Q: Tax Playa, what are some of the basic rules for non-resident aliens?
Sandra, Alexandria VA
A: The basic rules for non-residents are very similar for residents, with a few twists. Non-resident aliens must pay U.S. income tax on U.S.-source income. Several of the tax benefits available to residents and citizens are not available to non-residents. Finally, non-residents may benefit from a tax treaty between the U.S. and their home country...
For more information on this, please consult IRS Publication 519, Tax Guide for Aliens.
The first question to establish is your residency status. Resident aliens and citizens are taxed very similarly. If you are not a citizen, you are considered a non-resident unless you pass one of the following tests:
1. "Green Card Test." You are a resident alien if you have a green card.
2. "Substantial Presence Test." To pass this test, you must be physically present in the U.S. for at least 31 days in the present tax year, and at least 183 days in the current and prior two tax years.
For the prior two years, count only 1/3 of the days in the prior year, and 1/6 of the days in the year before that. The total of this bizarre equation must equal or exceed 183 days.
Days of presence in the United States do not count commuting or day-trips, nor does it count days here on a visa.
Even if the substantial presence test is met, one may assert non-residency if physically present in the United States for less than 183 days throughout the year, you maintain a foreign tax home, and you have a closer connection to this foreign tax home.
3. Tax Treaties. If a foreign country and the United States are operating under a tax treaty, the provisions of that treaty supersede any of these rules.
4. Dual Status. If you meet the substantial presence or green card tests in the middle of a year, you can treat yourself as a resident for the whole tax year. If your status changes in the middle of the year and does not fall under one of these categories, you may have to file part of the year as a resident, and part as a non-resident.
5. Non-Resident Spouse. A non-resident spouse may affiliate themselves with their resident/citizen spouse for tax purposes.
Source of Income
Residents are taxed on worldwide income, the same as citizens. Non-residents are taxed only on U.S. source income.
Fixed or determinable income not effectively-connected to a non-resident's U.S. trade or business, but sourced in the U.S., are subject to a 30% tax rate. Such income includes interest, dividends, rents, annuities, salaries, wages, and other compensation. Social Security benefits are 85% taxable. In many cases, tax treaties lower the rate.
High-income former residents of the U.S. may be subject to an expatriation tax.
Preparing the Return
Non-residents fill out a 1040-NR. A few items of interest immediately arise:
- The educator expense and tuition and fee adjustments are not allowed
- A standard deduction is not allowed. Non-residents must itemize their deductions
- Residency and treaty benefits must be documented and cited
- Non-residents cannot claim the earned income credit