
• J-1 NRA Exempt for FICA/Medicare taxation
• Eligible for J-1 Teaching/Researching Tax Treaty
• W-4 - Statutory withholding

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Example B continued

• If Mei Lee is still present in the U.S. as a J-1
  visa holder and working for MSU, Mankato on
  January 1st, 2006, she will be taxed as a
  resident alien starting January 1st, 2006.
• J-1 Resident Aliens are subject to FICA/Medicare
  taxation
• Ineligible for Tax Treaty benefits
• W-4 same as US citizen or permanent residents

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Example B reprised

• Mei Lee was in the United States as an F-1
  student visa holder from August 1, 2001 until
  June 15, 2002.
• Was she an exempt individual in 2 of the past 6
  years?
• Yes as an F-1 student visa holder she was an
  exempt individual in 2001 and 2002.
• Since Mei was an exempt individual in 2 out of
  the past 6 years, she must start counting days of
  presence towards tax residency starting December
  15, 2004

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Tax Treaties Income Withholding

• Agreement between two countries to reduce or
  eliminate double taxation.
• US has income tax treaties with over 48 different
  countries
• Each treaty is unique and may not contain the
  same provisions or exemptions as another tax
  treaty.
• From time to time, treaties with additional
  countries are signed and existing treaties
  revised
• For the complete text of current tax treaties, go
  to the IRS website and type in Tax Treaty

• Typically, the employee must be a nonresident
  alien for tax purposes to claim treaty benefits
• Commonly Used Tax Treaty Article/Clause
• Dependent Personal Services (TN, H-1B)
• Teaching/Researching (J-1 nonstudent)
• Compensation during training (F-1 OPT)
• Annual maximum dollar amount and/or a time limit
  of presence in the U.S.
• Examples Article XV of the U.S.-Canada
  U.S.-India tax treaty, Article 22

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US China Article 19

• Teachers, Professors and Researchers
• An individual who is, or immediately before
  visiting a Contracting State was, a resident of
  the other Contracting State and is temporarily
  present in the first-mentioned Contracting State
  for the primary purpose of teaching, giving
  lectures or conducting research at a university,
  college, school or other accredited educational
  institution or scientific research institution in
  the first mentioned Contracting State shall be
  exempt from tax in the first mentioned
  Contracting State for a period not exceeding
  three years in the aggregate in respect of
  remuneration for such teaching, lectures or
  research.

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Claiming Treaty Benefits IRS Form 8233
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8233 Statement Attachment
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In Summary

• I-9 other alien until xx/xx/xxxx
• Payroll Tax Residency Information Form
• Immigration Documentation
• Send Tax Services copies of 2 3
• Tax Services determines employees tax status
  contacts HR/Payroll
• Treaty benefits? 8233 and if applicable the 8233
  statement attachment
• W-4 Statutory withholding
• HR/Payroll taxes employee according to tax
  residency status
• Tax Services supplies Dept of Finance with
  documentation supporting NRA status

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Contact Information

• Contact Tax Services with questions
• Ann Page, 651-632-5007 Ann.Page_at_so.mnscu.edu
• Steve Gednalske, 651-632-5016, Steve.Gednalske_at_so.
  mnscu.edu