In the United States, both citizens and non citizens who earn income are taxed. Resident aliens refer to people who have established permanent residency status in the United States. Nonresident aliens are people who have entered the country to live, work, or do business. Each category has significantly different tax consequences, so it’s important to file with the correct status. Our California-area CPA firm offers a brief outline to help you make the most sense out of these differences.
Resident Alien Tax Status:
The IRS treats a resident alien in essentially the same way as a U.S. citizen if the person meets either the “Green Card Test” or the “Substantial Presence Test.” Qualified resident aliens are taxed by the same income tax rates as a U.S. citizen. They also have access to the same tax deductions and credits, such as education credits and foreign tax credits (for taxes paid to another country).
Green Card Test:
If you have an alien registration card, also known as a “green card”, you are deemed to be a resident alien for US tax purposes. As a lawful permanent resident of the United States of America, you must file your annual tax return with the IRS (Form 1040). As long as you do not abandon your status or your status is not taken away by USCIS, you must pay taxes on your worldwide income.
Example: Hanna, who is a German citizen, received her green card on January 14th. She is now subject to US taxes and filing requirements on any income she earns in the US and in Germany.
Substantial Presence Test:
If you are physically present in the US for:
- 31 days during the year, AND
- more than 183 days within the past three years
You are deemed to be a resident alien for US tax purposes.
Example: Luis, a Portuguese citizen has been working seasonally in the U.S. for the last three years. In 2016, he was in the U.S. for five months. In 2015, he was present for three months and in 2014 he was present for two months. He is determined to have 190 eligible days for the substantial presence test.
Here’s how it’s calculated: if an individual is present in the U.S. for more than 31 days in the current year, add all the days from the current year plus a third of the days from the prior year and a sixth of the days from the year before that. If the total is 183 days or more, the person is deemed to be a resident alien. Important exception to this rule: if the individual holds a “J”, “Q”, or “F” visa while physically present in the country.
If you want to exclude certain number of days from the “Substantial Presence Test” you must file Form 8843 which may help you to avoid being classified as a tax resident in the eyes of the IRS. This leads us to the nonresident alien tax status.
Nonresident Alien Tax Status:
Not meeting the above tests deems you a nonresident alien. In this status, only U.S.-sourced income is usually subject to tax. Income other than wages is usually taxed at 30% and is not eligible for deductions. However, payment for personal services is generally considered to be connected with a U.S. trade or business, and is eligible for deductions, most credits, and the graduated tax rates used by U.S. citizens.
Dual-status aliens that can demonstrate a closer connection to a foreign country may take advantage of classifying their tax home in the foreign country. This can be valuable if taxes are lower in the foreign country. However, granting the nonresident status is not automatic and everyone must file Form 8840 with their IRS Form 1040NR.
We all can agree that these tax rules and exemptions are very complicated! That is why we encourage everyone to seek out the guidance of a tax professional such as MiklosCPA. We can explain these complicated regulations like these and ensure that you file correctly. MiklosCPA has helped businesses and individuals over the years handle their accounting needs and address tax questions such as resident alien statuses.
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