Non-U.S. Citizens: Filing Requirements and Tax Treatment

If you are not a U.S. citizen, your U.S. federal income-tax and tax return obligations depend on tax residency, income and applicable exceptions. Citizenship or immigration status alone does not answer whether worldwide income or particular U.S.-connected income is taxable.

This article explores how the IRS determines a non-U.S. individual’s tax residency status, what kind of tax returns non-U.S. citizens must file, and how their income is taxed in the U.S.

Determining an Individual’s Tax Residency Status: Nonresident Alien vs. Resident Alien

For federal tax purposes, an “alien” is an individual who is not a U.S. citizen. A noncitizen generally is a nonresident unless the green card or substantial presence test is met, subject to treaty rules, exceptions and elections. Tax residency is not the same as immigration status.

Lawful permanent resident status generally satisfies the green card test. That status normally continues for tax purposes until it is taken away or administratively or judicially determined to have been abandoned; card expiration or moving abroad alone does not end it. Residency starting and ending dates, treaty positions and possible expatriation consequences require separate analysis.

To be considered as a resident of the United States under the substantial presence test, you must be physically present in the United States on at least:

• 31 days during the calendar year, and

• 183 days during the 3-year period that includes the current year and the 2 years immediately prior, counting:

  • All the days you were present in the current year, and
  • 1/3 of the days you were present in the first year before the current year, and
  • 1/6 of the days you were present in the second year before the current year.

The closer-connection exception generally requires fewer than 183 actual days in the United States in the current year, a foreign tax home throughout that year and a closer connection to that foreign country. A limited two-country rule also exists. Taking steps toward lawful permanent residence can disqualify a claim. Form 8840 generally must be filed on time; consult the current instructions for the limited late-filing exception.

Certain qualifying government-related individuals, students, teachers, trainees and athletes can exclude specified days under the substantial presence rules. The term “exempt individual” concerns day counting, not a blanket income-tax exemption. Visa conditions, time limits and Form 8843 requirements may apply; holding a visa alone is insufficient.

Meeting a residency test usually results in resident tax treatment, but a qualifying treaty residence rule or other exception can change the result. Treaty claims may require Form 8833 with Form 1040-NR. First-year elections and dual-status years also need separate analysis. See IRS Publication 519 for the applicable rules.

Resident aliens are required to file different tax returns and are taxed differently than nonresident aliens. Given that the filing requirements and tax treatment of resident aliens and nonresident aliens differ significantly, you are encouraged to consult with a tax attorney to assist you in making a determination as to your individual tax residency status.

Filing Requirements for Non-U.S. Citizens

A nonresident may need Form 1040-NR, U.S. Nonresident Alien Income Tax Return, in the following circumstances, subject to the current form instructions and their exceptions:

• You engaged in a U.S. trade or business, generally even if it produced no income or the income was treaty-exempt, subject to specified exceptions;
• You were not engaged in a U.S. trade or business but received reportable U.S.-source income and not all U.S. tax due was withheld;
• You seek a refund or an allowable deduction or credit requiring a return. Special taxes and other circumstances can also create filing obligations; separate information forms may be required even without a return.

Form 1040-NR reports taxable items under the applicable source, effectively connected income and treaty rules; wages, rent, pensions, scholarships and gains do not all receive identical treatment. For a calendar-year individual receiving employee wages subject to U.S. income-tax withholding, the tax return is generally due April 15 of the following year; without such wages, generally June 15. Weekend, holiday, extension and relief rules can change the filing date. An extension to file generally does not extend the time to pay.

Resident aliens generally follow the federal income-tax rules for U.S. citizens, including the applicable filing thresholds, and use Form 1040 or, if eligible, Form 1040-SR. They are not necessarily lawful permanent residents: substantial presence can establish tax residency. Calendar-year returns generally are due April 15 of the following year, subject to applicable exceptions, extensions and relief.

U.S. citizens who move abroad generally remain subject to worldwide-income rules and may need a Form 1040 tax return. They do not become resident aliens merely by moving. Expatriation, dual-status years and subsequent nonresident filing obligations require separate analysis.

Ordinary late-filing and late-payment penalties can apply to nonresidents. Failure to file generally costs 5% of unpaid tax per month or partial month, up to 25%; failure to pay generally costs 0.5% per month or partial month, up to 25%. When both apply, the filing penalty generally is reduced by the payment penalty for that month. Minimum penalties, different rates and relief rules may apply; interest can also accrue.

Tax Treatment of Nonresident Aliens and Resident Aliens

Nonresident taxation distinguishes effectively connected income (ECI) from other income. ECI generally is taxed at graduated rates after allowable deductions. U.S.-source fixed or determinable annual or periodic income not effectively connected with a U.S. trade or business generally is taxed at 30% of gross income, without deductions, unless a statutory exemption or applicable treaty reduces or eliminates the tax. Certain foreign-source income can be ECI, and capital gains have separate rules; merely having a U.S. business does not make all income ECI.

Nonresident-alien tax treatment depends on source, effectively connected income and applicable exceptions or treaties. Compensation generally is sourced where services are performed; the employer’s nationality alone does not determine whether wages are U.S.-source.

Resident aliens generally report worldwide income, like U.S. citizens, subject to applicable exclusions, credits and treaty rules. Use the forms and filing instructions appropriate to the tax year and facts. Filing status, deductions and credits depend on eligibility; dual-status years and a nonresident spouse can limit otherwise available treatment.

Do You Need a Tax Attorney?

A tax attorney can help non-U.S. citizens determine their tax residency status and provide guidance on their filing requirements as well as how their U.S. and worldwide income will be taxed by the U.S. federal government.

If the IRS has assessed additional taxes, penalties and/or interest due to the taxpayer’s noncompliance, incorrect tax return, or errors on the tax return, a tax attorney can help you become filing compliant, seek reassessment of tax due, and pursue abatement of penalties where the circumstances warrant same.

For a consultation with Segal, Cohen & Landis (SCL), the following issues may be relevant. Confirm the proposed services and fees for your circumstances; no outcome is guaranteed:

• Counsel on tax residency status of non-U.S. citizens;
• Guidance on filing compliance for non-U.S. citizens;
• Review of assessments and possible corrections through appropriate returns or procedures;
• Evaluation of eligibility for an offer in compromise, installment agreement or currently not collectible status; the latter generally postpones collection rather than erasing tax;
• Penalty abatement;
• IRS Appeals.

To discuss your tax matter, contact the firm at (310) 285-3999. Confirm who will conduct the consultation, whether a fee applies, and the proposed scope and cost before engaging representation.