Non-resident aliens have unique tax reporting requirements. MEDOWS CPA, PLLC is a New York City Certified Public Accounting firm experienced in dealing with the unique tax requirements of non-resident aliens. Please feel free to contact us regarding your tax needs as not every NYC CPA firm is aware of the tax complexities of Non-Resident Alien tax returns.
There is a distinction in the US tax code between Non-Resident Aliens temporarily in the country and those here on a more permanent basis.
Non-Resident Aliens Temporarily in the USA (Less than 90 Days)
Your income from labor or services performed in the United States is free from federal taxation if several conditions apply. First, you were not present in the USA for more than 90 days during the tax year. Second, you earned, in total, less than $3,000 from the US-based work. Third, you are an employee of, or under contract with, a foreign person not engaged in a business in the USA; a US person, if the services are performed for the US person’s office overseas; or a foreign office of an agency of the US government. If these three conditions are satisfied, your income is not US-source income and it is not subject to federal tax.
The $3,000 compensation cap does not include funds you receive from your employer for travel expenses. The $3,000 cap also does not include pension or retirement payments from services performed in the United States.
The United States has negotiated tax treaties with many countries. Some of these treaties allow for an income ceiling above $3,000 or a length of stay limitation beyond 90 days. I will research the USA’s treaty, if one has been executed, with your home country to learn if different rules apply to you. Exceptions also exist for individuals who are employed in certain industries, for example the maritime trade, and for diplomats, students, and other workers.
Non-Resident Aliens in the USA More Than 90 Days
The distinction between resident aliens and nonresident aliens is crucial because resident aliens, like U.S. citizens, are taxed on worldwide income, whereas nonresident aliens are taxed only on U.S. source income. Your status as a nonresident alien individual affords you many opportunities to take advantage of the U.S. tax laws.
We must verify your status as a nonresident alien as the first step in the tax planning process. This procedure is complicated due to the many compliance issues associated with residency. Sometimes residency is determined under an applicable tax treaty; however, if no treaty exists, you are treated as a resident only if one of the following three conditions is met:
- You are a “lawful permanent resident” of the U.S. at any time during the calendar year (i.e., you have been issued a “green card”),
- You meet the “substantial presence test” (i.e., you have been present in the U.S. on at least 183 days during a three year period that includes the current year), or
- You elect to be treated as a resident alien.
The absence of all of the preceding conditions generally indicates that you are a nonresident alien. Of course, there are exceptions to the general rules. For example, an alien individual who meets the “substantial presence test” may still be considered a nonresident alien if a “closer connection” is established with a tax home outside the United States. You may also qualify for dual status residency; if so, your tax year is divided into two separate tax periods. You are then taxed as a resident during one period and as a nonresident during the other.
There are specific rules for establishing and terminating residency, abandoning residency, and expatriating. In addition, all departing aliens (resident or nonresident) must obtain a certificate from the IRS, known as a sailing or departure permit, stating that they have complied with the U.S. income tax laws.
The income of foreign persons subject to U.S. income tax is divided into two categories: certain income that is effectively connected with a U.S. trade or business; and certain U.S. source income that is not effectively connected with a U.S. trade or business. Effectively connected income is taxed at graduated rates. Income not effectively connected with a U.S. trade or business is taxed at a flat 30 percent rate, subject to withholding.
Income is subject to withholding if it is fixed or determinable annual or periodical (FDAP) income. Some examples of FDAP income include: interest, alimony, dividends, royalties, pensions and annuities, original issue discount, and compensation for personal services. There could be other items classified as source income depending on the taxpayer’s business. In addition, a payment may be subject to withholding if it is specifically required to be withheld even though it may not constitute U.S. source income.
Generally, Non-resident aliens file a special tax return (1040-NR) and are subject to certain specific rules:
- Married nonresident aliens who are not married to US citizens or residents generally must use the Tax Table column or the Tax Rate
- Schedule for married filing separate returns when determining the tax on income effectively connected with a US trade or business.
- They normally cannot use the Tax Table column or the Tax Rate Schedule for single individuals.
- Nonresident aliens cannot claim the standard deduction. However, students and business apprentices from India may be eligible to claim the standard deduction under Article 21 of the U.S.A-India Income Tax.
- Generally, if you are a nonresident alien engaged in a trade or business in the United States, you can claim only one personal exemption. You may be able to claim an exemption for a spouse and a dependent if you are described in any of the following categories:
- If you are a resident of Mexico or Canada or a national of the United States, you can also claim a personal exemption for your spouse if your spouse had no gross income for U.S. tax purposes and was not the dependent of another taxpayer. In addition, you can claim exemptions for your dependents who meet certain tests. Residents of Mexico, Canada, or nationals of the United States must use the same rules as U.S. citizens to determine who is a dependent and for which dependents exemptions can be claimed. See Publication 501 for these rules.
- Pursuant to tax treaties certain residents of South Korea and certain students and business apprentices from India may be able to claim exemptions for their spouse and dependents.
- If you are a resident of Mexico or Canada or a national of the United States, you can also claim a personal exemption for your spouse if your spouse had no gross income for U.S. tax purposes and was not the dependent of another taxpayer. In addition, you can claim exemptions for your dependents who meet certain tests. Residents of Mexico, Canada, or nationals of the United States must use the same rules as U.S. citizens to determine who is a dependent and for which dependents exemptions can be claimed. See Publication 501 for these rules.
- You can claim deductions to figure your effectively connected taxable income. You generally cannot claim deductions related to income that is not connected with your U.S. business activities. Except for personal exemptions, and certain itemized deductions, you can claim deductions only to the extent they are connected with your effectively connected income. Nonresident aliens can deduct certain itemized deductions if they receive income effectively connected with their U.S. trade or business. These deductions include:
- State and local income taxes
- Charitable contributions to U.S. non-profit organizations. Casualty and theft losses
- Miscellaneous itemized deductions. The ordinary and necessary expenses related to a U.S. trade or business.