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Matthew Ledvina - Taxation of Non-Resident Aliens vs. Resident Aliens

 


Nonresidents and residents face a different set of rules when filing their taxes in the United States than those who are citizens. Filers who are not citizens may be excused from declaring definite types of income, based on their circumstances. Resident aliens are not US citizens but they have green cards enabling them to work in the US or they have been in the country for no less than 183 days over a three-year period including the present year. Nonresident aliens are in the United States legally but do not have green cards. They may be tourists or other visitors.

 Taxation of Nonresident Aliens

Nonresident aliens are needed to pay income tax only on income that is earned in the United States or earned from a US source. They do not have to pay tax on foreign-earned earnings. Investment income comprehended in the US that is not from a US source is taxed at the rate of 30% usually unless otherwise specified by treaty. Nonresident aliens should keep records to show the sources of all of their income so that the Internal Revenue Service (IRS) can see what income is tax-exempt clearly and what is not.

Taxation of Resident Aliens

Most resident aliens are taxed on all forms of income obtained, domestic or foreign, including any payments received from a pension from a foreign government. Also, resident aliens who work for a foreign government in the United States may be able to claim an exemption on their wages if the US has a reciprocal tax treaty with the government that recruits the person.

The IRS Rule

If you are a foreign national, you are considered a non-resident alien unless you meet one of two tests:

  • The substantial presence test or the green card test for any specified calendar year
  • If you do not meet either the Substantial Presence Test or the Green Card Test, then you are a non-resident alien.

Green Card Test: You are a legal Permanent Resident of the USA, at any time, if you have been given the freedom, as per the immigration laws, of residing in the United States as an immigrant permanently. You usually have this status if the US Citizenship and Immigration Service issued you an alien registration card. You have resident status, under this test, except you renounce voluntarily and discard this status in writing to the USCIS, or your immigrant status is terminated administratively by the USCIS, or your immigrant status is terminated by a US federal court judicially.

Substantial Presence Test: You will also be regarded as a US resident for tax purposes if you meet the substantial presence test for the calendar year. You should be physically present in the United States on at least:

  • 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:
  • 31 days during the current year, and
  • All the days you were present in the current year, and
  • 1/6 of the days you were present in the second year before the current year and
  • 1/3 of the days you were present in the first year before the current year.

Matthew Ledvina is an expert tax adviser for Aerium Strategies and a director for a Fintech company in London which specializes on asset-backed lending.

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