When writing about topics like the tax requirements for taxpayers who are not U.S. citizens, an introductory word of caution always seems appropriate. This area of the Tax Code is not for the faint of heart and tax dabblers should take pause. The information in this blog is an introduction to this topic and is not considered a definitive guide. If compared to a pan of lasagna, this blog would represent a tray that was made without the noodles. There’s a good, saucy base and some cheese for a little body and flavor, but without the noodles… Hopefully, you get the point. Now that you know what you are having for dinner, let’s tackle this saucy topic.
Usually, U.S. citizens and residents are required to file an annual federal Form 1040, U.S. Individual Income Tax Return, if they meet the filing requirements for the year. It does not matter if the taxpayer is 3 years old or 93 – if they meet the filing requirements, they must file a return.
So, what are the rules if someone is not a U.S. citizen?
To answer this question, an individual must first determine whether they are considered a resident alien or a nonresident alien for U.S. income tax purposes. This determination is a matter of the taxpayer’s facts and circumstances. This is an important distinction, as resident aliens are required to file Form 1040 and follow the same rules as U.S. citizens, whereas a nonresident alien is required to file a
Form 1040NR, U.S. Nonresident Alien Income Tax Return. A non-U.S. citizen can be considered a resident alien if they meet one of two tests: (1) the lawful permanent residence test (also known as the green card test), or (2) the substantial presence test for the calendar year.
If they do not meet either of these tests, the taxpayer is considered a nonresident alien. Once a taxpayer determines if they are considered a resident or nonresident for income tax purposes, the rest comes down to whether the taxpayer has a filing requirement based on 1) the type of form they are required to file and 2) their tax situation. For this blog, we will be focusing on some of the rules to determine whether a taxpayer can be considered a resident alien for U.S. income tax purposes and follow the same filing rules as U.S. citizens. Or, if a taxpayer is considered a nonresident alien, we will be discussing the two main categories of income that qualify a nonresident alien to file a Form 1040NR.
Resident Aliens
Resident aliens are non-U.S. citizens (a.k.a. “aliens”) who meet either of the two tests below.
Remember that resident aliens are generally taxed on their worldwide income and required to file the same forms as U.S. citizens, which is Form 1040.
- Test 1: Lawful Permanent Resident test, a.k.a. Green Card test: A taxpayer is a U.S. resident if they are a lawful permanent resident of the United States. Generally, they are issued a Form I-551, which is commonly known as a “Green Card.”
A taxpayer continues to be a permanent resident and is required to file a U.S. resident income tax return until such time they formally abandon their residency status, or it is taken away by the U.S. Government.
- Test 2: Substantial Presence test: A taxpayer is considered to be substantially present in the U.S., and therefore taxed as a U.S. citizen, if they are physically present in the U.S. for at least:
- 31 days during current tax year, and
- 183 days during the 3-year period that includes the current tax year and the two preceding tax years (for 2023, it would be 2023, 2022, and 2021). The 183 days are calculated as follows:
- All of the days the taxpayer was present in the current year (i.e. 2023), plus
- 1/3 of the days the taxpayer was present in the first year before the current year. If the current year is 2023, then the taxpayer will include 1/3 of the days they were physically present during 2022, plus
- 1/6 of the days the taxpayer was present in the second year before the current year. If the current year is 2023, then the taxpayer will include 1/6 of the days they were physically present during 2021.
Generally, a taxpayer is considered present in the U.S. on any day that they are physically present in the country. It does not matter what time of day that is. What about people who are just passing through the U.S.? Let’s suppose a person who lives in Argentina is traveling to Vancouver, Canada, and there is a twelve-hour layover in Los Angeles. Does the time the taxpayer spends in Los Angeles on layover count as one day for the physical presence test? What about people who live in Mexico or Canada and commute to work in the U.S.? Thankfully, there are exceptions when determining the number of days for the physical presence test. The exception list below provides a highlight to many, but not all of the exceptions. Taxpayers will not count the following days for the purpose of the physical presence test:
- Taxpayers who live in Canada or Mexico and regularly commute to the U.S. for work do not count their commuting days when calculating the number of days for the physical presence test. To qualify for this exception, the worker must travel to their job in the U.S. and travel back to their residence in Canada or Mexico within a 24-hour period. To be considered “regularly commuting,” a taxpayer must commute to work in the U.S. for more than 75% of their working period. A working period begins on the first day of the year the taxpayer is physically present in the U.S. and ends on the last day they are physically present during the same year.
- The days a taxpayer is in the U.S. for less than 24 hours because they are traveling between two other countries.
- The days crew members of a foreign vessel are temporarily in the U.S.
- The days you are unable to leave the U.S. due to medical reasons. A good example of this would be foreign persons who were temporarily detained in the U.S. at the start of the COVID pandemic because borders were temporarily closed, and transportation halted.
- The days a person is in the U.S. under a NATO visa as a member or civilian component to NATO. Keep in mind that this exception does not extend to the NATO member’s immediate family traveling with them.
- The days an exempt individual is in the U.S. For this purpose, an exempt individual is someone:
- Temporarily in the country as a foreign government-related individual under specific “A” or “G” visas. (Not all “A” and “G” visa holders qualify for this exemption. For more specific information, please review IRS Publication 519, U.S. Tax Guide for Aliens.)
- A teacher or trainee and their immediate family that are temporarily in the country under a “J” or “Q” visa and comply with the requirements of the visa.
- A student and their immediate family that are temporarily in the country under a “F,” “J,” “M,” or “QP” visa and comply with the requirements of the visa.
- A professional athlete who is temporarily in the U.S. to compete in a charitable sports event.
There is another exception to the substantial presence test, and it is for those who have a closer connection to another country than the U.S. A taxpayer will be treated as a non-resident alien, even if they meet the substantial presence test, if they meet all of the following conditions under the closer connection exception:
- They were present in the United States for less than 183 days during the year, and
- Had a closer connection to the foreign country that was considered their tax home during the year, and
- Maintained a tax home in the foreign country that was considered their tax home during the year.
Nonresident Aliens
Now, let’s look at some of the ways
nonresident aliens may be required to file a U.S. income tax return. Nonresident aliens who are required to file a U.S. income tax return will use
Form 1040NR, U.S. Nonresident Alien Income Tax Return. Usually, nonresident aliens are taxed only on the income that is derived from sources within the United States as well as on certain income connected with the conduct of a trade or business within the United States. A nonresident alien’s income that is subject to U.S. income tax is generally divided into two categories.
- Effectively Connected Income: This is income that is connected with a trade or business within the United States. After allowable deductions, effectively connected income is subject to income and alternative minimum tax, the same as it would be if the taxpayer was a U.S. citizen or resident. For example, the gain or loss from the sale of real property located in the U.S. is considered a gain or loss connected with a US trade or business.
- U.S. source income that is fixed, determinable, annual, or periodical (FDAP) is taxed at a flat 30% (or lower treaty rate, if qualified). On their webpage “Fixed, Determinable, Annual, Periodical (FDAP) Income,” the IRS describes this kind of income “as all income, except:
- Gains derived from the sale of real or personal property (including market discount and option premiums, but not including original issue discount).
- Items of income excluded from gross income, without regard to the U.S. or foreign status of the owner of the income, such as tax-exempt municipal bond interest and qualified scholarship income.”
- Unlike effectively connected income, no deductions are allowed against this type of income. Often, FDAP income is fixed, the amount of the payment may be known ahead of time, and usually paid at known intervals, whether that be annually, monthly, quarterly, etc. Sporadic payments can also qualify as FDAP income. Examples of FDAP income include:
- Compensation, such as commissions that are earned for personal services
- Interest and dividends
- Pensions and annuities
- 85% of U.S. Social Security benefits received, unless exempt by treaty provisions between the taxpayer’s foreign country of residence and the U.S.
- Certain alimony received
- Real property income, such as rents received. Real property income does not include the gains from the sale of real property.
- Scholarships and fellowship grants
- Royalties
- Winnings from certain gambling games
- Taxes, mortgage interest, or insurance premiums paid to, or for the account of, a nonresident alien landlord by a tenant under the terms of a lease
- Prizes and awards
- Certain capital gain income. Remember, the gain associated with the disposition of real property in the U.S. is not considered FDAP income. The taxation of capital gain income for nonresident taxpayers is complex. Nonresidents with capital gain income that may be taxable to the U.S. should seek the advice of a qualified tax professional for more information.
What about taxpayers who were both a resident and nonresident alien during the year?
There are special tax rules for taxpayers who are residents of the U.S. and another country. Some of these rules will depend on any tax treaties the U.S. has with the other country.
What about U.S. citizens and residents who are married to nonresident aliens?
Are the nonresident alien spouses required to file an income tax return? Are they required to file a joint return with their resident spouse? When a U.S. citizen or resident alien is married to a nonresident alien, the couple can choose to treat the nonresident alien as a U.S. resident for income tax purposes. By choosing to treat the nonresident alien spouse as a resident alien, all the spouse’s worldwide income will be subject to U.S. income tax. If the nonresident spouse has a lot of foreign income, the taxpayers may want to run a couple of tax scenarios to see if it is still advantageous for the nonresident alien spouse to be treated as a resident for U.S. income tax purposes. The spouses are required to file a joint income tax return the first year they choose to treat the nonresident spouse as a resident. In the following years, the spouses can choose to file a joint or separate return. Once the choice is made, the nonresident alien spouse will continue to be treated as a resident for income tax purposes in future tax years or until either spouse makes a revocation or another identifying event takes place, like the death of either spouse. Once either spouse makes a revocation, neither spouse can choose to be considered a resident for income tax purposes in future years.
Whether a taxpayer is considered a resident alien for U.S. tax purposes or a nonresident, the taxpayer will need to obtain tax identification numbers (TINs). This could be a Social Security Number (SSN) or an Individual Taxpayer Identification Number (ITIN). The due date to file a calendar year Form 1040 for non-citizens who qualify as resident aliens is the same as it is for U.S. citizens, which is April 15 of the following year. If April 15 falls on a weekend or holiday, then Form 1040 is due the next business day. For nonresident aliens who file a Form 1040NR, the due date depends on a couple of factors. Nonresident aliens who received wages subject to U.S. income tax withholding have until April 15 of the following year to file their calendar year Form 1040NR return. However, nonresident aliens who did not receive wages subject to U.S. income tax withholding may file Form 1040NR by the 15th day of the sixth month of the following year. Usually, this date would be June 15. However, if June 15 falls on a weekend or holiday, the due date is the next business day.
To recap, generally a non-U.S. citizen can be considered a resident alien or nonresident alien. Once a non-U.S. citizen determines whether they are considered a resident or nonresident alien, they will follow the filing requirements for the form they are filing. And, if they are considered a nonresident alien, the taxpayer will also need to look at any tax treaty provisions that have been put into effect between the U.S. and the country where their tax home is located.
This topic is tricky, to say the least. Perhaps you would like the peace of mind knowing that, in the event of an audit, you have help at your fingertips. If this is the case, then you may be interested in our
prepaid Audit Defense membership. TaxAudit does not represent taxpayers who have filed Form 1040NR, but we do represent taxpayers who have filed resident individual income tax returns.