For US tax purposes, the meaning of 'resident alien' versus 'non-resident alien' statuses plays a crucial role in determining one's tax obligations. This guide aims to clarify these terms, providing a clear understanding of their implications for tax compliance.
​Key Takeaways
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What is the meaning of the term 'Resident Alien'?
A Resident Alien is a foreign individual who is not a U.S. citizen but resides in the U.S. and meets specific criteria set by the IRS. Typically, this status is determined by the "Green Card Test" or the "Substantial Presence Test." Resident Aliens are generally taxed on their worldwide income, similar to U.S. citizens.
What is the meaning of the term 'Nonresident Alien'?
A Nonresident Alien is a foreign individual who does not meet the criteria to be considered a Resident Alien. They are typically in the U.S. for a short duration, like tourists, or under specific visas. Nonresident Aliens are taxed only on their U.S.-sourced income.
Determining Residency Status
Your residency status is primarily determined by the aforementioned "Green Card Test" and "Substantial Presence Test." If you have a green card and you've visited the US after obtaining the Green Card, you're a Resident Alien. If you don't, the Substantial Presence Test calculates the number of days you've been in the U.S. over the past three years. If it's 183 days or more, you're considered a Resident Alien.
Example: Maria, a researcher from Spain, has been in the U.S. for 200 days in the current year. She would be considered a Resident Alien for tax purposes.
Key Tax Differences
Taxable Income: Resident Aliens are taxed on worldwide income, while Nonresident Aliens are taxed only on U.S.-sourced income.
Tax Rates: Nonresident Aliens might be subject to different tax rates and can benefit from tax treaties between the U.S. and their home country.
Deductions: Nonresident Aliens have limited itemized deductions compared to Resident Aliens.
Filing a Nonresident Alien Tax Return (1040NR)
If you're a Nonresident Alien with U.S.-sourced income, you must file Form 1040NR. This form is specifically designed for nonresidents and differs from the standard tax return forms used by U.S. citizens and Resident Aliens.
Worldwide Income vs US-Sourced Income
Worldwide income includes all income, irrespective of where it's earned. U.S.-sourced income is income earned within the U.S. While Resident Aliens are taxed on worldwide income, Nonresident Aliens are only taxed on U.S.-sourced income.
Important Notices or Exceptions:
Some Nonresident Aliens from countries with tax treaties with the U.S. might be eligible for reduced tax rates or exemptions.
Not all U.S.-sourced income is taxable. For instance, bank interest from personal savings accounts is often exempt.
Penalties can be severe for misrepresenting your residency status or failing to report income.
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Article by Lewis Grunfeld, CPA
Lewis Grunfeld, CPA, is a renowned expert in international and U.S. expat taxation, with expertise spanning over ten years. He has successfully helped thousands of expats around the world navigate complex international U.S. tax regulations, and achieve significant tax savings. His work is driven by a strongly rooted passion for assisting the expat community through a wide range of tax situations, ensuring tailored solutions for each unique situation.