WHAT IS A NONRESIDENT ALIEN?
A nonresident alien is an individual who does not meet the criteria for being classified as a resident alien for tax purposes in the United States. According to the Internal Revenue Code, nonresident aliens are generally only subject to U.S. income tax on their U.S.-sourced income. For example, if a nonresident alien works in the U.S. for six months and earns income from a U.S. employer, that income would be subject to U.S. income tax.

Nonresident aliens are required to file a tax return if they have U.S.-sourced income and want to claim a refund of any taxes withheld. They may also need to report any income from sources outside the U.S. if it is effectively connected with a U.S. trade or business. Nonresident aliens are not eligible for certain tax deductions and credits that are available to resident aliens and U.S. citizens.

WHAT IS A RESIDENT ALIEN?
A Resident Alien is an individual who meets the substantial presence test, which is based on their physical presence in the United States over a three-year period or meets the Green Card test. This means that they have been present in the U.S. for at least 31 days in the current year and 183 days in total over the past three years.

Resident aliens are treated similarly to U.S. citizens for tax purposes and are required to report their worldwide income on their tax returns. They are eligible for the same tax deductions and credits as U.S. citizens and are fully subject to U.S. income taxes. They may also have certain reporting requirements, such as reporting their foreign bank accounts if the total value exceeds a certain threshold.

Related: FBAR and FATCA: Reporting foreign accounts as US Expat

THE DIFFERENCE BETWEEN NONRESIDENT AND RESIDENT ALIENS
Nonresident aliens and resident aliens are two distinct classifications for tax purposes in the United States. Nonresident aliens are only taxed on their U.S.-sourced income and are exempt from reporting worldwide income. For example, a foreigner who earns income from a U.S. source, such as rent from a property in the U.S., would be considered a nonresident alien and would need to file a U.S. tax return reporting that income.

In contrast, a resident alien is someone who meets the substantial presence test, which means they have been physically present in the U.S. for a certain number of days over a three-year period. Resident aliens are subject to U.S. income tax on their worldwide income, just like U.S. citizens.

TAX IMPLICATIONS FOR NONRESIDENT ALIENS
Nonresident aliens are only subject to U.S. income tax on income from U.S. sources. For example, if a nonresident alien earns income from a job in the United States or from investments in U.S. companies, they would have to report and pay taxes on that income to the U.S. government.

However, income earned outside of the United States is generally not subject to U.S. income tax for nonresident aliens. It is important for nonresident aliens to understand their tax obligations and file the appropriate tax forms to report their U.S.-sourced income. This may include filing Form 1040NR or 1040NR-EZ, depending on their specific circumstances. Additionally, nonresident aliens may be eligible for certain tax treaty benefits that can reduce their tax liability.

US-SOURCED INCOME AND TAX LIABILITY
Nonresident aliens in the United States may have a tax liability for any income sourced from the US. Under US tax rules, income from sources within the country is subject to taxation, regardless of the individual’s residency status. This means that even nonresident aliens must report and pay taxes on any US-sourced income they earn.

However, nonresident aliens may be eligible for certain deductions, exemptions, or reduced tax rates under tax treaties between the United States and their home country. These treaties aim to prevent double taxation and promote international commerce by providing relief from income tax obligations. It is important for nonresident aliens to understand the provisions of the tax treaty between their home country and the US to take advantage of any available benefits.

EXEMPT INDIVIDUALS
Exempt individuals, such as certain international students, scholars, and trainees, may have a special tax status in the United States. These individuals are not considered resident aliens for tax purposes and are exempt from counting their days of presence in the US for the substantial presence test. As a result, they may be able to exclude certain types of income from their tax return, such as income from their foreign country of residence.

Exempt individuals generally need to file a tax return using Form 1040NR or 1040NR-EZ and must follow specific reporting requirements. It is essential for exempt individuals to understand their tax residency status and any applicable tax treaties to properly determine their tax liability.

PROFESSIONAL ATHLETES
Professional athletes who are nonresident aliens face unique tax challenges in the United States. Nonresident alien athletes are only taxed on their U.S.-sourced income, which includes income earned from competitions or endorsements within the country. However, they are exempt from reporting their worldwide income. To determine their tax status, athletes must meet the substantial presence tests by counting the number of days they spend in the United States over a three-year period. If they meet the criteria, they may be classified as resident aliens for tax purposes and be subject to tax on their worldwide income.

DETERMINING RESIDENCY STATUS OF NONRESIDENT ALIENS
Determining tax residency status is crucial for nonresident aliens in the US. Nonresidents are taxed only on their US-source income, while resident aliens are subject to tax on their worldwide income. Factors such as physical presence, visa type, and intent to stay influence residency determination.

SUBSTANTIAL PRESENCE TEST
The Substantial Presence Test is used to determine whether a nonresident alien will be considered a resident alien for tax purposes in the United States. According to the Internal Revenue Code Section 7701(b)(3), an individual will be considered a resident alien if they meet the substantial presence test by being physically present in the United States for at least 31 days during the current year and a total of 183 days during a three-year period that includes the current year, as well as the two preceding years, using a weighted formula.

Example:
If a nonresident alien was physically present in the U.S. for 120 days in the current year, 100 days in the first preceding year, and 80 days in the second preceding year, their total days of presence would be 300 (120 days + 100 days x 1/3 + 80 days x 1/6). Since this exceeds the 183-day threshold, the individual would be considered a resident alien for tax purposes.

It’s crucial for nonresident aliens to understand their tax residency status, as it determines their tax liability and reporting requirements in the United States.

ALIEN STATUS UNDER IMMIGRATION LAWS
Alien status under immigration laws refers to the classification of individuals who are not American citizens. There are two main categories: nonresident aliens and resident aliens. Determining alien status is important for tax purposes as it impacts an individual’s tax liability, reporting requirements, and eligibility for certain tax benefits.

J-1 OR F-1 VISA HOLDER STATUS
J-1 or F-1 visa holders in the United States are generally considered nonresident aliens for tax purposes. This means that they are not taxed on their worldwide income, but only on their income from U.S. sources. However, there are certain exceptions and rules that may affect their tax status.

For example, if a J-1 or F-1 visa holder meets the substantial presence test, they may be considered a resident alien and taxed on their worldwide income. The substantial presence test looks at the individual’s days of presence in the United States over a three-year period.

It is important for J-1 or F-1 visa holders to understand their tax status and obligations, as well as any provisions in tax treaties between their home country and the United States.

Hav a question? Contact Olivier Wagner, 1040 Abroad