Tax Rules for Resident and Nonresident Aliens

Resident and nonresident aliens face a different set of rules when filing their taxes in the U.S. than those who are citizens. In fact, filers who are not citizens may be exempt from declaring certain types of income, depending on their circumstances.

Here are some of the key rules, and who needs to follow them.

Who Are Resident and Nonresident Aliens?

Resident aliens are not U.S. citizens but they have green cards allowing them to work in the U.S. or they have been in the country for at least 183 days over a three-year period including the current year.

Nonresident aliens are in the U.S. legally but do not have green cards. They might be tourists or other visitors.

Taxation of Nonresident Alien Income

Nonresident aliens are required to pay income tax only on income that is earned in the U.S. or earned from a U.S. source. They do not have to pay tax on foreign-earned income.

For example, a German citizen who owns a business in Germany and another in the U.S. will be taxed only on the income from the latter source. The German business will be ignored.

Investment income realized in the U.S. that is not from a U.S. source is usually taxed at the rate of 30% unless otherwise specified by treaty.

Nonresident aliens must keep careful records to show the sources of all of their income so that the Internal Revenue Service (IRS) can clearly see what income is tax-exempt and what isn't.

Taxation of Resident Alien Income

Unlike nonresident aliens, most resident aliens are taxed on all forms of income received, foreign or domestic, including any payments received from a pension from a foreign government.

Resident aliens may claim the foreign earned income exclusion and/or the foreign tax credit if they qualify.  

In addition, resident aliens who work for a foreign government in the U.S. may be able to claim an exemption on their wages if the U.S. has a reciprocal tax treaty with the government that employs the person.

The Residence Test for Resident Aliens

Resident aliens carry a green card or meet the residence test, or both.

This test requires that the alien taxpayer must reside in the U.S. for at least 31 days during the year, and must have been in the U.S. for a total of at least 183 days of the past three years (including the current year).

However, the residence test only counts a day of residence in the U.S. as a full day of residence for the purpose of this test for the current year. A day of residence only counts as one-third of a day of residence in the previous year and one-sixth of a day in the year before.

Therefore, the total number of days of residence during the previous two years must be divided by either three or six before being totaled, and this final total must equal at least 183.

Exceptions to the Residence Test

The residence test contains a number of exceptions. They effectively exempt a large percentage of legal aliens in the U.S. from having to report taxable income. Below are some of the most common exceptions.

You Commute from Canada or Mexico

People who commute to work from Canada or Mexico to the U.S. on a regular basis cannot count commuting days as days of residence for the purpose of the residence test.

Your Tax Home Is Elsewhere

Aliens who can prove that they had a tax home in another country during the year and were not in the U.S. for 183 days during the year are usually not required to pay taxes in the U.S. even if they meet the standard residence test.

In this case, a tax home is usually considered to be either the principal place of business or the primary residence of the person in question.

Those in this category are exempt from U.S. taxation even if they have a residence in the U.S.

Aliens who wish to claim this exemption must file Form 8840 with the IRS.

You Qualify for These Exemptions

Those who must reside temporarily within the U.S. for certain reasons can claim an exemption for the days spent in the U.S. by filing Form 8843. Those who are eligible to claim this exemption include:

• Teachers
• Trainees
• Students
• Professional athletes
• Any person who has diplomatic or consular status for a foreign government or international organization, or is a member of that person's immediate family

You Qualify for a Medical Exception

Anyone who is unexpectedly detained in the U.S. for medical reasons can claim a medical exemption. For example, a foreign tourist who suffers a heart attack while in the U.S. and is hospitalized for three months can file Form 8843 and list the days spent here for medical reasons under this exemption.

A Tax Treaty Is In Place

The residence test does not override any definition of residence as specified in a tax treaty. A treaty with another country may exempt you from being classified as a resident even if an alien otherwise meets the residence test.

How to Handle Dual Tax Status

Aliens who receive their green cards during the year will have to file a dual-status return because they were nonresident aliens before they got their card and resident aliens afterward. Their status changed on the day that they received the green card.

People in this category must include a statement that breaks down all income they received as a resident and as a nonresident.

When Aliens Leave the U.S.

Aliens who leave the U.S. for any length of time must get a certificate of compliance that states that they have paid their U.S. taxes. Otherwise, a tax return must be filed and paid at the point of departure.

Those who are leaving should obtain IRS Form 1040-C to find out what they are required to report. Those listed as exempt persons above are likewise exempt from this requirement.

The Expatriation Tax

Aliens and any U.S. citizens who leave the U.S. and relinquish their citizenship must pay expatriation tax on all of their income and assets.

The taxpayer's assets are assessed for taxation on the day before their expatriation.

For More Information

That just about covers the tax rules that apply to most resident and non-resident aliens.

However, the rules can be quite complicated depending on an individual's circumstances. For more information, consult IRS Publication 519.