Taxation of Nonresident Aliens
International Tax Gap Series
Each year, thousands of nonresident aliens are gainfully employed in the United States. Thousands more own rental property or earn interest or dividends from U.S. investments. This article discusses the tax filing requirements for nonresident aliens.
First step: Determining Alien Tax Status
If you are an alien (not a U.S. citizen), you are considered a nonresident alien unless you meet one of two tests: the green card test or the substantial presence test for the calendar year (January 1 – December 31). If you do not meet either the Green Card Test or the Substantial Presence Test, then you are a nonresident alien.
Green Card Test: You are a Lawful Permanent Resident of the United States, at any time, if you have been given the privilege, according to the immigration laws, of residing permanently in the United States as an immigrant. You generally have this status if the U.S. Citizenship and Immigration Service (USCIS) issued you an alien registration card, Form I-551, also known as a "green card." You continue to have resident status, under this test, unless you voluntarily renounce and abandon this status in writing to the USCIS, or your immigrant status is administratively terminated by the USCIS, or your immigrant status is judicially terminated by a U.S. federal court.
Substantial Presence Test: You will also be considered a U.S. resident for tax purposes if you meet the substantial presence test for the calendar year. To meet this test, you must be physically present in the United States on at least:
- 31 days during the current year, and
- 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:
- All the days you were present in the current year, and
- 1/3 of the days you were present in the first year before the current year, and
- 1/6 of the days you were present in the second year before the current year.
You were physically present in the United States on 120 days in each of the years 2006, 2007, and 2008. To determine if you meet the substantial presence test for 2008, count the full 120 days of presence in 2008, 40 days in 2007 (1/3 of 120), and 20 days in 2006 (1/6 of 120). Since the total for the 3-year period is 180 days, you are not considered a resident under the substantial presence test for 2008.
Resident aliens are generally taxed in the same way as U.S. citizens. This means that their worldwide income is subject to U.S. tax and must be reported on their U.S. tax return (Form 1040, U.S. Individual Income Tax Return; Form 1040A, U.S. Individual Income Tax Return or Form 1040EZ, Income Tax Return for Single and Joint Filers with No Dependents).
Filing Requirements for Nonresident Aliens
Nonresident aliens are generally subject to U.S. income tax only on their U.S. source income. They are subject to two different tax rates, one for effectively connected income, and one for fixed or determinable, annual, or periodic (FDAP) income. Effectively connected income (ECI) is earned in the U.S. from the operation of a business in the U.S. or is personal service income earned in the U.S. (such as wages or self-employment income). It is taxed for a nonresident at the same graduated rates as for a U.S. person. FDAP income is passive income such as interest, dividends, rents or royalties. This income is taxed at a flat 30% rate, unless a tax treaty specifies a lower rate.
Nonresident aliens must file and pay any tax due using Form 1040NR, U.S. Nonresident Alien Income Tax Return or Form 1040NR-EZ, U.S. Income Tax Return for Certain Nonresident Aliens with No Dependents.
The United States has income tax treaties with a number of foreign countries. For nonresident aliens, these treaties can often reduce or eliminate U.S. tax on various types of personal services and other income, such as pensions, interest, dividends, royalties, and capital gains. Each individual treaty must be reviewed to determine whether specific types of income are exempt from U.S. tax or taxed at a reduced rate. More details can be found in Publication 901, U.S. Tax Treaties.
When to File
Nonresident aliens who were employees and received wages subject to U.S. income tax withholding must file Form 1040NR (or 1040NR-EZ) by the 15th day of the 4th month after their tax year ends – by April 15, 2009 for the 2008 calendar year.
Nonresident aliens who did not receive wages as an employee subject to U.S. income tax withholding must file Form 1040NR (or Form 1040NR-EZ) by the 15th day of the 6th month after their tax year ends – by June 15, 2009 for the 2008 calendar year.
Extension of time to file. If you cannot file your return by the due date, you should file Form 4868. You must file Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, by the regular due date of the return.
Note. Form 4868 does not extend the time to pay your income tax. The tax is due by the regular due date of the return.
Where to File
File Form 1040NR (or 1040NR-EZ) with the Department of the Treasury, Internal Revenue Service Center, Austin, TX 73301-0215 U.S.A.
Taxation of Nonresident Aliens
Publication 515, Withholding of Tax on Nonresidents and Foreign Entities
Publication 519, U.S. Tax Guide for Aliens
Publication 901, U.S. Tax Treaties
Form 1040NR, U.S. Nonresident Alien Income Tax Return
Form 1040NR Instructions
Form 1040NR-EZ, U.S. Income Tax Return for Certain Nonresident Aliens with No Dependents
Form 1040NR-EZ Instructions
Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return
The International Tax Gap Series