In the US, taxation for both resident aliens and non-resident aliens works differently. However, what's common is that both are required to pay income taxes.
The Internal Revenue Service has two tests (the green card test and the substantial test) that help them to identify the alien status of the individual.
In this blog, we will understand all about the resident aliens vs non-resident aliens and how the residency status affects the taxable amount of an individual.
Key Takeaways
The Internal Revenue Service uses two tests, namely the green card test and the substantial residence test. These tests help the IRS identify the alien status of the individual.
If an individual meets the requirements of any of the tests, then they are considered a resident alien for taxation. In other cases, they are treated as non-resident aliens.
As per the IRS, the non-resident alien is also required to pay annual tax returns to the IRS. However, the taxes are paid only on the income that is connected effectively to the United States.
What is a Resident or Non-Resident Alien?
As mentioned above, the IRS uses two tests to determine the alien status. The tests are the Green Card test and the Substantial Presence test. Now, if you are an alien with a green card, which enables you to hold U.S. citizenship, and the Immigration Service allows you to reside in the country legally, then you are a resident alien.
On the other hand, if you do not have a green card but
You have spent at least 31 days in the United States for the current tax year.
Or a total of 183 days during the last three tax years, including the current tax year.
If either of the two requirements is met, then you pass the physical presence test and are also considered a resident alien.
Count 183 Days This Way
When you're counting the number of days you were present in the US during the last three years, do this. Do not count every single day; instead, count a fraction of the days in two of the three years.
For example, you want to know the alien status for the 2024 tax because you live in the country for 60 days. So while counting, you will count all the 60 days of 2024, one-third of the days in the year 2023, and one-sixth of the days in the year 2022.
Let us say, if you were in the United States for 120 days in the year 2023, you would count only 40 days. And in the year 2022, you were in the US for 180 days, so you will only count one-sixth, which is for 30 days. This makes your total number of days in the last three years 130.
Hence, in this case, you will pay income tax as a non-resident alien.
Apart From This, If You Are in the US Under the Following Conditions, Then Those Are Not Counted:
When a taxpayer commutes to work in the United States from a residence in Mexico or Canada.
You cannot count the days when you are in the United States for less than 24 hours during the transit periods while flying between the two places.
Days when you were in the US as a crew member of a foreign vessel.
You also cannot count such days when you are not able to leave the US because of a medical condition that occurred while you were in the country.
Days when you are an "exempt individual".
With Respect to The Presence Test, An Exempt Individual is Someone:
Who is temporarily present in the US as an individual related to a foreign government under an A or G Visa.
A trainee or a teacher who is temporarily in the US under the J or the Q visa.
A student who is temporarily in the USA under the F, J, M, or Q visa.
Any professional athlete who is temporarily residing in the USA to compete in a charitable sports event.
Resident Alien Taxes
The taxation rules are the same for both U.S. residents and citizens. Meaning you have to report all the income that you have earned, regardless of the country in which you earn it. Meaning the foreign and the domestic income both will be taxed.
Now, in a case where you are also being taxed in the county of citizenship, then you can file for a foreign tax credit. Additionally, you can also qualify for the double taxation avoidance which comes under the US bilateral tax treaty.
As a resident alien taxpayer, you are required to file Form 1040 or Form 1040-EZ for your annual tax returns.
A Tip: In the transition years, when you are between being a resident alien and a non-resident alien, you are considered a Dual Status. A taxpayer with Dual status files two tax returns for that tax year.
Non-Resident Taxes
A taxpayer with a non-resident alien status is also required to pay income taxes to the IRS. However, the non-resident aliens only pay income tax on the income that is connected to the US. Meaning the non-resident aliens pay taxes only on the income they have earned in the US.
Additionally, the Internal Revenue Service cannot impose any taxes on the income a non-resident alien earned either in a foreign country or their home country.
For a Non-resident alien, Form 1040NR is used while filing their annual return.
In this form, the income earned in the US is reported.
Tax deductions and credits are also available on the non-resident return, just like any other US citizen or resident.
All the tax forms, such as 1040NR or Form 8843 for non-resident alien tax filing, are available with instructions at the official website of the IRS.
Dual-Status Taxpayers
When an individual transitions between being a resident alien and a non-resident alien, they are considered a Dual Status Taxpayer. Being a dual status taxpayer, you have to file two tax returns in the year. One return is filed for the portion of the year where you are considered a resident. Whereas another return is for the period of the year, during which you are considered a non-resident alien.
There are some instances in which the taxpayer can be treated as a full-year resident of the United States during their transition year. Doing so helps them to avoid filing two separate tax returns.
File Your Tax Return Under Expert Guidance
Knowing your status is essential because it lets you see how you are going to file the taxes for the year. Although the tax framework for both the resident alien and the non-resident alien is different, what remains common is that both of them are taxed on income.
So, if you are confused about your alien status and want to file taxes in the US without a hassle, connect with a US tax expert. Such an expert is Savetaxs, a leading name in the taxation industry. We have helped over thousands of US citizens, residents, and non-resident citizens to help them file their taxes with respect to their status.
Our experts ensure the entire process goes by with 100% accuracy, and maximum refunds are guaranteed. We are serving your clients across the world 24/7, so connect with us right away and make your taxation stress a thing of the past.
Note: This guide is for informational purposes only. The views expressed in this guide are personal and do not constitute the views of Savetaxs. Savetaxs or the author will not be responsible for any direct or indirect loss incurred by the reader for taking any decision based on the information or the contents. It is advisable to consult with either a Chartered Accountant (CA) or a professional Company Secretary (CS) from the Savetaxs team, as they are familiar with the current regulations and help you make accurate decisions and maintain accuracy throughout the whole process.
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Resident aliens use Form 1040 to file their tax returns. This is the same form used by U.S. citizens. Resident aliens are required to report both domestic and foreign income.
Whereas non-resident aliens file Form 1040-NR or Form 1040NR-EZ. They are only required to report the U.S.-sourced income. At the same time, dual-status aliens who change their status mid-year may require special tax filing treatment.
Resident aliens are taxed on their global income, like domestic salaries, wages, pensions, and investments. These individuals can also use tax credits and exclusions to reduce their tax, such as he foreign tax credit and foreign earned income exclusion.
Whereas the non-resident aliens are taxed on the income they have earned in the US. However, the investment income can be taxed at the flat rate of 30% unless the respective tax treaty reduces it.
A dual status alien is an individual whose tax residency changes within the same year. For example, starting as a non-resident alien and becoming a resident alien by mid-year. Such individuals are required to file a dual status return, which is quite complicated.
Yes, a non-resident alien can be chosen as a resident alien if they are married to a US citizen or resident and file a joint return.
The election must be made on your tax forms.
Your tax status is affected by it:
The alien status determines which tax form you will file. For the resident alien and the non-resident alien, the tax return form is different.
The source income of both entities is different.
Eligibility criteria for the deduction, exemption, and credits are different.
Yes, the tax residency is determined independently, regardless of your immigration status. If you are in the US on an immigrant visa like F-1 or J-1, then you can be treated as a resident alien for tax purposes only if you pass the substantial presence test.
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