Nonresident aliens and resident aliens are required to comply with a variety of U.S. tax return rules. This applies to individuals coming to the U.S. on business, for education, for marriage or for other personal reasons. The rules are different for various visa types. In this article we will discuss what is a nonresident alien and a resident alien for tax purposes. We will also discuss the different types of US tax return filings for resident aliens and nonresident aliens. Finally, we will review related issues of tax elections, tax treaties and Taxpayer Identification Numbers (ITINs).
Determining Alien Status
Determining alien status is crucial for tax purposes in the United States. The Internal Revenue Service (IRS) uses the substantial presence test to ascertain whether an individual qualifies as a resident or nonresident alien. To pass the substantial presence test, an individual must be physically present in the US for at least 31 days in the current year and a total of 183 days during the 3-year period that includes the current year and the two preceding years. The calculation for the 183 days includes all the days present in the current year, one-third of the days present in the previous year, and one-sixth of the days present in the year before that.
However, certain individuals are exempt from the 183-day requirement. These exemptions include foreign government-related individuals, teachers or trainees holding a J or Q visa, students with an F, J, M, or Q visa, and professional athletes competing in charitable sporting events. Understanding these exemptions is essential for accurately determining your tax residency status and ensuring compliance with IRS regulations.
Resident Alien Tax Return
You are considered to be a resident alien if you meet either the green card test or the “substantial presence test.”
Resident aliens report their income and file their taxes with the IRS using Form 1040. This form is due on or before April 15 of the following year. Six month extensions are available.
Resident aliens are taxed on their worldwide income, not just their income earned in the U.S. This is the same rules that applies to U.S. citizens.
Resident aliens are eligible for all tax deductions, tax credits special elections.
What is the Green Card Test?
You are considered to have met the green card test if at any time during the calendar year you have a green card and are therefore a lawful permanent resident of the U.S. for immigration purposes. Green card holders are resident aliens.
Green card holders are required to file Form 1040 with the IRS even if their green card has expired. Otherwise they may be subject to penalties and interest.
What is the Substantial Presence Test?
In addition to the green card test, you are a resident alien if you meet the “substantial presence test.” Under this test, a resident alien is determined as follows:
- You have been in the US for at least 31 days in the current year, AND
- You have been in the US for 183 days or more over the past three years. For purposes of this test, days are calculated as follows:
- Number of days in the US in the current year
- 1/3 of the days in the prior year
- 1/6 of the days in the second preceding year
Exceptions to the Resident Alien Rule For Tax Purposes
Certain individuals are not considered to be a resident alien for tax purposes. Here is the list:
- Individuals who are unable to leave the US due to a medical condition that you developed while in the US
- Individuals with diplomatic status
- Individuals employed with international organizations. This includes employees of the United Nations, the World Health Organization or international non-governmental organizations (NGOs)
- Individuals employed by foreign governments
- Teachers or trainees with “J” or “Q” visas
- Students with “F,” “J,” “Q,” or “M” visas
- Professional athletes competing in charitable sport events
These individuals are required to file Form 1040-NR with the IRS, paying tax on their US source income only.
Nonresident Alien Tax Return
If you are not a U.S. citizen or resident alien, then you are a nonresident alien for tax purposes.
Unlike U.S. citizens and resident aliens, nonresident alien are taxed only on US source income.
Nonresident aliens are eligible for only limited tax deductions and tax credits. They are not able to file as married filing jointly or head of household. Married filing separately is allowed. Nonresident aliens do not qualify for the standard deduction.
Nonresident aliens are required to report their US source income and file their taxes with the IRS on Form 1040-NR.
CPA Note: Enhanced tax benefits may be available to the dependents of nonresident aliens from Canada, Mexico, Japan, Korea and for certain Indian students.
Dual Status Alien Tax Return
Dual status aliens qualify for tax purposes as both a resident alien and a nonresident during the same year. Dual status aliens must write ‘Dual-Status Return’ on their tax forms. This typically occurs in the year of arrival or departure to the US. Dual status taxpayers must attach a dual status statement to their tax return.
Dual status aliens are not able to file as married filing jointly or head of household. Married filing separately is allowed. They are allowed limited itemized deductions. The standard deduction is not allowed. Dual status tax requires differentiating income reporting for the periods as a resident and as a nonresident. Dual status tax filers must adhere to specific requirements, including limitations on deductions and credits.
Dual status taxpayers file two forms: Form 1040, reporting worldwide income, and Form 1040-NR, reporting US source income only. The implications of being both a resident and non-resident within the same tax year include unique filing rules and the necessity to correctly allocate income, expenses, credits, and deductions.
Choosing Nonresident Alien Tax Status
A resident alien may choose to be treated as a nonresident aliens for tax purposes, if they pass the the “closer connection” test. This test requires the following:
- You were present in the US for less than 183 days during the current year
- Had a closer connection during the year to a foreign country
- Maintained a tax home in the foreign country during the year
- Have not taken steps toward becoming a lawful permanent resident, such as a green card holder.
The exception is claimed by filing a Closer Connection statement, Form 8840, with Form 1040-NR.
However, the IRS will not approve this exception if you filed any of the following immigration forms:
- Form I-508, Waiver of Rights
- Form I-130, Petition for an Alien Relative
- Form ETA-750, Application for Alien Employment
- Form I-485, Application for Legal Permanent Resident Status
- Form I-140, Immigrant Petition for an Alien
- Form OF-230, Application for Immigrant Visa
Choosing Resident Alien Tax Status
There are a number of situations when an individual has the option to choose resident alien tax status.
Spouse Living in a Foreign Country
If the spouse of a US citizen or resident alien taxpayer lives in a foreign country, then the taxpayer make make an election for the nonresident spouse to be taxed as a resident alien. This is called a Section 6013(g) election. They will both pay tax on their worldwide income in the U.S. This election applies indefinitely.
The advantage of making this election includes the ability to file a joint tax return, which allows for lower tax rates and larger tax deductions. Foreign tax credits may also be available.
However, this election may result in the U.S. taxation of the wages of the foreign working spouse. Careful tax planning is required to determine whether or not this election will be beneficial.
Spouse is Dual Status Resident Alien for Tax Purposes
If one spouse is a resident alien, and the other spouse is immigrating to the U.S., the other spouse may be a dual status alien for tax purposes during the year of immigration. The taxpayer may wish to make an election to treat the immigrating spouse as a full-year resident alien for tax purposes. This is called a Section 6013(h) election. This election only applies in the year of immigration.
The advantage of making this election includes the ability to file a joint tax return, which allows for lower tax rates and larger tax deductions. There are also fewer tax returns to prepare and file with the IRS. Foreign tax credits may also be available.
However, this election may result in the U.S. taxation of the wages of a foreign working spouse earned prior to the time of immigration. Careful tax planning is required to determine whether or not this election will be beneficial.
Taxpayer Fails Substantial Presence Test
A nonresident alien who do not meet the substantial presence test may make an election to be treated as dual status resident alien for tax purposes. This is called a Section 7701(B)(4) election.
The benefit of making this election includes the ability to take advantage of increased tax deductions on a U.S. tax return.
However, here too, this election may result in the taxation of non-US income. Careful tax planning is required to determine whether or not this election will be beneficial to a nonresident alien.
Tax Implications for Resident Aliens
Resident aliens are taxed on their worldwide income, which means they must report income from all sources, both within and outside the United States. They are subject to the same tax rates as US citizens and are required to file a tax return using Form 1040 to report their income. This form must be submitted to the IRS by April 15 of the following year, with an option for a six-month extension if needed.
Resident aliens may also be eligible for certain tax benefits, such as the personal exemption deduction and the earned income credit. These benefits can help reduce the overall tax liability. However, resident aliens must adhere to specific requirements, such as filing a tax return even if they have no US-source income. This ensures that all worldwide income is reported and taxed appropriately, in line with US tax laws.
Tax Treaties
If a person is a resident alien in the U.S. and also a resident of a foreign country for which there is a tax treaty in place, then the treaty will determine which country’s rules will apply. This is called the “Treaty Tie-Breaker Position.”
This only works if the compensation paid to the taxpayer comes from a non-US employer. Furthermore, if the compensation is paid by a non-US employer but charged back to a US business, the tie-breaker position may not be utilized.
Tax treaty positions must be disclosed to the IRS on Form 8833.
Taxpayer Identification Numbers
A taxpayer, their spouse and dependents are required to have a Social Security Number (SSN) or an Individual Taxpayer Identification Number (ITIN) when filing a US tax return.
Non resident aliens and resident aliens without work authorization are not eligible to receive a Social Security Number. Therefore, they will need to apply for an ITIN.
Our firm provides ITIN acceptance agent services, which makes the ITIN application process significantly easier. Check out our article, Getting an ITIN the Easy Way: Certified Acceptance Agent, for more detail on how this works.
For additional information on this topic, check out our article on The Connection Between Immigration and Taxes.
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