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DISCLAIMER: These materials do not, and are not intended to, constitute legal or tax advice. You should consult an attorney or tax advisor for individual advice regarding your own situation.Although we have made considerable efforts to be thorough in the construction of these pages, we offer no assurance that the information posted here is timely, accurate, complete or applicable to any particular set of facts. To the contrary, be aware that some of the material on these pages is out of date, incomplete and/or altered in relation to the official version. These documents are not posted here for commercial use and should not be relied upon for any purpose whatsoever.
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Taxation of Non-resident Aliens |
A nonresident alien is an individual that is not a U.S. citizen and is not resident in the U.S. Section 7701(b)(1)(B). An individual is resident in the U.S. if they meet either of the following two tests: the lawful permanent residence test or the substantial presence test. Section 7701(b)(1)(A). If an individual becomes a citizen or resident of the U.S., then he or she becomes subject to U.S. taxation on his or her worldwide income.
Permanent Residence Test
An individual meets the lawful permanent residence test if he or she is a lawful permanent resident of the U.S. at any time during the calendar year. This test is sometimes called the “Green Card” test.
Substantial Presence Test
The substantial presence test is a bit more complicated and is not fully described here. One bright-line portion of the test is that if an individual is present in the U.S. more than 183 days during the calendar year, then he or she will be considered a U.S. resident for U.S. tax purposes. Section 7701(b)(3).
Special Rules
There are special rules for the first and last year of residency. Section 7701(b)(2) and Section 7701(b)(4). A nonresident alien that is married to a citizen or resident of the U.S. can elect to be treated as a resident of the U.S. (both spouses must make the election). Section 6013(g). Without such an election, a joint tax return cannot be filed. Section 6013(a)(1).
Head of Household Status
For purposes of qualifying for the Head of Household status, an individual is not considered married if the individual’s spouse is a nonresident alien. Section 2(b)(2)(B).
Income Tax Application
Section 1 imposes an income tax on individuals. Section 2(d) provides that in the case of a nonresident alien individual the tax in section 1 shall apply ONLY as provided in sections 871 and 877. Section 877 applies to nonresident aliens who have expatriated (those who were once resident aliens and then became nonresident aliens).
Income Not Connected With a U.S. Business - Section 871
Section 871(a) imposes a 30% tax on certain U.S. source income that is not connected with a U.S. business. If the income is “effectively connected” to a U.S. trade or business, then the normal section 1 income tax rules apply. Section 871(b).
Periodic Income
Section 871(a)(1) imposes a 30% tax on certain “periodic” income (e.g. interest, dividends, rents, royalties, annuities, wages, etc.). The tax is only imposed on U.S. sourced income. The rules for determining the source of income differ depending on the type of income.
Exceptions to 30% Tax on Periodic Income
There are several exceptions to the 30% tax in section 871(a)(1). First, interest on bank deposits is not subject to this tax. Section 871(i)(2)(A). Second, a proportionate amount of dividends paid by “80/20” companies are exempt. Section 871(i)(2)(B). Third, “portfolio” interest is exempt. Section 871(h).
Portfolio interest includes two types of interest. For unregistered obligations to qualify as portfolio interest, the requirements of section 163(f)(2)(B) must be met (arrangement designed to ensure only sold to non-U.S. persons, interest is only payable outside the U.S., and the face of the obligation contains a cautionary statement). For registered obligations to qualify as portfolio interest, the withholding agent must receive a statement from the beneficial owner that he/she is not a U.S. person. Section 871(h)(2).
Capital Gains
The U.S. generally does not impose capital gains tax on nonresident aliens. Although section 871(a)(2) imposes a 30% tax on U.S. source capital gains for nonresident aliens, the tax only applies if the individual was present in the U.S. for 183 days or more. Most individuals present in the U.S. for 183 days or more would be treated as resident aliens under the substantial presence test described above. Section 871(a)(2) is a trap for the unwary foreign government employee, teacher, student, or professional athlete that is exempt from the substantial presence test.
Tax Treaties
The U.S. has entered into income tax treaties with more than 50 countries. These tax treaties typically reduce the 30% tax imposed by section 871(a). The amount of the reduction depends upon the type of the periodic income. In addition, the treaties provide rules for determining residency. You should consult with the applicable treaty for modifications to the above described rules. Generally, the tax treaties override the existing statutory rules.
