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Nonresident Alien Meaning, a Complete Guide

Nonresident Alien Meaning

Any person who is not an American national or citizen is considered an alien. A foreigner who has not met either the significant presence or the green card requirements is considered a nonresident alien.

When filing Form 1040 under the “Married Filing Jointly” filing status, your spouse can opt to regard you as a resident alien for tax purposes even if you are a nonresident alien at the conclusion of the tax year.

Who Must File?

If you are a nonresident foreign who conducted, or was deemed to have conducted, a trade or business in the United States during the year, you are required to submit a return.

Though you have U.S. income on which the tax due was not satisfied by the withholding of tax at the source, even if you are not operating a trade or company in the country, you are required to submit a return.

If you have income from rental property that you choose to classify as income from a trade or company, for example, you must submit an income tax return in order to seek a refund of any excess withholding or to benefit from any deductions or credits.

Nonresident Alien Tax Treatment

The same tax rates that are in place for U.S. citizens and residents must be paid by nonresident aliens who are involved in a trade or business in the country. This tax must be paid on the amount of their effectively connected income after any permitted deductions. 

The payment of fixed, determinable, yearly, or monthly income from the United States is subject to a flat 30% tax (or a lower treaty rate) if you are not operating a trade or company, and deductions are not permitted from such income. Effectively linked income and fixed determinable, yearly, or periodic income may both be earned in the same year and will be taxed as such. 

Only income received in the United States or from a U.S. source is subject to income tax for nonresident aliens. They are exempt from paying taxes on income generated abroad. An American citizen who owns a firm in Germany and one in the United States, for instance, will only be subject to taxation on the revenue from the later source. The German company will be disregarded.

Unless specifically stated by a treaty, investment income earned in the United States that is not from a U.S. source is typically taxed at a rate of 30%. The Internal Revenue Service (IRS) has to be able to clearly distinguish between income that is tax-exempt and money that isn’t, thus nonresident aliens must keep meticulous records that detail the sources of all of their income.

Requirements for Filing for Nonresident Aliens

Only the income that has a U.S. source is typically liable to income tax for nonresident aliens. For effectively linked income and fixed or determinable, annual or periodic (FDAP) income, they are subject to two distinct tax rates.

Either personal service income or income from the running of a business in the United States is examples of effectively connected income (ECI) (such as wages or self-employment income). Nonresidents are subject to the same progressive tax rates as Americans.

Passive income includes things like interest, dividends, rent, and royalties. In the absence of a tax treaty that stipulates a lower rate, this income is taxed at a flat rate of 30%. 

Nonresident aliens must use Form 1040NR, U.S. Nonresident Alien Income Tax Return, or Form 1040NR-EZ, U.S. Income Tax Return for Certain Nonresident Aliens with No Dependents, to file their taxes and make any required payments.

Tax Agreements

With a number of other nations, the United States has income taxation agreements. These agreements can frequently help nonresident foreigners pay less or no tax on a variety of personal services and other income, including pensions, interest, dividends, royalties, and investment income. In order to ascertain whether certain categories of income are free from U.S. taxation or subject to a lower rate of taxation, each particular treaty must be examined.

International Tax Gap Series

Numerous non-resident foreigners work for pay each year in the United States. Thousands more own rental property or profit from American investments by way of interest or dividends. The criteria for nonresident alien tax filing are covered in this article.

Identifying an Alien’s Tax Status Is the First Step

If you are an alien (not a citizen of the United States), you are regarded as a nonresident alien until you pass either the significant presence requirement for the calendar year or the green card test (January 1 – December 31). You are a nonresident alien if you don’t pass either the Substantial Presence Test or the Green Card Test.

If you pass either requirement, you are regarded as a resident alien in the United States and are often taxed similarly to American citizens. This indicates that your international income is taxable in the United States and must be disclosed on your tax return therein.