Evaluate Residency And Nexus Issues
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CPA Tax Compliance & Planning (TCP) › Evaluate Residency And Nexus Issues
For U.S. federal income tax purposes, a U.S. citizen living abroad is:
Taxed only on U.S.-source income.
Not subject to U.S. tax if they have been abroad for more than one year.
Subject to U.S. tax on worldwide income regardless of where they live - U.S. citizens are taxed on a citizenship basis, not a residency basis.
Subject to U.S. tax only if they maintain a U.S. domicile.
Explanation
The U.S. taxes its citizens on worldwide income regardless of residency - citizenship-based taxation. Answer C is correct. Citizens abroad pay tax on worldwide, not just U.S.-source income (A). No one-year rule exempts citizens (B). Domicile is irrelevant for citizenship-based taxation (D).
An individual who is a resident alien at the end of the year but was not a resident at the beginning of the year files as:
A dual-status alien - filing a dual-status tax return that applies different rules to the resident and nonresident periods.
A nonresident alien with a first-year election to be treated as a resident.
A resident alien for the full year by making an election.
A nonresident alien for the full year.
Explanation
Dual-status aliens file a dual-status return covering the nonresident period (taxed on U.S.-source income only) and the resident period (taxed on worldwide income). Answer B is correct. They are not a full-year nonresident (A). Resident for full year is possible by election but only under specific circumstances (C). The first-year election (D) is a specific provision for those who become residents and want to elect earlier residency.
For state income tax purposes, an individual's 'domicile' is most accurately described as:
The state where the individual is registered to vote.
The state where the individual owns real property.
The state the individual considers their permanent home and intends to return to - domicile is based on intent and is the primary basis for a state to impose income tax on all worldwide income.
The state where the individual spent the most days during the year.
Explanation
Domicile is the legal concept of permanent home combined with intent - the primary test for state income tax jurisdiction over worldwide income. Answer C is correct. Days alone (A) may create statutory residency but not domicile. Property ownership (B) is one factor but not definitive. Voter registration (D) is evidence of intent but not the definition of domicile.
A state may tax a nondomiciliary individual as a 'statutory resident' when:
The individual is domiciled in any of the 50 states.
The individual owns a vacation home in the state.
The individual maintains a permanent place of abode in the state AND spends more than 183 days in the state during the year - both conditions must be met to establish statutory residency.
The individual earns any income from sources within the state.
Explanation
Statutory residency (distinct from domicile) requires both a permanent place of abode AND more than 183 days in the state. Answer D is correct. Vacation homes (A) alone don't create statutory residency. Domicile elsewhere (B) is the basis for nondomiciliary taxation. In-state income (C) creates source-based taxation, not residency.
A U.S. citizen who lives abroad and earns foreign-source income may exclude a portion of foreign earned income under Section 911 if they meet:
Either the bona fide residence test (established resident of a foreign country for a full tax year) or the physical presence test (present in a foreign country for 330 full days in a 12-month period).
Any presence test showing they were present abroad for part of the year.
The substantial presence test used for resident alien classification.
The domicile test by establishing a foreign domicile.
Explanation
Section 911 requires either bona fide foreign residence (full year) or physical presence abroad for 330 days in a 12-month period. Answer B is correct. Partial year presence (A) is insufficient. The substantial presence test (C) is for determining resident alien status. Foreign domicile (D) is not a Section 911 test.
A California resident moves to Nevada (which has no state income tax) in November. California may still tax income earned during the period of California residency. The income allocation is based on:
The percentage of the year spent in California.
The taxpayer's choice of allocation method.
The source of income - California taxes only California-source income.
The period of residency - California taxes worldwide income earned while a California resident (January through the move date), while Nevada taxes nothing earned during Nevada residency.
Explanation
Part-year residents are taxed on worldwide income during the period of state residency. California taxes all income during residency, not just California-source. Answer C is correct. Days-based proration (A) is a simplification but the correct rule is period-based. Source-based rules (B) apply to nonresidents. Taxpayer election (D) is not available.
A nonresident alien individual is generally subject to U.S. income tax on:
Income effectively connected with a U.S. trade or business (taxed at regular graduated rates) and U.S.-source fixed or determinable, annual or periodic income (FDAP income, taxed at 30% withholding unless reduced by treaty).
Only earned income from U.S. employers.
Worldwide income, the same as U.S. citizens and resident aliens.
Only capital gains from U.S. sources.
Explanation
Nonresident aliens are taxed on ECI at regular rates and FDAP income at 30% (or lower treaty rate). Answer D is correct. Worldwide income (A) applies to citizens and residents. Earned income only (B) ignores FDAP income. Capital gains from U.S. sources are generally not taxed unless ECI or from U.S. real property (C).
A nonresident alien sells U.S. real property. Under FIRPTA (Foreign Investment in Real Property Tax Act), the transaction:
Is taxed at the 30% FDAP withholding rate.
Is exempt from U.S. tax since the seller is a nonresident alien.
Is subject to U.S. income tax - FIRPTA treats gains from U.S. real property interests as ECI, and requires the buyer to withhold 15% of the amount realized as a prepayment of the seller's tax.
Is tax-free for foreign sellers as long as they hold the property more than one year.
Explanation
FIRPTA subjects U.S. real property gains to U.S. tax as if they were ECI, with 15% withholding by the buyer. Answer B is correct. U.S. real property sales are subject to U.S. tax (A). FIRPTA uses the graduated rates (not 30% FDAP) (C). No tax-free holding period applies (D).
The concept of 'source of income' is important for nonresident aliens because:
Nonresident aliens are generally taxed only on U.S.-source income (FDAP at 30%) and income effectively connected to a U.S. business - foreign-source income not connected to U.S. business is generally not taxed.
Source rules determine whether income is taxed at the capital gains rate or ordinary income rate.
Source rules apply only when the nonresident alien has dual citizenship.
All income earned by a nonresident alien working in the U.S. is U.S.-source income.
Explanation
Income source determines U.S. tax exposure for nonresident aliens - U.S.-source FDAP and ECI are taxed; foreign-source income not connected to U.S. business generally is not. Answer A is correct. Source depends on the nature and location of income, not just where the person works (B). Source rules don't determine rate type (C). Source rules apply broadly, not just to dual citizens (D).
A state that uses 'domicile' as the basis for taxing an individual's worldwide income must demonstrate that:
The individual filed a tax return in that state.
The individual's domicile is in that state - established by physical presence combined with intent to make it their permanent home with no present intention of leaving.
The individual earned income within the state's borders.
The individual has a bank account or investments in the state.
Explanation
Domicile requires both physical presence and intent - it is the state the individual considers their fixed and permanent home. Answer C is correct. Filing a return (A) doesn't establish domicile. Earning in-state income (B) supports source-based nonresident taxation. Financial accounts (D) are evidence but not determinative.