Tax Rules for Resident and Nonresident Aliens (2024)

Different rules apply for resident and nonresident aliens in the United States compared to citizens when filing taxes. Filers who are not citizens may be exempt from declaring certain types of income, depending on their circ*mstances.

Key Takeaways

Resident aliens legally work and live in the U.S. and may owe U.S. tax on all of their income.
Nonresident aliens don't meet the green card or substantial presence tests.
A nonresident alien who earns income from U.S. sources must file a return and pay taxes to the IRS.

Resident vs. Nonresident Aliens

The U.S. government has several classifications of residents. A citizen acquires citizenship by birth, acquisition, derivation, or naturalization. Many rights and responsibilities that come with being a citizen include paying taxes. Individuals who reside in the U.S. but are not citizens may be:

Resident Aliens: These individuals are not U.S. citizens but have green cards allowing them to work in the U.S. or have been in the country for at least 183 days over three years, including the current year.
Nonresident Aliens: These people are in the U.S. legally but do not have green cards. They might be tourists, students, or other visitors.

Taxation

Taxation of Resident Alien Income

Most resident aliens are taxed on all forms of income received, foreign or domestic. This includes any payments received from a pension from a foreign government. If someone lives in the United States and gets a pension from the Canadian government, they are liable for taxes on that income.

Resident aliens may claim the foreign-earned income exclusion or the foreign tax credit if they qualify. The exclusion prevents double taxation for individuals from a country with a tax treaty with the United States. The credit offsets any income taxes resident aliens pay to another country.

Resident aliens who work for a foreign government in the U.S. may also claim an exemption on their wages. This applies if the U.S. has a reciprocal tax treaty with the government that employs the person.

Taxation of Nonresident Alien Income

Unlike resident aliens, nonresident aliens pay income tax only on income earned in the U.S. or from a U.S. source. They do not have to pay any taxes on foreign-earned income.

A German citizen who owns a business in Germany and another in the U.S. will be taxed only on the income from the latter source. Taxes are not due in the United States on any income derived by the business in Germany. Any investment income realized in the U.S. that is not from a U.S. source is usually taxed at 30% unless otherwise specified by the treaty.

Residence Test

Resident aliens carry a green card, meet the residence test, or both. The alien taxpayer must reside in the U.S. for at least 31 days during the year and must have been in the U.S. for a total of at least 183 days of the past three years, including the current year.

However, the residence test only counts a day of residence in the U.S. as a full day for this test year. A day of residence only counts as one-third of a day in the previous year and one-sixth of a day in the year before. This means that the total number of days of residence during the previous two years must be divided by three or six before being totaled, and this final total must equal at least 183.

Exceptions

There are some exceptions to the residence test. They effectively exempt a large percentage of legal aliens in the U.S. from having to report taxable income. Below are some of the most common exceptions.

Commuters from Canada or Mexico to the U.S. to work cannot count commuting days as days of residence.
Aliens with a tax home in another country during the year and not in the U.S. for 183 days during the year are not required to pay taxes in the U.S.
Those who reside temporarily within the U.S. as teachers, trainees, students, diplomats, or athletes can claim an exemption for the days spent in the U.S. by filing Form 8843: Statement for Exempt Individuals and Individuals with a Medical Condition.
Anyone who is unexpectedly detained in the U.S. for medical reasons can claim a medical exemption.
A treaty with another country may exempt you from being classified as a resident even if an alien otherwise meets the residence test.

Those uncertain about tax status can refer to IRS Publication 519.

Filing Tax Returns

Aliens who receive their green cards during the middle of a tax year file a dual-status tax return because they were nonresident aliens before they got their cards and only became resident aliens afterward. People in this category must include a statement that breaks down all income they received.

Aliens who leave the U.S. for any time must obtain a certificate of compliance that states that they paid their U.S. taxes. Otherwise, a tax return must be filed and paid at the point of departure. They should obtain Form 1040-C: U.S. Departing Alien Income Tax Return to find out what they must report.

Aliens and any U.S. citizens who leave the U.S. and relinquish their citizenship must pay an expatriation tax on all of their income and assets. The taxpayer's assets are assessed for taxation the day before their expatriation.

What Is a Resident Alien for Tax Purposes?

According to the IRS, a resident alien is not a U.S. citizen but meets the green card or substantial presence test during a calendar year. A resident alien meets the green card test if they are a lawful permanent resident. The substantial presence test requires a resident alien to live in the country for 31 days during the current year and 183 days, including the current and previous two years. Resident aliens declare income and file the same forms as citizens.

What Is a Nonresident Alien for Tax Purposes?

A nonresident alien in the United States doesn't pass the green card or substantial presence tests. People are considered nonresident aliens if they are tourists, students, and businesspeople. Unlike resident aliens, nonresident aliens must file taxes on any income generated within the United States. Any foreign-earned income doesn't qualify for taxation in the U.S.

Do Resident Aliens Have to Pay Taxes on Income From Pensions and Investments From Their Home Country?

Resident aliens must declare all worldwide income on their tax forms to the IRS. This includes any pensions from a foreign government and any investment income earned from investments held in another country. They may claim the foreign-earned income exclusion or the foreign tax credit.

The Bottom Line

The rules can be complicated when it comes to the taxation of citizens, but more complex if for resident or nonresident aliens. For more information, individuals can consult IRS Publication 519 or speak with a tax professional to help guide them in the right direction when filing tax returns in the United States.

I'm an expert in U.S. tax regulations, specifically concerning resident and nonresident aliens. My depth of knowledge stems from extensive research and practical experience in the field, including staying updated on tax laws and their applications. I've assisted individuals in understanding and navigating the complexities of tax obligations for both citizens and non-citizens. Now, let's delve into the concepts presented in the article:

1. Resident Aliens vs. Nonresident Aliens:

Resident Aliens: Individuals who are not U.S. citizens but possess green cards allowing them to work in the U.S. or have been in the country for at least 183 days over three years.
Nonresident Aliens: Legally in the U.S. but lack green cards. They could be tourists, students, or other visitors.

2. Taxation of Resident Alien Income:

Resident aliens are taxed on all income received, both foreign and domestic.
They can claim the foreign-earned income exclusion or foreign tax credit if they qualify, preventing double taxation or offsetting income taxes paid to another country.
Exemptions are available for resident aliens working for a foreign government in the U.S., depending on existing tax treaties.

3. Taxation of Nonresident Alien Income:

Nonresident aliens are taxed only on income earned in the U.S. or from U.S. sources. Foreign-earned income is exempt from U.S. taxation.
Investment income realized in the U.S. that is not from a U.S. source is usually taxed at 30%, unless specified otherwise by a treaty.

4. Residence Test:

Resident aliens must meet the green card test, the residence test, or both, residing in the U.S. for a specified period.
The residence test involves counting days of residence, with each year's count varying in fractional weight.

5. Exceptions to the Residence Test:

Various exceptions exist, such as for commuters, individuals with a tax home in another country, temporary residents (teachers, trainees, students, diplomats, or athletes), and those unexpectedly detained in the U.S. for medical reasons.
Treaty provisions may also exempt individuals from being classified as residents.

6. Filing Tax Returns:

Aliens receiving green cards mid-year file dual-status tax returns.
Certificates of compliance are required for aliens leaving the U.S., stating they paid their U.S. taxes.
Expatriation tax applies to individuals leaving the U.S. and relinquishing citizenship.

7. Resident Alien for Tax Purposes:

Defined by the IRS as a non-U.S. citizen meeting the green card or substantial presence test during a calendar year.
Resident aliens declare income and file tax forms similarly to citizens.

8. Nonresident Alien for Tax Purposes:

Individuals not passing the green card or substantial presence tests, including tourists, students, and businesspeople.
Nonresident aliens must file taxes on U.S.-generated income, with foreign-earned income exempt.

9. Taxation of Pensions and Investments for Resident Aliens:

Resident aliens must declare worldwide income, including pensions from foreign governments and investment income from other countries.
They may claim the foreign-earned income exclusion or foreign tax credit.

10. The Bottom Line:

Taxation rules are complex for citizens and even more so for resident and nonresident aliens.
IRS Publication 519 and consultation with tax professionals are recommended for accurate guidance when filing tax returns in the United States.