Avoiding the United States Worldwide Tax Regime
The United States taxes its domestic corporations, citizens and “resident aliens” on a worldwide basis that is, such persons pay U.S. income tax on all of their income earned anywhere in the world (with an allowance for a foreign tax credit to avoid double taxation). It is easy for a Korean business entity to avoid this worldwide regime: don’t incorporate a subsidiary in any American State. It is also easy for a Korean individual to avoid becoming a U.S. citizen: don’t. But the rules regarding resident aliens are a little tricky, and are the focus of this article.
There are two primary ways by which one becomes a U.S. resident alien: the Green Card Test and the Substantial Presence Test. Under the Green Card Test, one is automatically a resident alien if he becomes a lawful permanent resident of the United States. A lawful permanent resident is an individual who has been granted the privilege of residing permanently in the United States as an immigrant under U.S. immigration laws. Colloquially, this means the person has received a “Green Card.”
Under the Substantial Presence Test, a formula is applied to see if the person has spent enough time in the United States to be taxed as if he were a citizen. The formula is as follows:
Days in U.S. in Current Year+ 1/3 of Days in U.S. in Preceding Year+ 1/6 of Days in U.S. in 2nd Preceding Year
If the sum of the days in the formula equals or exceeds 183, and the person was in the U.S. for at least 31 days in the Current Year, then he is a resident alien for the Current Year. By way of example, if one spent 100 days in the U.S. in 2013 150 days in the U.S. in 2012 and 180 days in the U.S. in 2011 (and no days prior to 2011), he would not be a resident alien in 2011 (180 + 0 + 0 < 183) he would be a resident alien in 2012 (150 + 60 + 0 &ge 183) and he would not be a resident alien in 2013 (100 + 50 + 30 < 183). Those who like math can deduce that one can spend 121 days each year in the U.S. without becoming a resident alien. Although I do not know for certain, it appears that golfer K.J. Choi meets the Substantial Presence Test, whereas Inbee Park does not, because many women’s golf tournaments are played outside the U.S.
There are a number of quirky rules that apply in counting days: (a) diplomats, whether working for Korea or an international organization, and their immediate family are not treated as being in the United States (persons with “A” or “G” visas) (b) teachers and trainees (and their immediate family) are not treated as being in the United States (persons with “J” or “Q” visas) and (c) students (and their immediate family) are not treated as being in the United States (persons with “F” or “M” visas). However, as a general matter, teachers and trainees can only use this exception for two years, and students can only use it for five years. In addition, one is not considered in the U.S. if: (d) he is travelling between two foreign points and is in the U.S. for less than 24 hours (for example, someone flying from Seoul to Mexico City, with a stop in Los Angeles) and (e) if one is unable to leave the U.S. because he became ill, his extra days in the U.S. are not counted.
There is also an important exception for those who are in the U.S. for fewer than 183 days. If such person can establish a “closer connection” to a foreign country than to the United States, then he will not be considered a resident alien. K.J. Choi’s own website lists his residence as Dallas, Texas, so it is unlikely that he would be eligible for this exception. However, golfer Sang-Moon Bae resides in Kyunggi-do, so perhaps he is considered a nonresident alien even though he likely satisfies the Substantial Presence Test.
Avoiding the United States Worldwide Tax Regime means, generally, that one will only be taxed by the United States on dividends from U.S. corporations, gain from the sale of American real property, and compensation for services physically performed in the U.S. So, assuming that Inbee Park is not a resident alien but K.J Choi is, Ms. Park will not owe U.S. tax on her championship winnings from this year’s Honda LPGA Thailand, but Mr. Choi will owe U.S. tax if he wins this year’s Open Championship in Scotland.