Tax Rules for Resident and Nonresident Aliens

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Tax Rules for Resident and Nonresident Aliens

When it comes to paying taxes in the United States, resident and nonresident aliens are subject to different laws than citizens. In reality, depending on their circumstances, filers who are not citizens may be excluded from disclosing some forms of income.

Here are some of the most important regulations, as well as who must obey them.

Who Are Resident and Nonresident Aliens?

Resident aliens are not citizens of the United States, but they hold green cards that enable them to work in the nation, or they have been in the country for at least 183 days in the last three years, including the current year.

Key Takeaways

  • Resident aliens who lawfully work and reside in the United States may owe US tax on all of their earnings.
  • Many resident aliens, however, qualify for one of numerous residence exclusions.
  • Nonresident aliens live outside the United States yet get income from the United States. They must pay taxes on their profits in the United States.

Nonresident aliens are lawfully present in the United States but do not hold green cards. They might be tourists or other guests.

Taxation of Nonresident Alien Income

Nonresident aliens are only obligated to pay income tax on income earned in the United States or derived from a source in the United States. They are not required to pay taxes on money generated abroad.

A German citizen, for example, who owns a firm in Germany and another in the United States will be taxed exclusively on the revenue from the latter. The German industry will be overlooked.

Unless specifically stated by treaty, investment income generated in the United States that does not originate in the United States is normally taxed at a rate of 30%.

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Nonresident foreigners must maintain meticulous records detailing the sources of all of their income so that the Internal Revenue Service (IRS) can plainly discern what income is tax-free and what is not.

Taxation of Resident Alien Income

Unlike nonresident aliens, most resident aliens are taxed on all sources of income received, foreign or domestic, including payments from a foreign government’s pension.

If they qualify, resident aliens may claim the overseas earned income exclusion and/or the foreign tax credit.

Furthermore, resident aliens who work for a foreign government in the United States may be eligible to claim a salary exemption if the United States has a reciprocal tax treaty with the country that employs the individual.

The Residence Test for Resident Aliens

Resident aliens either have a green card or fulfill the residency requirement, or both.

This test requires that the immigrant taxpayer dwell in the United States for at least 31 days during the fiscal year and for a total of at least 183 days in the previous three years (including the current year).

However, the residency test only recognizes a day of residence in the United States as a complete day of residence for the current year. A day of residency counts as one-third of a day in the preceding year and one-sixth of a day the year before.

As a result, the total number of days of residency during the preceding two years must be divided by three or six before totaling, and the final total must be at least 183.

Exceptions to the Residence Test

There are a few exceptions to the residence test. They essentially exclude a huge proportion of lawful immigrants in the United States from having to disclose taxable income. Some of the most frequent exceptions are listed below.

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The IRS regulations are complex. If you’re unsure about your tax situation, IRS Publication 519 offers all the information you need.

You Commute from Canada or Mexico

Commuting days from Canada or Mexico to the United States cannot be included as days of residence for the purposes of the residency test.

Your Tax Home Is Elsewhere

Even if they fulfill the ordinary residency requirement, aliens who can demonstrate that they had a tax home in another country throughout the year and were not in the United States for 183 days are typically exempt from paying taxes in the United States.

In this context, a tax home is often defined as either the person’s major place of business or primary house.

Those in this group are not subject to US taxes, even if they live in the US.

Aliens who seek to claim this exemption must submit IRS Form 8840.

You Qualify for These Exemptions

Those who must temporarily remain in the United States for particular reasons may seek an exemption for the days spent in the country by completing Form 8843. Those who qualify for this exemption include:

  • Teachers
  • Trainees
  • Students
  • Professional athletes
  • Any anyone with diplomatic or consular status for a foreign country or international organization, or a member of that person’s immediate family

You Qualify for a Medical Exception

A medical exception is available to anybody who is suddenly detained in the United States for medical reasons. A foreign tourist, for example, who has a heart attack while in the United States and is hospitalized for three months might submit Form 8843 and record the days spent here for medical reasons under this exception.

A Tax Treaty Is In Place

Any definition of residency established in a tax treaty is not superseded by the residence test. Even if an immigrant otherwise passes the residency criteria, a treaty with another nation may exclude you from being designated as a resident.

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How to Handle Dual Tax Status

Aliens who get green cards throughout the year must submit a dual-status return since they were nonresident aliens before receiving their card and resident aliens thereafter. Their situation altered the day they acquired their green card.

Individuals in this group must attach a declaration that breaks down all income received as a resident and nonresident.

When Aliens Leave the U.S.

Aliens who leave the United States for any period of time must get a certificate of compliance stating that they have paid their U.S. taxes. Otherwise, at the place of departure, a tax return must be submitted and paid.

Those who are departing should get IRS Form 1040-C to determine what they must report. Those identified as exempt individuals above are also exempt from this obligation.

The Expatriation Tax

Aliens and U.S. citizens who leave the country and give up their citizenship must pay an expatriation tax on all of their income and assets.

The taxpayer’s assets are taxed on the day before they are expatriated.

For More Information

That almost covers the tax regulations that apply to the majority of resident and non-resident immigrants.

However, depending on an individual’s circumstances, the regulations might be rather convoluted. Consult IRS Publication 519 for further details.

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