Alien Taxation - Certain Essential Concepts
The taxation of aliens involves certain essential concepts as follows.
A resident alien's income is generally subject to tax in the same manner as a U.S. citizen. If you are a resident alien, you must report all interest, dividends, wages, or other compensation for services, income from rental property or royalties, and other types of income on your U.S. tax return. You must report these amounts whether from sources within or outside the United States.
A nonresident alien is usually subject to U.S. income tax only on U.S. source income. Under limited circumstances, certain foreign source income is subject to U.S. tax.
You are a dual status alien when you have been both a resident alien and a nonresident alien in the same tax year.
Source of Income
A nonresident alien (NRA) usually is subject to U.S. income tax only on U.S. source income.
In general, all income of a nonresident alien is Fixed, Determinable, Annual, Periodical (FDAP) income. However, certain kinds of FDAP income are considered to be effectively connected with a U.S. trade or business. These two types of income are taxed in different ways.
Reporting your Income in U.S. Currency
You must express the amounts you report on your U.S. tax return in U.S. dollars. If you receive all or part of your income, or pay some or all of your expenses in foreign currency, you must translate the foreign currency into U.S. dollars.
Tax Withholding on Foreign Persons
Payments of income to foreign persons are subject to special withholding rules. In particular, foreign athletes and entertainers are subject to substantial withholding on their U.S. source gross income. This withholding can be reduced by entering into a Central Withholding Agreement with the Internal Revenue Service.
Foreign Students and Scholars
Special rules apply to the taxation of foreign students and scholars which do not apply to other kinds of aliens.
Taxpayer Identification Numbers (TIN)
Anyone (including aliens) who files a U.S. federal tax return must have a Taxpayer Identification Number (TIN). In addition, aliens who request tax treaty exemptions or other exemptions from withholding must also have a TIN.
The U.S. tax liability of aliens is determined primarily by the provisions of the U.S. Internal Revenue Code. However, the United States has entered into certain agreements known as tax treaties with several foreign countries which oftentimes override or modify the provisions of the Internal Revenue Code.
IRC 7701(a)(30) and Treas.Reg. 1.1441-1(c)(2)
The term 'United States person' means:
A citizen or resident of the United States,
A partnership created or organized in the United States or under the law of the United States or of any State,
A corporation created or organized in the United States or under the law of the United States or of any State,
Any estate or trust other than a foreign estate or foreign trust.
See Internal Revenue Code section 7701(a)(31) for the definition of a
foreign estate and a foreign trust, or
Any other person that is not a foreign person.
The term “foreign person” means:
- A nonresident alien individual;
- A corporation created or organized in a foreign country or under the laws of a foreign country;
- A partnership created or organized in a foreign country or under the laws of a foreign country;
- A foreign trust;
- A foreign estate, or
- Any other person that is not a U.S. person.
See Internal Revenue Code section 7701(a)(31) for the definition of a foreign estate and a foreign trust.
Note: This page contains one or more references to the Internal Revenue Code (IRC), Treasury Regulations, court cases, or other official tax guidance. References to these legal authorities are included for the convenience of those who would like to read the technical reference material. To access the applicable IRC sections, Treasury Regulations, or other official tax guidance, visit the Tax Code, Regulations, and Official Guidance page. To access any Tax Court case opinions issued after September 24, 1995, visit the Opinions Search page of the United States Tax Court.