Are you a foreigner who frequently visits the US for work or business? If yes, you might be liable for US income taxes.
The US has a complex tax system that taxes its own citizens even when they are living abroad. Sometimes, the US can also tax non-Americans, depending on how long they spend in the country.
In this article, we go over what a nonresident alien is and how their tax situation differs from resident aliens:
What is a nonresident alien?
The US classifies anyone that’s not an American citizen as an “alien.” For tax purposes, a nonresident alien is someone who is not a US citizen and doesn’t meet the Green Card Test or the Substantial Presence Test.
Common examples of nonresident aliens in the US are teachers, students, and researchers on F, J, M, and Q visas.
Let’s take a look at what the Green Card test and Substantial Presence Test entail:
Green Card Test
You qualify as a resident alien if you’re a lawful permanent US resident, also known as a Green Card holder, at any point in the tax year. Foreigners typically gain this status when they step foot on US soil for the very first time with their Green Card in hand.
From an immigration perspective (not to be confused with the IRS’s definition of residency), to maintain your Green Card status, you may not spend more than one year outside the US or establish a primary home in another country.
For further recommendations or instructions, it’s recommended that you consult with an immigration attorney on all things Green Card related.
Substantial Presence Test
The Substantial Presence Test is to determine whether you are considered a US tax resident as a result of your physical presence in the US over the past three years. The Substantial Presence Test involves a calculation to determine whether you’ve been in the US for at least 183 days, including:
- – All the days present this year
- – ⅓ of the days present last year
- – ⅙ of the days present two years ago
To be considered a US tax resident for purposes of the Substantial Presence Test, you must have been in the US for at least 31 days in the current year.
Many people in the US with nonimmigrant visas end up passing the Substantial Presence Test. However, the IRS also offers some exceptions, such as for those who can’t leave the US due to medical reasons. Days where you spent less than 24 hours in the US while in transit also don’t count towards meeting the Substantial Presence Test.
If you don’t pass either one of these two tests, then you are considered by the IRS to be a nonresident alien.
Nonresident aliens vs resident aliens: What’s the difference?
The main difference between nonresident aliens versus resident aliens is how the IRS taxes their income.
Resident aliens will report all of their worldwide income to the IRS each year, including dividends, interest, capital gains, and rental income. That’s the case even if they live overseas because of the US’s citizenship-based taxation system.
A nonresident alien, on the other hand, has reduced tax obligations with the IRS. This is because nonresident aliens only get taxed on their US-sourced income.
Nonresident aliens may get taxed differently depending on their type of income. Additionally, nonresident aliens use different IRS forms than those US taxpayers are used to, such as Form 1040. Instead, they’ll have to file Form 1040NR, the US Nonresident Alien Income Tax Return, to report any of their US-sourced income.
*Some examples of US-sourced income include: Rental income from a US-based property, dividends from a US-based company, or pension income from a US-based retirement plan
What’s a dual-status alien?
Strange as it sounds, it is possible to be both a US resident alien and nonresident alien in the same tax year, which qualifies you as a dual-status alien. This typically happens in the year someone is entering or leaving the US.
As a dual-status alien, the IRS will determine your US tax liability differently – specifically differentiating between the period you were a resident alien of the United States and the period you were a nonresident alien:
- – For the part of the year you are a US resident alien: The IRS will tax all of your worldwide income earned when you were a US resident alien.
- – For the part of the year you are a nonresident alien: The IRS will tax all US-sourced income during the time you were a nonresident alien.
- – Not effectively connected income: Any income received during your time as a nonresident alien not linked to a trade or business in the US will not be taxable.
Dual-status reporting also happens when a US citizen decides to renounce their citizenship part way through the tax year.
Need help thinking through your next best steps?
The US tax system is hard to navigate, even for American nationals. To determine if you’re a nonresident or a resident alien for tax purposes, run through this quick checklist:
- – Are you a US citizen? If so, you should file Form 1040 each year to the IRS.
- – If not, evaluate whether you meet the Green Card Test or Substantial Presence Test. If so, you’ll need to file Form 1040 with the IRS. If you don’t qualify for either of these tests, then the IRS will classify you as a nonresident alien.
- – As a nonresident alien, you’ll need to determine whether you’ve earned any income in the US during the year. Were you in the US for work? Do you have a US-based pension or a rental property? Or perhaps you received dividends from a US company. These would all require reporting on Form 1040NR.
- – Start preparing the paperwork required to file your US taxes, whether that be Form 1040 or Form 1040NR. You can also hire a specialized US expat tax expert to handle all of your US tax filings for you.