Alien Taxation - Certain Essential Concepts


The taxation of aliens involves certain essential concepts as follows.

Resident Aliens

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. Resident aliens file Form 1040 like U.S. citizens.

Nonresident Aliens

Nonresident aliens file Form 1040-NR. A nonresident alien is usually 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.  Under limited circumstances, certain foreign source income is subject to U.S. tax.

Dual-Status Aliens

You are a dual status alien when you have been both a resident alien and a nonresident alien in the same tax year.

  • Taxpayers who were nonresident aliens at the beginning of the tax year and resident aliens at the end of the tax year should file Form 1040 labeled "Dual Status Return" with Form 1040-NR attached as a schedule and labeled "Dual Status Statement."
  • Taxpayers who were resident aliens at the beginning of the tax year and nonresident aliens at the end of the tax year should file Form 1040NR labeled "Dual Status Return" with Form 1040 attached as a schedule and labeled "Dual Status Statement."

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 Person

Treas.Reg. 1.1441-1(c)(2)

The term “foreign person” means:

  1. A nonresident alien individual,
  2. A corporation created or organized in a foreign country or under the laws of a foreign country,
  3. A partnership created or organized in a foreign country or under the laws of a foreign country,
  4. A foreign trust,
  5. A foreign estate, or
  6. 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.

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.

Tax Treaties

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.

References/Related Topics

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.