The tax laws of the U.S. put all non-citizens into two groups: resident aliens and non-resident aliens. Taxation for these groups is determined by residency status, source of income, and applicable tax treaties. Here’s a breakdown of how taxation differs between the two.
Are You Taxed as a Resident Alien or as a Non-Resident Alien?
You are considered a resident alien for tax purposes if you meet either of the following tests.
- Green Card Test: You are a lawful permanent resident (a green card holder).
- Substantial Presence Test: You have been physically present in the U.S. for at least
- 31 days in the current year, and
- 183 days over the past three years.
- Calculated using a weighted formula: Count all the days you were physically present in the U.S. during the current year, but only one-third of the days you were physically present in the prior year, and only one-sixth of the days you were physically present in the year before that.
Example: You’re thinking about taxes for 2024. You have been physically present in the U.S. for 120 days per year in 2024, 2023, and 2022. This means you meet the first part of the Test, because 120 is greater than 31. You don’t meet the second part of the Test, though, because 120 + ( 120 / 3 ) + ( 120 / 6 ) = 180, which is less than 183.
Note: There are some days that do not count toward the Test, and there are categories of exempt individuals. Consult with an experienced attorney if you have any questions.
You are considered a non-resident alien for tax purposes if you do not meet either the Green Card Test or the Substantial Presence Test.
Tax Treatment for Resident Aliens
- Taxed on worldwide income, just like U.S. citizens.
- File Form 1040 for federal income tax.
- Eligible for the standard deduction, tax credits, and itemized deductions available to U.S. citizens.
- Required to report foreign bank accounts (through FinCEN Form 114, also known as “the FBAR”) and comply with the Foreign Account Tax Compliance Act (FATCA).
Tax Treatment for Non-Resident Aliens
- Only taxed on income earned within the U.S.
- Effectively Connected Income: Examples are standard salary and wages. Taxed at the same graduated rates that are applied to U.S. citizens, unless reduced by a tax treaty.
- Fixed, Determinable, Annual, or Periodic Income: Examples are interest, dividends, alimony or rent received. Subject to a flat 30% tax, unless reduced by a tax treaty, with no deductions.
- File Form 1040-NR for federal income tax.
- Generally, no standard deduction.
- May be eligible for tax treaty benefits (using Form 8833).
- Not required to report foreign income or foreign accounts unless engaged in U.S. trade or business.
Other Considerations
- Dual-Status Aliens: If you change residency status during the year—for example, by receiving your green card—you would file two tax returns that year: one for the portion of the year that you were a non-resident, and another for the portion of the year that you were a resident.
- Tax Treaties: Some countries have agreements with the U.S. that allow lower tax rates or exemptions for certain income types.
- State Taxes: Remember that the state in which you live has its own particular tax laws.
Understanding U.S. tax law is difficult. It is even more complex for resident and non-resident aliens, who must consider factors like tax treaties, exemptions, multiple sources of income, and changing residency status. Ensuring compliance while maximizing potential tax benefits requires careful attention to detail. If you are unsure about your tax obligations or how the rules apply to your specific situation, an experienced law firm like Lefebvre Michel, PLLC, can provide personalized guidance to help you navigate the process with ease.
Disclaimer
This article is for informational purposes only and does not constitute legal advice. Laws and policies are subject to change, and individual cases may vary. Consult with Lefebvre Michel, PLLC, to discuss your specific situation and receive personalized guidance.