What Non-U.S. Citizens Should Know About Filing U.S. Tax Returns and Paying Income Tax
If you’re not a United States citizen but you earn income from the United States, you may be wondering if you need to file a United States federal income tax return.
Most likely, you do have to file a U.S. tax return.
Unfortunately, tax law in the United States is complicated.
It’s always best to meet with a tax professional. A tax professional can examine your specific situation. Then, they can determine whether your situation requires you to file a tax return.
That said, there are some general guidelines you can follow to start figuring this out yourself.
Determine Your Status
If you’re not a United States citizen, you’re either a resident alien or a nonresident alien.
Your status as a resident alien or a nonresident alien affects how you file your tax return and how your taxes work.
To determine your status, there are two tests you must take:
- The green card test
- The substantial presence test
If you pass either test, you’re considered a United States resident alien.
(Note: You're likely also eligible for an individual retirement account.)
There are exceptions that may apply in certain circumstances so it’s best to consult an expert that can take a look at your entire situation.
1. The green card test
If you are a lawful United States resident at any time during the calendar year, you pass this test.
Lawful United States residence is determined by the ability to reside permanently in the United States as an immigrant.
Typically, this is achieved by having an alien registration card, Form I-551, which is commonly referred to as a green card.
In order to lose this status, you have to:
- Voluntarily renounce and abandon the status in writing to the United States Citizenship and Immigration Services (USCIS)
- Have your status administratively terminated by the USCIS or
- Have your immigrant status judicially terminated by a United States federal court
It is possible you may not be a lawful permanent resident for the full year.
If you don’t meet the substantial presence test for the year, your residency starting date is the first day which you are present in the United States as a lawful permanent resident.
You can elect to be treated as a resident alien for the entire calendar year if you wish.
2. The substantial presence test
The substantial presence test is more complicated and has more exceptions. This test is based on the number of days you’re physically present in the United States.
If you’re present at least 31 days during the current year and you meet the next calculation, as well, you pass this test.
The second calculation is a bit tricker.
You have to be present 183 days during the three-year period that includes the current year and two years immediately before that.
However, you don’t count every day. Instead, you count all of the days you were present the current year.
Then, you add one-third of the days you were present in the first year before the current year.
Finally, you add one-sixth of the days you were present in the second year before the current year.
If you meet both the 31-day rule and the 183-day rule, you’ve passed this test notwithstanding any of the many exceptions you can read about here.
Filing Taxes as a Resident Alien
If you’re a resident alien, things are pretty straightforward.
For the most part, you’re taxed like a regular United States citizen and will use the usual forms to fill out your tax return.
Normally, this is Form 1040, U.S. Individual Income Tax Return.
Unfortunately, United States residents are required to pay federal income tax on all income you earn worldwide. It doesn’t matter which country you earn the income in.
As a resident alien for an entire tax year, you’re able to claim the same deductions as United States citizens.
On the other hand, you’ll need to check each tax credit you might qualify for to see whether you can take it as a resident alien.
Filing Taxes as a Nonresident Alien
As a nonresident alien, things are a bit different.
Instead of filing Form 1040, U.S. Individual Income Tax Return, you’ll likely need to file one of these two forms:
- Form 1040NR, U.S. Nonresident Alien Income Tax Return
- Form 1040NR-EZ, U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents
These forms generally only tax nonresident aliens on their United States-sourced income.
This income is subject to two different tax rates depending on how the income is earned:
- Effectively connected income
- Fixed or determinable, annual or periodic income
Effectively connected income
Effectively connected income (ECI) can be earned in a couple of ways.
- It is income earned in the United States from operating a business in the United States.
- It can also be personal service income earned the United States, such as wages or self-employment income.
This income is taxed at the same graduated rates as it is for a United States person.
Fixed or Determinable, Annual or Periodic (FDAP) Income
FDAP income is different. It is typically passive income such as:
FDAP income is usually taxed at 30%, but may be taxed at a lower rate depending on any applicable tax treaties.
Deductions and Credits
In general, non-resident aliens cannot claim all of the same types of deductions resident aliens and United States citizens can.
However, tax treaties may allow you to claim certain deductions or tax credits.
For instance, certain individuals from India may be able to claim the standard deduction.
You May Have to File Two Tax Returns
Based on the rules, it’s possible to be a dual-status taxpayer that must file both a resident and a non-resident tax return in the same year.
This typically happens in years which you transition from being a nonresident to a resident.
You’ll file a non-resident tax return for the portion of the year you weren’t considered a resident. You’ll also file a regular tax return for the part of the year you were considered a resident.
This can get complicated. Consult a tax professional if you need help determining what to do.
Minimizing Your Tax Liability
As a citizen or resident of another country, three particular items may help you minimize your tax liability.
Foreign tax credit
If you pay taxes to a foreign country, you may be able to claim a foreign tax credit or take an itemized deduction for foreign taxes paid.
The foreign tax credit allowed can be calculated on Form 1116, Foreign Tax Credit.
Adding foreign taxes paid as an itemized deduction can be done on Schedule A, Itemized Deductions. You’d list foreign taxes paid on line 6, other taxes.
It’s important to note, you can no longer deduct foreign taxes paid on real estate.
Tax credits are better than deductions if you qualify for them.
A credit will reduce the amount of tax you owe by one dollar for each dollar of credit.
A deduction only reduces your taxable income by one dollar which means you’ll only save a fraction of that dollar after taxes are applied.
Another way you may be able to save is if your country has a tax treaty with the United States. Tax treaties can help reduce your United States tax liability.
The IRS states that tax treaties generally reduce the United States taxes of residents of foreign countries as determined under the applicable treaties.
Tax treaties can be complex.
Using a tax professional that is intimately familiar with any tax treaties your country may have with the United States would be a smart move to potentially minimize your United States tax liability.
What About Taxes In Your Home Country?
Tax laws around the world can vary wildly from country to country.
While some United States-based tax preparers may be familiar with tax laws in your home country, most United States-based tax preparers likely won’t be.
It never hurts to double check with a tax professional in your home country to make sure any advice you get from a United State tax preparer is accurate for your home country’s tax laws.
Don’t Forget About State Income Taxes
Each state has its own tax laws.
Some states don’t have an income tax at all. Others have hefty income taxes.
While states might have a income tax that closely mimics the federal income tax, they don’t have to follow the same rules.
You may need to file in the state you’re living in.
Additionally, some items, like tax treaties, may not apply to state taxes like they would with federal taxes.
Taxes Are Complicated
Taxes in the United States are complicated enough for United States citizens. If you’re a nonresident alien or resident alien, things get even more complex.
It is possible to read through the massive amounts of tax information on the web to figure out how to file your tax return on your own.
It probably isn’t worth the hours of your time you may waste doing so.
Instead, look for a tax professional who commonly works with resident or nonresident aliens, depending on your situation, to get help preparing your return. These professionals should be best suited to file your tax returns.