Resident Alien vs. Nonresident Alien: Know the Difference
Resident aliens and nonresident aliens are subject to different tax laws based on the nature of their U.S. source of income and their status in the US. This article explores the tax distinction between resident and nonresident aliens, including resident aliens who are also US citizens, with an aim to dispel common myths about these classifications.
Key Takeaways
- A nonresident alien is a non-US individual who still has a filing requirement in the United States.
- You can determine whether you are a nonresident alien by taking the Substantial Presence Test and the Green Card test.
- Nonresident aliens must use special tax forms to ensure proper reporting and avoid penalties.
What Is a Nonresident Alien?
First, we must consider the meaning of a nonresident alien. A nonresident alien is an individual who does not reside in the United States for any part of the tax year and has a green card but does not meet the substantial presence test.
Residence in the United States is determined by the Substantial Presence Test, which calculates time spent in the country during the last three tax years. If you have spent a lot of time in the US, you may be a resident and need to file a Form 1040, which is the same requirement for US citizens. Citizens and Green Card Holders have filing requirements to report worldwide income regardless of where they reside.
Nonresidents are not US persons, but they still may have a filing requirement in the United States. If you have US-sourced income, then you are likely required to file a Form 1040NR U.S. Nonresident Alien Income Tax Return. US persons file Form 1040 and are required to report worldwide income from all sources, while nonresidents file Form 1040NR and are required to report US-sourced income.
Are You a Nonresident Alien or a Resident Alien?
To determine whether you’re a nonresident alien or resident alien, consider the Substantial Presence Test and the Green Card Test. If you pass either of these, you are likely considered a resident alien.
Substantial Presence Test
To pass the Substantial Presence Test, you must be physically present in the US for a minimum of 183 days over a three-year period. This period must include at least 31 days in the current calendar year.
However, you can’t simply add the days together. The requirements stipulate that these days be counted as follows:
- Count all the days of the current year
- Count only 1/3 of the days in the previous year
- Count only 1/6 of the days in the year prior
Note that it’s possible to spend 183 days in the US without having enough days in the right time frame for them to count. The more days you’ve spent in the US in recent months, the better your odds are of passing this test.
Green Card Test
The Green Card Test means that you are legally living permanently in the US and have an alien registration card, also called a green card.
Tax Requirements for Nonresident Aliens
The source and the related location determine what income must be reported to the Form 1040NR and is subject to US taxation. First, you’ll decide if the source is the US or foreign and then determine if the US source income is Effectively Connected Income (ECI) to the US or Not Effectively Connected (NEC) to the US. Here are some examples:
- Salaries and wages earned while in the United States are ECI. If you are a US citizen or meet the substantial presence test, you would file the Form 1040, whereas a non-resident would file a Form 1040NR.
- To determine if business income is from a US source and if it is ECI or NEC, questions like “Where is the service performed? Where is the Inventory stored or sold? Where is the product made?” can help.
- Rents, royalties, the sale of property, and even natural resources are all subject to tax if US-sourced.
- Pensions are allocated by where the service is performed.
- Scholarships are typically based on residency.
- Interest is based on residency and dividends on the corporation’s location.
Not Effectively Connected income will usually include all FDAP (Fixed, Determinable, Annual, or Periodic) income that came from a US trade or business that is not effectively connected. For example, if you fly into Orlando or Las Vegas and win a big prize or lottery that is US Source NEC. If you received dividends from a US corporation, that is US source NEC.
Effectively Connected Income is about location. If you have an F, J, M, or Q visa, then scholarships are ECI. A partnership organized in the US is ECI. Any personal services or business operations in the US, rents received from US property, or the sale or exchange of US property all are examples of ECI.
Withholding
If a nonresident receives US source income, a mandatory withholding of 30% on most types of income will apply. But, exceptions exist – for example, on some sales of US real estate. However, the US has tax treaties with many countries that change the tax treatment of US source income to 15%, 10%, or even zero. If you are a resident or national of one of the countries that have an agreement with the US, you may need to file Form 1040NR to claim a refund of all, or a portion, of the 30% of tax withheld.
Think of it this way: the withholding agent does not know if there is a treaty in place that could alleviate the 30% withholding. To make them aware, you provide a Form W-8Ben. This form goes to the organization from which you are the receiving the US source income, such as a bank, investment company, or pension provider. It does not go to the IRS. It informs the withholding agent that, because of the tax treaty, they should withhold at a lower rate.
In most cases, nonresidents with only NEC income are not required to file Form 1040NR if the tax is withheld at the US source. By submitting the W-8Ben, the correct amount of tax is withheld, so no additional steps or actions are required. However, when the withholding has not been satisfied at the US source, a nonresident must file a Form 1040NR to calculate any tax due.
Who Must File a Form 1040NR for Nonresident Alien Taxation?
- Nonresident individuals engaged or considered to be engaged in a trade or business in the United States during the year.
- Nonresident individuals who are not engaged in a trade or business in the United States and have U.S. income on which the tax liability was not satisfied by the withholding of tax at the source.
- A fiduciary for a nonresident alien estate or trust, and some resident or domestic fiduciaries for a nonresident.
Representatives or agents are responsible for filing the return of an individual described in the first two bullets above for nonresident alien taxation.
Filing Nonresident Alien Tax Return
In the first quarter of the calendar year, a new tax season starts in the US. From January to March most of the US tax documents are required to be mailed to the taxpayer. Nonresidents with NEC income should receive a Form 1042-S reporting the US source income subject to tax and the 30% withholding if not at a lower treaty rate. Nonresidents with ECI usually receive these on the same US person forms, like wages are reported on a W-2 if performed in the US. If you receive any US tax forms during the calendar year, it is likely, when filing a nonresident alien tax return, that you will need to file the Form 1040NR. Following the advice above can help you not get behind on US taxes!
Have More Questions About Your Non-resident Alien Status? We can Help!
Greenback accountants are skilled in helping nonresident aliens who are subject to US taxes. Contact us, and we’d be happy to help you.
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