CPAs for Expats
US Tax for Non-US Citizens
As most of you already know, US citizens have to file US tax returns every year in which they have enough income to meet the filing requirements, no matter where they live and where they work. However, what about the opposite case? When do people who are not citizens or residents of the US ever have to file taxes in the US?
The basic answer to this question is: “Whenever they have income from United States sources”. However, that seemingly simple answer is fraught with pitfalls and exceptions. Today, we will attempt to get some clarity on this and some related issues as they relate to non-resident aliens (see below) and their income from the US.
What Is a “Nonresident alien”?
The first thing we need to discuss is the IRS’s definitions of “nonresident aliens” (or “NRA”), which is the term the IRS uses for people not subject to US taxation of their worldwide income, in contrast to a “resident alien”, who is treated the same as a US citizen. The IRS defines a nonresident alien as anyone who is not a US citizen or resident alien. The definition of a citizen is, while not always simple, binary—people are either citizens or they are not—while the definition of “resident alien” can be unclear and depends on multiple variables.
The IRS applies two tests to non-citizens to determine whether they are nonresident or resident aliens. If the alien satisfies either of the tests, he or she is a resident alien, and therefore subject to the same taxation rules as US citizens. Let’s go through the tests one at a time:
Green Card Test
If a noncitizen is issued an Alien Registration Card—better known as a Green Card—and is granted lawful permanent resident status, then he or she is automatically a resident alien and is treated the same as a US citizen in all matters regarding US taxes. Once a person is granted a Green Card, they remain a "resident" until the Green Card is either abandoned (i.e., sent back to the Department of Homeland Security along with Form I-407) or taken away (i.e., if the government or a judge deports the alien or declares him or her inadmissible to the US).
VERY IMPORTANT NOTE: Even if a green card expires or becomes invalid because the alien spent too much time outside the US without DHS authorization, the IRS still considers the alien to be a resident for US tax purposes until Form I-407 is received by DHS. Green card holders can use the Streamlined Procedures to catch up on their returns if they mistakenly stopped filing after the expiration of their green cards.
Substantial Presence Test
Using this method, the IRS determines if a non-US citizen is a US tax resident by calculating the number of days that the individual was in the United States for during the tax year and the previous two years. There are two numbers that the IRS looks at when calculating the Substantial Presence Test: 31 and 183. Specifically:
If you were in the US for at least 31 days during the tax year; AND
If the total amount of days you were in the US during the tax year, plus one third of the days you were in the US during the previous year, plus one sixth of the days you were in the US during the year before that, adds up to 183 or more;
…then you are considered a resident. Otherwise, you are considered a nonresident.
Aliens in the United States on certain visas are exempt from the Substantial Presence test—i.e., even if they spend the entire year in the US on one of these visas, they still qualify as a nonresident. These aliens include:
Foreign government or international organization employees on most A or G visas;
Teachers or trainees on J or Q visas;
Students on F, J, M, or Q visas;
Professional athletes in the United States temporarily for charity sports events.
In general, there are limits to how long a person can remain an exempt individual. Contact us for details if you are in one of these categories and you are unsure of your tax status.
Individuals with US-sourced income who do not satisfy either of the tests mentioned above are nonresident aliens, and need to file Form 1040-NR in the following circumstances:
If they are engaged in a trade or business in the US;
If they had wage or pension income from US employment;
If they have income from a US rental property;
If they have passive income sourced from the US, including interest and dividends;
If they are a partner in a US partnership (or a member of a US LLC) which was engaged in a trade or business in the US.
There are additional situations where an NRA would need to file a return, but they are beyond the scope of this article, and not particularly common.
NRAs report their income on Form 1040-NR, and pay tax at different rates depending on the type of income. Income which is “effectively connected with a US trade or business” (also called “effectively connected income”, or ECI) is generally taxed at the same rates as a US resident would pay, at bracketed rates ranging from 10% to 37%. Other income (known as “not effectively connected”, or NEC), such as interest or dividends, are taxed at fixed rates. Usually, the rate for NEC income is 30%, unless a tax treaty dictates a lower rate (more on tax treaties later).
If you have employment or rental income, you may also have to file a state return. Each state has its own filing requirements, so make sure you are aware of them before investing in a state.
Withholding and Claiming Refunds
Often, an NRA will receive income from a US source with tax already withheld. Nonresident withholding is usually done on Form 1042-S (investments), Form 8805 (partnership income), or Form 8288-A (real estate sales). As is often the case with US residents, the withholding regulations may dictate that the rate of withholding is more than the tax owed. In these cases, the NRA can request a refund of the excess tax. Consider the following examples, using our old friends Harry and Ginny Potter, who are both British citizens:
Harry worked for MACUSA, a US government agency, as a law enforcement consultant. After 10 years at MACUSA, he moved back to the UK. While he was working in the US, he had taken advantage of the government’s Thrift Savings Plan, and the money remained there until he was 59 ½, at which point Harry withdrew $15,000 from the account. The administrator of the account, seeing that Harry is a nonresident alien, withheld $4,500 in tax and sent Harry a Form 1042-S detailing the withholding. Harry should file Form 1040-NR to claim a refund for the tax withheld above his rate—he will probably receive a refund in the neighborhood of $2,800.
Ginny opened an investment account while the Potters were living in the United States with the earnings she received from her career as a Quidditch coach (she coached the Fitchburg Finches while Harry was working for MACUSA). Three years after the Potters move back to England, Ginny received a dividend payout of $5,000 from her investment account. The investment company withheld $1,500 (30%) because Ginny never filled out Form W-8BEN. However, the rate of tax on dividends for a UK citizen is only 15%, as per the US-UK tax treaty. Ginny can file Form 1040-NR to claim her refund of $750.
US Tax Treaties
The United States has treaties with nearly 70 countries which are designed to eliminate double taxation and tax evasion. In addition, the treaties promote commerce between the contracting countries and streamline the handling of disputes and jurisdiction questions. Many tax treaties also provide for a lower rate of tax for specific types of income, such as interest, dividends, annuities, royalties, and social security. Consult your country’s treaty (note—many former Soviet republics are still covered by the US-USSR treaty signed in 1973, so check the IRS website to confirm your country’s status) to see what your rates of tax should be, and compare to the rate of tax actually withheld by your US payor to see if you might be entitled to a refund.
One word of caution regarding tax treaties: If you become a US resident during a tax year (for example, if you receive a green card or if you satisfy the substantial presence test), you will typically lose most of the protections of the tax treaty which you had previously enjoyed. Contact us for details.
When a nonresident alien who was never issued a Social Security Number files a tax return, he or she needs to apply for an Individual Tax Identification Number (ITIN). An NRA applies for an ITIN by filling out Form W-7 and submitting it with the required forms of identification (usually a foreign passport or a certified copy). The IRS typically issues the ITIN in 3 months or so after receiving the application.
A few notes about ITINs:
If you are eligible for a Social Security Number (for example, if you were born in the US, or born outside the US to married US-citizen parents), you are not permitted to apply for an ITIN. In those cases you would need to visit your local US Embassy or Consulate to apply for a Social Security number—and then contact us about catching up on your tax returns using the Streamlined Procedures or the Relief Procedures for Accidental Americans.
You cannot apply for an ITIN without a reason. Valid reasons include filing a tax return (which you would include with the application), withholding tax on partnership income, or claiming benefits under a tax treaty.
If you receive a Social Security Number after receiving an ITIN, you should stop using the ITIN. You should contact the IRS about merging the information from both accounts under your new Social Security Number.
ITINs have to be renewed if they haven’t been used for three years. In addition, ITINs that have middle digits of 70 through 99 (except for 89 or 93) have to be renewed before filing a return in 2021. Contact us if your ITIN needs to be renewed.
As a non-US citizen, you may be under the impression that you would have fewer requirements to worry about when it comes to the US taxes, but that wouldn’t be the case. NRAs can come under strict scrutiny by the IRS if they do not file US taxes when they are supposed to, and could also be leaving money on the table if they do not claim the refunds to which they are entitled. Contact us if you are a nonresident with US income, and we will help make sure you are in compliance with the IRS.