Foreign nationals who come to the United States for work, study, or other reasons must understand the dual-layered nature of taxation in the country. The U.S. tax system imposes obligations at both the federal and state levels, and each has its own definition of tax residency. It is entirely possible to be classified as a nonresident for federal tax purposes while being a resident for state tax purposes. Understanding the difference between these two classifications and the rules that govern them is essential for filing accurate tax returns and remaining compliant with U.S. tax laws.
The Role of Federal and State Tax Authorities
Federal income tax in the United States is managed and collected by the Internal Revenue Service. In addition to the federal tax system, most states have their separate income tax systems, managed by state-level departments of revenue or similar authorities. Currently, 42 states, along with the District of Columbia, impose a state income tax. Each of these entities has its own residency definitions and filing requirements, which can lead to discrepancies between federal and state residency classifications. Therefore, individuals may find themselves navigating a system in which they are a resident for one set of rules and a nonresident for another.
Filing Requirements for Foreign Nationals
Foreign nationals living in the United States are generally required to file an annual federal income tax return. Whether or not they must also file a state tax return depends on the state they reside in, as well as whether they earned income from within that state. Before filing any returns, non-citizens must determine their federal and state residency status. This status affects the type of form they must use, what income must be reported, and what deductions and credits may be available.
Federal Tax Residency
At the federal level, the United States tax code draws a distinction between U.S. citizens and resident aliens on one side, and nonresident aliens on the other. The residency status determines which tax rules apply. While U.S. citizens are always treated as tax residents, non-citizens must qualify for resident status under either the green card test or the substantial presence test. If they do not qualify under either, they are considered nonresident aliens.
The Green Card Test
The green card test is one of the two methods the IRS uses to determine residency status. It is based on immigration status rather than physical presence. An individual passes the green card test if they have been granted lawful permanent residence in the United States. This is evidenced by the issuance of Form I-551, commonly known as a green card. Individuals who qualify under this test are considered residents for federal tax purposes from the year they first received the green card, regardless of the amount of time they physically spent in the U.S. during that year.
The Substantial Presence Test
The substantial presence test is the second method used to determine whether a non-citizen qualifies as a resident for tax purposes. It is based on the number of days a person is physically present in the U.S. over three years, including the current tax year. To meet the substantial presence test, an individual must have been present in the U.S. for at least 31 days during the current year and a total of 183 days over the current year and the previous two years. The calculation includes all days present in the current year, one-third of the days present in the previous year, and one-sixth of the days present two years ago.
Exempt Individuals and Exceptions to the Substantial Presence Test
Certain foreign nationals are temporarily exempt from counting days of physical presence toward the substantial presence test. This typically includes students, teachers, researchers, and trainees on specific visa types. For example, individuals on F-1 or J-1 student visas are exempt from counting days for the first five calendar years they are present in the U.S. This means they are generally considered nonresident aliens during that period. Scholars, teachers, and researchers on J-1 visas are exempt from counting days for the first two calendar years. Once these exemption periods are over, they must begin counting days under the substantial presence test to determine their status.
Examples of Residency Transitions
A foreign student who arrives in the U.S. on an F-1 visa in 2020 is considered a nonresident alien for federal tax purposes for the first five years, until the end of 2024. In 2025, the student begins counting days toward the substantial presence test. If the student is present in the U.S. for at least 183 weighted days as calculated by the IRS formula, they will be considered a resident alien for federal tax purposes in 2025. Similarly, a J-1 researcher who arrives in 2022 is a nonresident alien for 2022 and 2023. In 2024, the researcher starts counting days, and if they pass the test, they become a resident alien for 2024.
Residency and Visa Categories
The tax residency status of a foreign national often depends on the type of visa under which they are admitted to the U.S. Students on F-1 and J-1 visas, researchers on J-1 visas, and exchange visitors fall under special rules that delay their transition to resident status. Other visa categories may not carry similar exemptions. For instance, individuals on H-1B work visas begin counting days toward the substantial presence test immediately upon entering the U.S. Their status must be evaluated annually to determine whether they meet the test for that year.
State Tax Residency
Unlike the federal government, each state has its own rules for determining tax residency. These rules vary widely and are based on different factors such as domicile, physical presence, financial ties, and personal connections. As a result, an individual who is a nonresident alien at the federal level may still be considered a resident by the state in which they live or work. This dual-status situation can make tax filing more complex and may require submitting both resident and nonresident returns.
Common Criteria for State Residency
Although the specifics vary, many states use similar factors to determine whether an individual qualifies as a resident. Domicile is one of the most common criteria. A domicile is a person’s fixed, permanent, and principal home to which they intend to return after temporary absences. Other states rely heavily on physical presence and may classify anyone who spends more than a certain number of days in the state as a resident. Additional factors may include voter registration, driver’s license registration, property ownership, and the location of family members. These criteria allow a state to assert residency even if the individual is a nonresident alien federally.
Dual Status Complications
Because of these differing definitions, it is not uncommon for a person to be a nonresident alien for federal purposes but a resident for state purposes. This may result in the need to file a resident state tax return and a nonresident federal return. In some situations, the individual may also need to file returns in multiple states if they lived in one state but earned income in another. States that allow for part-year residency status add a layer of complexity. Understanding how each state defines and applies residency is crucial to filing correctly and avoiding penalties.
The Role of Domicile in State Residency
Domicile plays a central role in determining state residency. It is defined as the place where an individual has their permanent home and intends to return whenever absent. A person can only have one domicile at any given time, even if they have homes in multiple states or countries. If a state determines that an individual’s domicile is within its borders, it will typically classify that person as a resident for tax purposes, regardless of their federal tax status or how much time they spent in the state during the year.
State Residency Based on Day Count
Some states base residency status purely or partially on the number of days an individual is present in the state. For instance, a state may presume residency if an individual spends more than 183 days within its borders during a calendar year. In these cases, maintaining a domicile outside the state may not be sufficient to avoid state residency classification if the day count threshold is exceeded. Day counting rules are strict, and even partial days or overnight stays may be included.
Situations Leading to Mismatched Residency
There are many scenarios where a person may end up with different residency statuses at the state and federal levels. For example, a foreign student who has not yet met the substantial presence test for federal purposes may still be classified as a resident in a state where they rent an apartment, work part-time, and attend school. Another example is a foreign researcher on a J-1 visa in their second year of residence. They are a nonresident for federal tax purposes, but the state may determine they are a resident based on physical presence and economic ties. These mismatches are not errors, but rather a reflection of how differently residency is determined by different tax authorities.
Complications from Living and Working in Different States
For individuals who live in one state and work in another, the residency situation becomes even more complicated. Many states require income to be reported and taxed if it is earned within the state, regardless of where the taxpayer lives. This may result in an individual needing to file two separate state tax returns: one as a resident and one as a nonresident. Each state has its own rules on how credits for taxes paid to other states are handled, and navigating these rules can be confusing without proper guidance.
Part-Year Residency Status
Some states allow for a third classification beyond resident and nonresident: part-year resident. This applies to individuals who move into or out of a state during the tax year. The rules vary, but in general, part-year residents are required to report and pay tax only on income earned during the period they were residents of that state. If a person lives in a state for part of the year and qualifies as a resident during that time, they may need to file as a part-year resident and report income accordingly.
Residency and State-Specific Guidance
Because of the wide variation in residency rules among states, determining your residency status requires state-specific analysis. Some states provide publications or online tools to help residents determine their status. In many cases, taxpayers may need to consult state tax instructions, seek help from tax professionals, or use specialized software to ensure they are classified correctly and that the proper forms are filed.
Impact of Mismatched Residency on Tax Filing
When your federal and state residency statuses differ, it can create confusion during tax season. Understanding how to navigate the requirements of both the IRS and your state’s tax authority is critical to filing accurate returns and avoiding penalties. If you are a nonresident alien for federal tax purposes but are considered a resident by your state, you may need to complete entirely different forms and provide different types of documentation. These differences can impact your tax liability, refund eligibility, and the types of deductions and credits you may claim.
Filing a Federal Tax Return as a Nonresident Alien
If you are classified as a nonresident alien for federal tax purposes, you are required to file a specific form designed for nonresidents. This form is used to report income earned from U.S. sources, and certain deductions available to resident taxpayers are not available to nonresidents. Nonresident aliens cannot file a joint return with a spouse unless they make an election to be treated as a resident, which may not be advantageous. Additionally, nonresident aliens are taxed differently from residents, particularly when it comes to passive income, such as interest and dividends. These income types may be subject to a flat rate of withholding with no allowance for deductions.
State Residency and Its Effect on State Tax Filing
If the state in which you live or work considers you a resident, it generally requires that you report your worldwide income, not just income earned in that state. In contrast, nonresidents are typically only taxed on income that is sourced from within the state. This distinction becomes especially important when you have foreign income, such as money from overseas bank accounts or investments. If your state treats you as a resident, you may be obligated to report and pay taxes on that income even if you are not subject to federal taxation on it due to your nonresident status.
When You Are a Resident for State but Not Federal Purposes
One of the most common situations for foreign nationals is being considered a nonresident alien for federal purposes but being classified as a resident for state tax purposes. This scenario may arise if you have lived in a state for a significant portion of the year, maintained a home there, worked part-time, or were physically present for more than 183 days. The state may treat you as a resident due to these factors, even if you do not meet the federal substantial presence test or hold a green card. In this case, you must file a resident state tax return and a nonresident federal return. Your state return may require you to include income that is not taxable on the federal return, including foreign earnings.
Understanding Domicile Versus Physical Presence
State residency laws often rely on two key principles: domicile and physical presence. Domicile refers to your permanent legal residence—the place you consider your true home. You can have only one domicile at any given time. Physical presence refers to the number of days you spend in a state during the tax year. Even if your domicile is in another country or another state, you may still be classified as a resident of a particular state if you exceed a certain number of days of physical presence. States may use either or both of these standards to determine residency.
Establishing or Changing Domicile
Establishing domicile in a state typically involves more than simply being present there. It includes actions such as signing a lease or purchasing a home, registering to vote, obtaining a driver’s license, enrolling children in school, and relocating personal belongings. To change your domicile from one state to another, or from a state to a foreign country, you must take clear steps that demonstrate your intent to abandon your previous domicile and establish a new one. These steps may be scrutinized by state tax authorities, particularly if you are claiming that you moved to avoid taxes.
States with Aggressive Residency Rules
Some states are known for aggressively asserting tax residency over individuals who maintain even minimal ties. For example, a person who maintains a vacation home in a state or returns there for visits may still be considered a resident by that state if they exceed a certain number of days or appear to maintain a permanent connection. New York and California are two states that apply particularly strict rules, often relying on both domicile and statutory residency criteria. In these states, individuals who spend more than 183 days per year in the state and maintain a permanent place of abode may be considered residents regardless of where their federal residency lies.
Foreign Nationals and State Residency Presumptions
Many states presume residency if you are present in the state for more than half of the year. Even if you are an international student, teacher, or researcher who is exempt from the federal substantial presence test, the state may still count your days of presence and apply its own residency rules. This creates a situation where you are required to file a state tax return as a resident and report all income, even though you are not required to do so on your federal return. Understanding these presumptions and how they interact with your visa status is crucial for avoiding mistakes.
Part-Year Residents and Multiple State Returns
Foreign nationals who move between states or enter or leave the U.S. during the tax year may be considered part-year residents. In this case, the tax year is divided into periods of residency and nonresidency. You will be required to file a part-year resident return in the state where you lived and a nonresident return in any other state where you earned income. You must allocate your income according to the time you spent in each state and according to where the income was earned. These situations can be especially complex for individuals who travel frequently, move for work or study, or hold multiple short-term housing arrangements throughout the year.
Filing Dual State Tax Returns
In some cases, you may be required to file tax returns in two states: one as a resident and one as a nonresident. This often happens when you live in one state but commute to another for work. The state where you work may require you to file a nonresident return to report income earned within its borders. Meanwhile, the state where you live will require a resident return that includes all income from all sources, including the income earned in the other state. Some states allow tax credits to avoid double taxation, but these credits are not uniform and must be applied carefully.
Residency for Students and Scholars
Students and scholars on nonimmigrant visas such as F-1 and J-1 often face particularly confusing residency issues. Federally, they are exempt from the substantial presence test for a limited number of years, which generally makes them nonresident aliens. However, the state where they live may not recognize this exemption and may still apply its own rules to determine residency. If the student or scholar rents housing, enrolls in an educational institution, opens a bank account, or begins working, the state may treat them as a resident. In such cases, students and scholars must prepare both a federal nonresident return and a resident state return, which may include foreign income and different rules for credits or deductions.
Treatment of International Income by the States
Unlike the federal government, which generally excludes foreign-source income for nonresident aliens, states that classify you as a resident may require you to report your global income. This includes wages from foreign employers, investment income from overseas accounts, and even rental or business income from property in your home country. States do not necessarily follow the federal definitions of taxable income, and state rules often lack treaties or exclusions that would otherwise apply at the federal level. As a result, taxpayers can be surprised by unexpected state tax liabilities based on income that is not taxable federally.
Withholding Issues and Refunds
Mismatched residency statuses can also lead to issues with withholding. Your employer may withhold taxes based on your federal status, treating you as a nonresident and not withholding state income tax. However, if the state later determines that you were a resident and owed tax, you may receive a tax bill. Conversely, if you were over-withheld because the state treated you as a resident but you were only a nonresident, you may be entitled to a refund. Keeping proper records, including documentation of your visa status, travel dates, and domicile intentions, is essential for resolving such disputes.
Common Mistakes in Residency Determination
Many taxpayers make mistakes when determining their residency status, particularly foreign nationals unfamiliar with U.S. tax rules. Common errors include assuming that federal and state definitions are the same, failing to count days correctly under the substantial presence test, overlooking state-specific residency factors, and misunderstanding the effect of their visa status on their tax obligations. Mistakes in determining residency can lead to incorrect filings, missed tax benefits, or underpayment penalties. It is important to review the rules carefully, seek professional advice if needed, and use accurate tools for determining your tax status.
Importance of Accurate Residency Classification
Accurately determining your federal and state residency status is the foundation of proper tax reporting. It affects which forms you must file, what income you must report, what deductions and credits you can claim, and whether you are subject to withholding. Mismatched residency status is not necessarily a problem if you understand the rules and file accordingly. However, failure to recognize the difference can result in incorrect filings, penalties, audits, and the loss of benefits. By understanding both federal and state definitions of residency, you can ensure compliance and avoid complications.
Preparing Tax Returns with Conflicting Residency
When preparing your tax returns with conflicting federal and state residency statuses, you must ensure that each return reflects the correct classification. Your federal return should reflect your nonresident or resident alien status according to the green card test or substantial presence test. Your state return should be prepared based on that state’s definition of residency, including your domicile, physical presence, and other ties. You may need to allocate income differently, attach statements explaining your situation, and maintain documentation that supports your residency position in each case.
Practical Implications of Dual Residency Classifications
When a person is classified differently at the federal and state levels for tax purposes, it creates practical challenges during tax preparation and throughout the year. Understanding how to manage dual residency status can help prevent complications and ensure full compliance. One of the most important steps is to prepare separate strategies for each tax return, treating them as governed by separate legal frameworks. While the federal government considers your immigration and physical presence status, the state may be more focused on your daily life, property, and intentions.
Documentation Required to Prove Residency
Tax authorities may request documentation to verify your residency claims. If you are filing as a nonresident for federal purposes and a resident for state purposes—or vice versa—you should maintain evidence to support both positions. For federal tax residency, key documentation includes your visa type, entry and exit records from the United States, and any correspondence from immigration authorities. Travel logs, I-94 records, and academic enrollment confirmations are often used to demonstrate compliance with visa terms and support substantial presence calculations. For state residency, authorities may request copies of leases, utility bills, bank statements, employment contracts, vehicle registration, or state ID cards that demonstrate your ties to the state. The burden is on the taxpayer to prove they meet the criteria for each residency classification.
Common Audit Triggers Related to Residency
Tax residency mismatches may trigger audits if the information submitted to different tax authorities does not align. For example, if you claim to be a nonresident at the federal level and report only limited U.S.-source income but submit a state return declaring global income, this inconsistency may be flagged. Audits may also arise if the state receives wage information from employers that conflicts with your claimed residence, especially when you fail to report income from other states. Other red flags include listing addresses in multiple states, declaring foreign income inconsistently, or claiming tax credits that require resident status while filing as a nonresident elsewhere.
Filing Strategy for Dual Residency Scenarios
When preparing your returns, use the correct forms for each type of residency. Nonresident aliens file a different form for federal tax returns than resident aliens or U.S. citizens. These forms include separate instructions and eligibility for deductions. If your state classifies you as a resident, you will use that state’s resident return form and report your worldwide income accordingly. When your state does not follow the federal definition of residency, do not assume you can simply copy your federal information over. Each return should be prepared independently, according to the rules of the respective tax authority.
Calculating Income Allocation Between Jurisdictions
In situations involving multiple states or mismatched residency, income must be properly allocated. Federal tax law generally requires nonresident aliens to report only U.S.-source income, while state tax law may require residents to report all income, including foreign earnings. If you earn income while working remotely for a foreign employer but reside in a U.S. state that taxes global income, that income must be included on your state return even if it is not taxable federally. If you move between states during the year or live in one state and work in another, you must allocate wages and other earnings based on the source of income and time spent in each state. Accurate allocation ensures correct taxation and reduces the risk of double taxation.
Claiming Credits for Taxes Paid to Other States
When you are taxed by two different states on the same income, you may be eligible to claim a credit for taxes paid to another state. This is common when you live in one state but work in another, or when your state of residence taxes global income that overlaps with income taxed elsewhere. Each state has its own rules on how to apply these credits, and the method for computing the credit varies. Some states limit the credit to certain income types or require additional documentation. Carefully completing these credit sections is important to avoid overpayment or tax disputes. Keep copies of all relevant returns and tax payments made to the other state.
Handling Multiple State Returns with Different Statuses
Foreign nationals often find themselves needing to file more than one state tax return. If you worked in one state and lived in another, each state may require its return. The state where you earned income will require a nonresident return, while your state of residence may require a resident or part-year return. Depending on the timing of your move, you may need to file as a part-year resident in one or both states. Each return must reflect income accurately, and you may be eligible for credits or exemptions to avoid double taxation. Be sure to read the instructions for each state carefully, as the filing rules differ significantly.
Examples of State Residency Rules That Differ from Federal
To illustrate the contrast, consider a student in Massachusetts on an F-1 visa. Under federal rules, they are a nonresident alien due to the five-year exemption from the substantial presence test. However, Massachusetts may treat them as resiresidentssthey live there for more than 183 days, maintain a lease, and are enrolled in an educational institution. In New York, residency can be established either by maintaining a permanent place of abode and spending more than 183 days in the state or by establishing domicile. In California, where domicile plays a dominant role, even temporary absences do not necessarily sever residency. These examples show that relying solely on federal rules may lead to errors when filing state returns.
Tax Treaties and Their Influence on Residency
The United States maintains income tax treaties with various countries, and these treaties can affect how income is taxed and whether exemptions apply. However, treaties primarily affect federal taxation and do not automatically apply to state taxes. Even if you claim a tax treaty exemption for federal income, the state may not recognize the treaty and may still tax the income. For example, scholarship income exempted from federal tax under a treaty may still be taxable by the state. Additionally, tax treaties may contain tie-breaker rules for determining residency in cases of dual residence between the U.S. and another country, but these are generally not adopted at the state level.
Employment Authorization and State Taxation
Employment in the United States typically requires work authorization, which may come with certain visa types. Whether you are working under Optional Practical Training, Curricular Practical Training, or another authorized arrangement, the wages you earn may be subject to state taxation depending on your residency classification. If your state considers you a resident, you may be taxed on all income, even from temporary or part-time jobs. If you are considered a nonresident, only wages earned within the state may be taxed. If you are working in a different state from where you live, both states may assert taxing rights, and proper documentation must be kept to show where the income was earned and which state has primary jurisdiction.
Differences in Deductions and Credits by Residency Status
Your ability to claim deductions, exemptions, and tax credits depends on your residency classification. At the federal level, nonresident aliens are generally not allowed to claim the standard deduction unless they are residents of certain countries that allow it under a treaty. Instead, they may only claim itemized deductions that are directly connected to U.S. income, such as state income taxes paid, charitable contributions, or tax preparation fees. Meanwhile, state rules vary widely. Some states allow the standard deduction regardless of residency status, while others impose limits on nonresidents or part-year residents. Credits for dependents, education, or earned income may also be limited based on your classification.
Social Security and Medicare Tax Considerations
Another area affected by residency status is Social Security and Medicare tax withholding. Generally, nonresident aliens on certain visas are exempt from paying these taxes for a limited time. For example, F-1 and J-1 visa holders are exempt from these taxes for a certain period under federal law. However, if the state uses a different standard to classify you as a resident and you are employed, the rules surrounding payroll taxes may become more complicated. Employers must apply the proper withholding rules, and errors in classification can lead to overpayment or underpayment. In some cases, nonresident aliens may need to request a refund from the IRS or the Social Security Administration for withheld taxes.
Residency Planning for Foreign Nationals
For those who anticipate being in the U.S. for an extended time, careful planning around residency is important. Understanding how many days you are in the U.S. each year and how that affects your status under the substantial presence test can help you manage your transition from nonresident to resident status. Similarly, knowing what actions might establish domicile in a state can help you avoid being taxed by a state where you do not intend to reside long-term. Planning includes keeping detailed travel logs, maintaining foreign ties if you intend to return, and consulting tax professionals who can offer state-specific advice.
Tax Software and Residency Calculations
Many taxpayers use tax preparation software to complete their returns, but not all programs are designed to handle the complexities of dual residency status. Some software may not offer separate options for state and federal residency, or they may automatically copy information from one return to the other without accounting for status differences. It is important to use software that is tailored for international taxpayers and allows for separate classification of state and federal residency. Entering incorrect information into generic tax programs can result in rejected filings, incorrect tax liabilities, or missed credits. When in doubt, manual preparation or professional assistance may be more appropriate.
Recordkeeping for Multi-Jurisdiction Compliance
Maintaining good records is essential when filing taxes with different residency statuses. Keep copies of your visa documents, I-20 or DS-2019 forms, travel logs, employment authorizations, pay stubs, state ID cards, and any state-specific documents such as leases, utility bills, or school records. These documents not only support your residency position but also help in preparing accurate returns, especially when allocating income or claiming credits. In the event of an audit, these records will be necessary to defend your residency classification and avoid penalties.
Real-Life Case Studies of Residency Mismatch
To understand how dual residency status works in real life, consider a few case studies. These examples reflect common scenarios experienced by foreign nationals and help illustrate how the rules are applied in practice. A graduate student from India entered the United States on an F-1 visa in 2021 to pursue a PhD in Illinois. According to federal rules, the student is a nonresident alien for the first five calendar years due to the substantial presence exemption. However, because she rents an apartment, registers her car in Illinois, and resides in the state for more than 183 days each year, Illinois treats her as a full-year resident for state tax purposes. She must file a federal nonresident return and a state resident return, reporting her U.S. income on both but excluding foreign bank interest from her federal return. In another example, a postdoctoral researcher on a J-1 visa lives in Massachusetts. This visa category provides only a two-year exemption from the substantial presence test. He arrives in 2020 and becomes a resident alien for federal purposes in 2022. Massachusetts, where he rents housing and works at a university, treats him as a resident for state tax purposes during the entire period. His federal and state residency statuses align starting in 2022, but before that, he wass a nonresident alien federally and a resident of Massachusetts.
The Role of Visa Expiry and Status Changes
Visa status changes can also affect residency. A student who changes from F-1 to H-1B status begins counting days under the substantial presence test immediately upon the switch, often becoming a resident for federal tax purposes within the same calendar year. States do not always take visa changes into account and may rely instead on physical presence or domicile. As a result, a taxpayer may be considered a nonresident federally during a transition year but a resident for state purposes the entire year. Understanding how immigration status and tax status align is essential for accurate reporting.
Strategic Timing of Residency Status
Some taxpayers can manage their residency status through careful planning. For example, by timing their arrival in the United States late in the year, they may avoid meeting the substantial presence test and remain nonresident aliens for that year. This may offer tax advantages, such as limiting the taxation of global income. On the state side, delaying the establishment of domicile by staying with friends, not signing a lease, or not accepting in-state employment can help avoid triggering residency in the state. However, strategic planning must comply with the law and reflect the taxpayer’s actual living situation. Misrepresenting facts or manipulating documents to avoid residency may result in legal consequences.
Dual-Status Year and Transition Considerations
When transitioning between residency statuses, you may experience a dual-status tax year. This occurs when you are a nonresident alien for part of the year and a resident alien for the remainder. During such years, you may need to file both nonresident and resident forms for federal taxes, attaching a statement explaining your situation. Most states do not recognize dual-status years in the same way and require you to file either as a resident, nonresident, or part-year resident. Coordinating these filings can be complex, especially when income is earned throughout the year. Allocating income to the proper periods and jurisdictions requires accurate records and careful tax preparation.
State Tax Liability in Absence of Federal Tax
It is possible to have a state tax liability even when no federal tax is due. This often occurs when a state treats you as a resident and taxes your worldwide income, including income that is exempt or excluded at the federal level. For example, certain scholarship or fellowship income may be exempt under a treaty or federal law but is fully taxable at the state level. Additionally, foreign income that is not taxable federally due to nonresident alien status may still be taxable under state law. This can be surprising to taxpayers and may result in a state tax bill even when they owe nothing to the federal government.
Tax Filing for Dependents and Family Members
When a taxpayer’s family members have different residency statuses, additional complications can arise. For instance, a dependent spouse may have different visa exemptions or travel histories that affect their federal residency status. A spouse who is treated as a resident under the substantial presence test may be eligible to file a joint federal return, but if the other spouse is a nonresident alien, the couple must either elect to file jointly or file separately. At the state level, some states require married couples to use the same residency classification for both spouses, while others allow mixed-status returns. The rules for dependents, including children, can also differ. Some states allow personal exemptions or credits for dependents even if they are not eligible on the federal return, depending on the family’s residency and income level.
Refunds, Overpayments, and Residency Changes
When taxpayers incorrectly file using the wrong residency status, they may either underpay or overpay their taxes. If the error results in an overpayment, it may be possible to amend the return and claim a refund. Most states have statutes of limitations for refund claims, usually between two and four years. If you have moved between states or changed your residency status mid-year, you may be entitled to a refund of overpaid taxes, especially if you reported more income than required. On the other hand, if you mistakenly filed as a nonresident when you were a resident, you may owe additional taxes and interest. States may audit these filings and request proof of residency classification.
How States Audit Residency
States use various tools to audit and enforce residency laws. These include analyzing tax return data, reviewing driver’s license records, monitoring lease agreements, and comparing reported income to third-party documents. Some states even request bank and credit card statements to determine the number of days a taxpayer was physically present in the state. If the state believes you have improperly claimed nonresidency, it may initiate an audit and require detailed records to prove your status. The burden of proof is generally on the taxpayer, and failure to provide adequate documentation may result in the imposition of additional taxes, penalties, and interest.
Planning for Exit or Relocation
When planning to move from a state or leave the United States, consider how this affects your residency status and tax obligations. States may continue to treat you as a resident until you have established a new domicile elsewhere. Simply leaving the state does not end residency unless you also sever other ties, such as closing bank accounts, changing your driver’s license, and establishing housing and employment in the new location. If you are leaving the U.S., notify your state’s tax authority if required, and csiderconsiderlobal income may still be taxed by the state if they consider you a domiciliary. Filing a final return and providing a forwarding address may help demonstrate your intent to terminate residency.
Maintaining Nonresident Status Intentionally
In certain cases, individuals may wish to maintain nonresident status to avoid state taxation. This is common among students, researchers, and temporary workers who plan to return to their home country. To maintain nonresident status, avoid actions that indicate an intent to remain in the state, such as purchasing property, changing immigration status, or applying for state benefits. Limit your physical presence in the state, maintain a home address abroad, and avoid claiming in-state tuition or other residency-based benefits. Documentation such as a lease in your home country, active bank accounts abroad, and round-trip travel records can help support your nonresident position if questioned.
State Taxation of Investment and Passive Income
State taxation of investment income can differ significantly based on residency. Residents are usually required to report all investment and passive income, including dividends, capital gains, and interest from foreign and domestic sources. Nonresidents, on the other hand, are typically only taxed on investment income that is effectively connected to a business or property located in the state. If your residency status differs federally and at the state level, you may find that income excluded on your federal return is included on your state return. This is particularly important for foreign nationals who maintain investment portfolios in their home countries or who invest in U.S. property while living in a different state.
Working Remotely Across State Lines
With the increase in remote work, many taxpayers now earn income in one state while living in another. This can create multiple residency issues and obligations. If your employer is located in a state where you do not live, you may be required to file a nonresident return in the work state and a resident or part-year return in the state where you reside. Additionally, states may not always agree on where income was earned, especially if the taxpayer worked in multiple locations. Some states have reciprocity agreements that simplify filing in these situations, but others do not. Proper allocation of income and a clear understanding of the tax rules in each state are essential.
Handling Residency During Gaps Between Visas
Residency status can also be affected by gaps between visa categories. If a person finishes their study program and remains in the U.S. on a grace period or changes status to a visitor visa, the exemption from the substantial presence test may no longer apply. This can result in an unexpected change in federal residency status. Meanwhile, the state may continue to treat the individual as a resident based on their continued presence and other connections. During these transition periods, it is essential to carefully monitor days of presence, housing arrangements, and financial activity to ensure that tax filings remain accurate and compliant.
Coordination Between Federal and State Filings
Even though federal and state definitions of residency may differ, it is important that your filings be internally consistent and properly coordinated. Report income on the correct forms, include supporting schedules where required, and clearly explain any differences in residency classification. For example, if you claim nonresident status federally but file a resident return in your state, attach a statement to each return clarifying your position. Consistency in addresses, dates, and sources of income helps reduce the chance of triggering audits or rejections. Where applicable, use tax software or professional services that understand how to handle dual-status filings.
Final Thoughts on Residency Differences
Understanding the difference between federal and state tax residency is crucial for every foreign national in the United States. While it may seem confusing or contradictory at first, the logic behind each system reflects its purpose. Federal residency is based on immigration law and physical presence, while state residency focuses on where you live, work, and maintain personal and financial ties. These two systems serve different functions and are applied independently. Recognizing this separation allows you to correctly file your taxes, comply with all legal obligations, and avoid costly mistakes.
Conclusion
While it is entirely possible and legal to have different residency statuses at the federal and state levels in the U.S., these differences create a complex tax landscape that requires careful attention. Whether you are a student, scholar, worker, or new immigrant, you must be aware of how your visa status, physical presence, domicile, and financial ties impact your residency classification. File accurate and timely tax returns for both federal and state purposes, understand what income must be reported, and keep documentation to support your status. By doing so, you can ensure compliance, minimize your tax burden, and avoid complications with tax authorities.