Resident Alien

A Resident Alien is an individual who is not a citizen of a country but resides there and is treated as a resident for tax purposes. In the world of investing, this term is most frequently encountered in the context of the United States tax code. Unlike tourists or temporary visitors, a resident alien is subject to U.S. income tax on their worldwide income, just like a U.S. citizen. This has enormous implications for how you manage your investments, as everything from the profit on a stock sold in your home country to the interest earned in a foreign bank account can fall under the watchful eye of the Internal Revenue Service (IRS). An individual typically qualifies as a resident alien for U.S. tax purposes in one of two ways: by passing the Green Card Test (meaning they are a lawful permanent resident) or by meeting the criteria of the Substantial Presence Test, which is based on the number of days they are physically present in the United States over a three-year period.

Understanding your residency status is not just a legal formality; it's a critical component of your financial strategy. The distinction between a resident alien and a non-resident alien can mean the difference between a manageable tax bill and a financial nightmare.

• Tax on Worldwide Income: This is the big one. If you are a resident alien, the IRS wants to know about the dividends from your German stocks, the capital gains from your London flat, and the interest income from your Japanese bonds. You are taxed on your global investment portfolio, not just your U.S.-based assets. A non-resident alien, by contrast, is generally only taxed on their U.S.-sourced income.
• Capital Gains: For a resident alien, long-term capital gains on investments held for more than a year are taxed at preferential rates, similar to a U.S. citizen. However, for a non-resident alien, U.S. capital gains are often (but not always) exempt from tax, provided they are not connected to a U.S. business. This is a massive difference that can heavily influence when and where you decide to sell assets.
• Estate and Gift Taxes: The rules for resident aliens regarding the estate tax are much more generous than for non-resident aliens. A resident alien enjoys the same substantial lifetime exemption as a U.S. citizen, meaning a large portion of their estate can be passed on tax-free. A non-resident alien has a much, much smaller exemption for their U.S.-based assets, which can be a brutal surprise for their heirs.

The IRS uses two primary tests to determine if you are a U.S. resident alien for a given calendar year.

This one is simple. If you were a lawful permanent resident of the United States at any time during the calendar year (i.e., you have a “green card”), you pass the test and are considered a resident alien.

This is a mathematical test based on your physical presence in the U.S. You meet this test if you were physically present in the United States for at least:

1. 31 days during the current year, and
2. 183 days during the 3-year period that includes the current year and the 2 years immediately before that.

The 183-day total is a weighted calculation:

• Step 1: Count all the days you were present in the current year.
• Step 2: Add 1/3 of the days you were present in the first year before the current year.
• Step 3: Add 1/6 of the days you were present in the second year before the current year.

Example: Let's say you were in the U.S. for 120 days in 2024, 150 days in 2023, and 180 days in 2022.

1. 2024: 120 days
2. 2023: 150 days x (1/3) = 50 days
3. 2022: 180 days x (1/6) = 30 days
4. Total: 120 + 50 + 30 = 200 days.

Since 200 is greater than 183 (and you were present for more than 31 days in 2024), you would be considered a resident alien for 2024. Note: There are exceptions, such as for students, diplomats, and individuals who can prove a “closer connection” to a foreign country. These rules are complex, and professional advice is highly recommended.

A core principle of value investing is understanding all the variables that can affect your long-term returns. Tax is one of the biggest. Warren Buffett has often structured his investments to be as tax-efficient as possible, famously benefiting from long-term holding periods. For an investor, “resident alien” status is a giant variable that cannot be ignored. It introduces a significant layer of tax drag on your global portfolio, potentially eroding the power of compounding. A prudent investor, especially one living an international life, must proactively manage their residency status. This isn't about evading taxes, but about understanding the rules of the game so you can plan accordingly. Just as you wouldn't buy a business without understanding its balance sheet, you shouldn't build an investment portfolio without understanding your tax balance sheet. Your residency status is the very first line item.