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It stands to reason that those living in the US count as residents for tax purposes. But did you know that those who frequently visit for work may be subject to US taxes, too? To know exactly what your obligations are, you’ll need to understand the difference between a nonresident alien vs. a resident alien for tax purposes.
Below, we’ll walk you through the difference between a nonresident alien vs. a resident alien, what their tax and reporting obligations are, how to minimize your tax liability, and more.
Defining nonresident aliens vs. resident aliens
Who is a resident alien?
A resident alien is a non-US citizen who meets one of two tests: the Green Card Test or the Substantial Presence Test.
Whether due to their legal immigration status or the amount of time they spend in the US, resident aliens typically have stronger ties to the US. As such, they have robust tax and reporting obligations — the same ones as citizens, in fact.
Green Card Test
Anyone who is a lawful permanent resident at any time during the calendar year passes the Green Card Test. You become a lawful permanent resident after receiving a Permanent Resident Card, also known as a “green card” due to its historically green color, and then entering the U.S. with that card. While green cards have an expiration date, your tax and reporting obligations do not expire along with the card.
Note:
From an immigration perspective, you could lose your green card if you spend more than a year outside the US or establish a permanent home in another country. Again, this doesn’t automatically end your US tax obligations.
The only way your US tax obligations will discontinue is if you have your permanent residence status terminated by formally abandoning your green card. Doing so, however, can make it significantly harder to move or travel back to the US and could even trigger an expensive exit tax
Remember, US immigration law is complex. If you need advice or counsel on a specific topic, your best bet is to contact an experienced immigration attorney.
Substantial Presence Test
Even if you don’t have a US green card, you may qualify as a resident alien if you spend enough time within the US. The Substantial Presence Test confers resident alien status on anyone who is physically present in the US for at least:
- 31 days in the current year, AND
- 183 days during the period including the current year plus the two years before that, counting:
- All of the days in the current year
- ⅓ of the days in the last year
- ⅙ of the days in the year before that
Note:
Only days where you spend all 24 hours in the US count toward the Substantial Presence Test. There are also exceptions for certain extenuating circumstances. For example, days you couldn’t leave the US due to illness or days you spent on an F, J, M, or Q visa will not count.
This formula can be a bit confusing in the abstract, so let’s go over an example.
Beatriz is a Brazilian woman who has spent a lot of time in the US for work over the past three years. In year one, she spent 120 days in the US. In year two, she spent 150 days in the US. In year three — the current year — she has spent 130 days in the US.
For the purposes of the Substantial Presence Test, she has spent the following days in the US:
- Year 3: 130 days (1 x 130)
- Year 2: 50 days (⅓ x 150)
- Year 1: 20 days (⅙ x 120)
Beatriz, therefore, passes the Substantial Presence Test, since she has been in the US for:
More than 31 days in the current year (130)
At least 183 days during the current year plus the two years before that (130+50+20=200)
Nonresident alien
Anyone who doesn’t pass either the Green Card Test or the Substantial Presence Test is classified as a nonresident alien.
Example: Felix is an undergraduate student from Germany living in the US on an F-1 visa. He’s in the third year of his biomedical engineering program and has spent 60 days in the US so far this year. Last year, he spent 240 days in the US. The previous year, he spent 235 days in the US.
However, all of these days were on an F visa, which don’t count toward the Substantial Presence Test. Since Felix did not meet the Substantial Presence Test and does not hold a green card, he is a nonresident alien.
Tax implications & obligations
To stay in good standing with the US government, both resident and nonresident aliens must comply with US tax laws. Failing to do so can result in financial penalties, immigration challenges, and in extreme cases, even prison time. So, the better you understand your tax and reporting obligations, the more you set yourself up for success.
Resident aliens
As we mentioned earlier, the US generally taxes resident aliens the same way it does US citizens. They must report all worldwide income, both passive and active if it exceeds the minimum reporting threshold.
Tax rates vary depending on the type of income. Ordinary income like wages and rental income, for example, incurs a tax rate of 10% to 37% depending on overall taxable income. Short-term capital gains — aka profits from the sale of assets held for a year or less — also attract ordinary income tax rates.
Sell an asset after holding it for over a year, however, and you’ll qualify for the more favorable capital gains rate: 0%, 15%, or 20%, depending on your total taxable income.
Note:
If your finances are complex and include many different types of income, you will likely need the help of a tax professional to accurately gauge your tax liability.
Resident aliens usually report their earnings on Form 1040. Depending on their circumstances — such as if they own a business — they may need to file additional forms and schedules. Resident aliens also must often file the:
- Foreign Bank Account Report (FBAR): Mandatory for US tax residents with over $10,000 in a foreign financial account
- Statement of Specified Foreign Assets (Form 8938): Mandatory for US tax residents with over $50,000 in foreign assets on the last day of — or $75,000 at any point during — the tax year.
- Note: Thresholds increase for those who are married and filing jointly and/or living outside the US.
Nonresident aliens
In contrast to resident aliens, nonresident aliens are only subject to US taxation on their US-sourced income. A few examples of US-sourced income may include income you earn from renting out a property located in the US, dividends from a US-based company, or pension income from a US-based retirement plan.
The government categorizes this income into two different classes:
Effectively Connected Income (ECI)
ECI is income that comes directly from US trade or business. This includes regular earned income from a US employer (i.e. paychecks). You can also make an election to treat rental income from a US-based property as ECI.
The US taxes ECI at a rate of 10% to 37%, depending on overall taxable income.
Fixed Determinable Annual or Periodical (FDAP) Income
FDAP mainly refers to passive income like dividends, interest, pensions, annuities, alimony, and royalties. It can also refer to sales commissions or performance-based payments (i.e. annual bonuses).
FDAP comes with a flat tax rate of 30%, unless otherwise defined by a tax treaty — and critically, is not usually eligible for tax breaks.
Nonresident aliens’ primary tax filing is Form 1040-NR. They may need to attach additional schedules and forms according to their circumstances. That said, they are typically exempt from reports like the FBAR and Form 8938 — unless they choose to be treated as a resident for tax purposes.
Note:
Resident aliens and nonresident aliens may also be subject to — and need to file a return to report — state income taxes. Rates vary widely by state, with some (e.g. Florida, Wyoming, Alaska) imposing no income taxes. Others have high taxes, like California, whose rates max out at 13.3% for tax year 2023 and 12.3% for tax year 2024.
Dual-status aliens
It may sound strange, but it is actually possible to be both a resident alien and nonresident alien. This may happen during years in which someone:
- Arrives to the US for the first time or leaves long enough to lose their previous resident alien status)
- Changes their visa, residence status, or citizenship (for example, going from an F-1 student visa to a work visa or abandoning your green card)
In these cases, the US treats you as a resident alien for part of the year and as a nonresident alien for the other depending on which definition you met at the time.
Alternatively, you may choose to be treated as either a nonresident alien or a tax resident for the entire year when:
- You marry a US citizen or permanent resident
- You arrive in the US for the first time
- You can claim a closer connection to a country outside the US
- You’re an exempt individual (e.g. diplomat, teacher, student, researcher)
Those who are resident aliens for part of the year and nonresident aliens for the other must file a dual-status tax return.
In theory, you have to report your resident alien income on Form 1040 and nonresident alien income on Form 1040-NR. However, you can submit just one of these forms — whichever one corresponds to your status at the end of the tax year — and then include a statement for the other part.
The US tax deadline for resident aliens, nonresident aliens, and dual-status aliens alike is April 15th. If you need more time, you can file Form 4868 to receive an extension until October 15th. However, you must still pay your estimated tax bill by April 15th.
Reducing tax liability
While living, working, or doing business in the US as a foreigner may make you subject to taxes, there are ways to reduce your tax burden.
Credits, deductions, & exclusions
Resident aliens generally have access to the same tax breaks as citizens. This may include the:
- Standard deduction: $13,850 for tax year 2023, $14,600 for tax year 2024
- Child Tax Credit (CTC): Up to $2,000 in partially refundable credits per child
- Foreign Tax Credit (FTC): Gives US taxpayers dollar-for-dollar credits on any foreign income taxes they’ve paid
- Foreign Earned Income Exclusion (FEIE): Allows taxpayers who pass either the Bona Fide Residence Test or Physical Presence Test to exclude a portion of foreign-earned income from taxation: $120,000 for tax year 2023 and $126,500 for 2024.
Nonresident aliens aren’t eligible for nearly as many tax breaks as resident aliens. A few they can claim, however, include those associated with charitable contributions, casualty and theft losses, and state/local income taxes. Remember, these tax breaks can only be applied to ECI — not FDAP income.
Dual-status aliens can claim tax breaks available to resident aliens only during the portion of the year they met resident alien criteria. The rest of the time, they can only claim the limited tax breaks available to nonresident aliens.
Income tax treaties
The US has income tax treaties with dozens of countries around the world. Exact benefits vary by treaty, but generally, they aim to prevent double taxation on nationals of one country living in the other.
Most tax treaties contain a saving clause, which gives the US the right to tax its citizens as if the agreement didn’t exist. As a result, you may have better luck claiming treaty benefits in your home country than the US.
Totalization agreements
Totalization agreements may also help reduce your worldwide tax burden. These prevent nationals of one country living in the other from paying social security taxes in both countries. Because nonresident aliens usually don’t pay social security taxes (unless US wage income), this primarily benefits resident aliens.
Which country you pay social security taxes to generally depends on how long you intend to stay in the US, but varies between different Totalization Agreements:
- 5 years or less: Pay social security taxes in your home country
- Over 5 years: Pay social security taxes in the US
Navigate your taxes with confidence
If you’re a foreign national working and living in the US, the Green Card Test and Substantial Presence Test determine your status as a resident alien vs. nonresident alien. Resident aliens are subject to taxes on their worldwide income, while nonresident aliens only pay US taxes on US-sourced income.
