If you are not a U.S. citizen you may be wondering whether you need to file a tax return in the United States and to what extent you are required to pay federal income tax. Will you be required to pay tax on worldwide income, on income from a trade or business in the U.S., or both? As it turns out, there are different rules regarding filing and taxation depending on the nature of your non-U.S. status.
This article explores how the IRS determines a non-U.S. individual’s tax residency status, what kind of tax returns non-U.S. citizens must file, and how their income is taxed in the U.S.
Determining an Individual‘s Tax Residency Status: Nonresident Alien vs. Resident Alien
An alien is defined as any individual who is not a U.S. citizen. Nonresident aliens are taxed differently and have different filing requirements than resident aliens. You will be considered a nonresident alien of the United States for tax purposes unless you qualify as a resident alien under either the green card test or the substantial presence test.
If the U.S Citizenship and Immigration Services issued you a permanent Resident Card, also known as a “green card,” you will be deemed a lawful permanent resident of the U.S. and therefore a resident alien for U.S. tax purposes. If your green card status gets revoked or is determined to have been abandoned, you will no longer meet the green card test for determining tax residency.
To be considered as a resident of the United States under the substantial presence test, you must be physically present in the United States on at least:
- 31 days during the calendar year, and
- 183 days during the 3-year period that includes the current year and the 2 years immediately prior, 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.
Even if you meet the substantial presence test, you may still be treated as a nonresident alien under certain exceptions. For example, under the closer connection exception, if you have a closer connection during the year to one foreign country in which you have a tax home than to the U.S., you may not be given resident alien status.
Also, there are rules regarding exempt individuals who are working or studying in the U.S. under certain visas. In this situation, the exempt individual’s days of presence in the U.S. will not be counted in determining whether they meet the substantial presence test.
In short, a resident alien is someone who is legally in the U.S. for a short period of time and doesn’t have a green card. As discussed above, in some cases you will be considered a nonresident alien even if you meet the substantial presence test if you hold certain visas or have a closer connection to a foreign country other than the U.S.
Resident aliens are required to file different tax returns and are taxed differently than nonresident aliens. Given that the filing requirements and tax treatment of resident aliens and nonresident aliens differ significantly, you are encouraged to consult with a tax attorney to assist you in making a determination as to your individual tax residency status.
Filing Requirements for Non-U.S. Citizens
If you are a nonresident alien, you will need to file Form 1040-NR Nonresident Alien Income Tax Return if:
- You were engaged in a trade or business in the U.S.;
- You received income from U.S sources;
- You want to claim a refund of excess withholding or want to claim the benefit of any deductions or credits.
Nonresident aliens will use 1040-NR to report U.S. income such as salaries, wages, rental income, pension income, scholarships, and capital gains or losses. If you had wages subject to income tax withholding and file on a calendar-year-basis, your tax return is due by April 15. If you didn’t have wages subject to withholding and file on a calendar-year-basis, your tax return is due by June 15.
Resident aliens are considered lawful permanent residents of the United States and must follow the tax laws as U.S. citizens. Accordingly, you will file Form 1040 U.S. Individual Income Tax Return or Form 1040-SR U.S. Tax Return for Seniors. If you file on a calendar-year-basis the tax return is due by April 15.
Americans who relocate overseas in the U.S. will be treated as resident aliens who must file 1040 tax return unless they renounce their U.S. citizenship and still conduct business in the U.S., in which case they will be considered a nonresident alien who must file a 1040-NR.
The IRS will impose the same penalties against nonresident aliens as it does to U.S. citizens and resident aliens. The failure to file penalty is assessed the rate of 5 percent of the unpaid tax (up to 25 percent) for each month that the return goes unfiled. The failure to pay penalty is assessed at the rate of 5 percent on the unpaid tax (up to 25 percent) for each month that the tax remains unpaid.
Tax Treatment of Nonresident Aliens and Resident Aliens
Nonresident aliens are required to pay tax on income from U.S. sources. Specifically, if you are engaged in a trade or business in the U.S., you must pay tax on income generated from these transactions at the same rates that apply to U.S. citizens and residents. If you are not engaged in a trade or business but receive fixed income from U.S. sources, that income will be taxed at a flat 30 percent unless subject to a lower treaty rate and cannot be offset by any deductions.
However, as a nonresident alien, you do not need to report any income earned outside of the U.S. For example, if you have two jobs, one with an American company and the other with a French country, the IRS can only impose taxes on the income you earn from the U.S. job.
On the other hand, resident aliens will owe tax on their worldwide income from all sources just like U.S. Citizens. This is a significant distinction for taxpayers that generate income abroad. You can use the same IRS forms and mailing addresses as U.S. citizens as well as the same filing status and deductions that are available to U.S. citizens.
Do You Need a Tax Attorney?
A tax attorney can help non-U.S. citizens determine their tax residency status and provide guidance on their filing requirements as well as how their U.S. and worldwide income will be taxed by the U.S. federal government.
If the IRS has assessed additional taxes, penalties and/or interest due to the taxpayer’s noncompliance, incorrect tax return, or errors on the tax return, a tax attorney can help you become filing compliant, seek reassessment of tax due, and pursue abatement of penalties where the circumstances warrant same.
The experienced tax attorneys at Segal, Cohen & Landis have helped clients of other countries with filing compliance as well as reassessment and resolution of U.S. tax liabilities by providing the following services:
- Counsel on tax residency status of non-U.S. citizens;
- Guidance on filing compliance for non-U.S. citizens;
- Reassessment of tax due via filing compliance;
- Resolution of tax due via offer in compromise, installment arrangement, or not collectible status;
- Penalty abatement;
- IRS Appeals.
If you are interested in having a complimentary consultation with one of our partner attorneys regarding your tax matter, please feel free to contact us at 866-505-1872. We would be happy to advise you as to how we can resolve your case and how much it would cost.
