This International Tax Blog series will discuss U.S. filing requirements for nonresident aliens and dual citizens. To get started, we will discuss some of the terms that will be used in the series and provide some background information about what these terms mean.
The main type of taxpayer in the United States is a U.S. citizen or resident alien. A resident alien is someone living in the United States and taxed the same as a citizen on his or her worldwide income. A nonresident alien is someone who is not a U.S. citizen and:
- is not living in the United States,
- is only in the United States temporarily, or
- meets an exception to not be considered a resident.
If someone becomes a U.S. person (resident or citizen) or leaves the country and gives up his or her U.S. status during the year, that year is considered a dual status year, meaning the individual will be considered a nonresident for part of the year and a resident for part of the year.
Here are a couple of the main tests to determine a foreign taxpayer’s residency status:
- Substantial presence test – If you are in the United States for at least 31 days in the current tax year and at least 183 days during the three-year period that includes the current year and two prior years you meet the substantial presence test for U.S. residency. The days that count toward this test for the two prior years are limited – only 0.333 days of the first preceding year and 0.167 days of the second preceding year count toward this test.
- There are some exceptions to this rule. Teachers and scholars can exclude their presence in the United States for this test if they have a certain visa type and substantially comply with the requirements of the visa. Someone cannot be an exempt individual indefinitely; the number of years the exception can be claimed is limited.
- Closer connection to a foreign country – This could apply if you were in the United States fewer than 183 days in the current year, establish that your tax home is in a foreign country, and establish that you have a closer connection to one foreign country in which you have a tax home. If you meet the closer connection test, you will not be considered a U.S. resident even if you meet the substantial presence test.
- You cannot claim this exception indefinitely. It will not apply if you’ve taken steps to change your immigration status to a permanent resident, if you have not maintained a closer connection to a foreign country, or if you haven’t complied with your visa requirements. You are also required to have a departure date in mind in the near future.
Nonresident aliens can still owe tax to the United States on income from U.S. sources. There are different types of U.S. sourced income—some are taxable to nonresidents and others are not.
- Income effectively connected with a U.S. trade or business – This income (which includes U.S. wages) is taxed at the same rates that apply to U.S. citizens and residents. You can elect to treat income from real property located in the United States for the production of income as effectively connected income (gains on sales, rents, and royalties).
- U.S. income not effectively connected with a U.S. trade or business – This income (which includes interest paid on U.S. debt and dividends from domestic corporations) is taxed at 30% unless a treaty between the foreign country and the United States has set a lower applicable rate.
- Interest from U.S. bank accounts – This is one of the rare exceptions of U.S. sourced income that is not taxable to nonresident aliens.
- U.S. income exempt from U.S. tax – This income is exempt from tax by treaty.
We hope this helps clarify some of the terms that will be used in this series on U.S. filing requirements for nonresident aliens and dual citizens.