The US tax system is unusual in that it taxes all Americans globally. It also sometimes places filing or reporting obligations on non-Americans, even if they live outside the US. In this article we look at what a nonresident alien is, and what US tax filing obligations they can have.
What is a nonresident alien?
A nonresident alien, sometimes referred to as a NRA, is an IRS term used to describe someone who doesn’t have American citizenship and who doesn’t meet IRS definitions of US residency status for tax purposes
Determining alien tax and residence status
Someone who isn’t an American citizen or national is described as an alien by the IRS. There are two types of aliens though – resident aliens, and nonresident aliens.
Resident aliens are non-US citizens who either have a US Green Card (and even if they live abroad), or who meet what is called the Substantial Presence Test.
The Substantial Presence Test refers to someone being physically present in the US for either at least 31 days during a tax year, or 183 days during a three consecutive year period, counting –
1 – All the days they were present in the third year, and
2 – 1/3 of the days that they were present in the second year, and
3 – 1/6 of the days that they were present in the first year.
“An alien is any individual who is not a U.S. citizen or U.S. national. A nonresident alien is an alien who has not passed the green card test or the substantial presence test.” – the IRS
All other aliens who don’t have a Green Card and don’t meet the Substantial Presence Test are considered nonresident aliens.
There are several exceptions though, notably daily commuters from a residence in Mexico or Canada, and some foreign students and teachers.
Someone can be both a resident alien and a nonresident alien in the same tax year, if they arrive to live in or depart from the US midway through a year. These people are known as Dual-Status Aliens for that year.
Do nonresident aliens have to file a US income tax return?
Nonresident aliens have to file a US income tax return in three scenarios:
1 – If they are engaged in a trade or business that takes place in the US during a year.
2 – If they have US source income that hasn’t been taxed at source.
3 – If neither of the above applies but they want to claim a US refund or US tax credits that wouldn’t otherwise have been automatically applied. This may be applicable to an alien who lives abroad but receives a salary from a US employer that is taxed at source, or who might have US property rental income, for example.
Nonresident aliens are taxed at the same rates as US citizens, but only on their US source income, not their global income.
Nonresident aliens can file Form 1040NR instead of the normal US income tax return Form 1040, which covers global income.
What about nonresident aliens married to a US citizen?
Many Americans live abroad and are married to a foreigner who is often an NRA.
It is often most advantageous for the American expat to leave their foreign spouse outside the US tax system (assuming that the foreign spouse doesn’t have any US income or business interests of their own). American expats can do this by checking ‘Married Filing Separately’ on Form 1040.
There are some circumstances in which it can be beneficial for an American and a nonresident alien to elect to file a joint US tax return though. This means that the nonresident alien is treated as if they were a US resident, having to report their worldwide income. If they have no income of their own though, it provides the American with a higher Standard Deduction, which reduces the joint US tax bill.
Filing US taxes from abroad is more complex than filing in the US, and it’s always advantageous to seek professional advice from an expat tax specialist.