Immigration Tax Issues: Resident vs. Nonresident Alien Tax Status

As a non-U.S. citizen who engages in trade or business in the U.S. or earns income from almost any U.S. source, you are required to file a U.S. tax return and possibly pay taxes on that income. Taxpayers who are not U.S. citizens fall into one of two categories: resident alien or nonresident alien.

Resident or Nonresident: Why Does It Matter?

The amount of income tax you pay to the U.S. government and how much other information you are required to provide about your business and personal affairs, depends on whether you are considered a resident or a nonresident.

A resident alien’s income is generally taxed just like that of a U.S. citizen, at similar rates and in compliance with the same rules. They must report all income, whether from sources within or from outside the United States. That is in contrast to the requirements for a nonresident alien, who must report and pay taxes only on income generated within the U.S. Non-resident aliens pay tax at prescribed rates based on different types of income and after applying only specific types of deductions.

Generally, resident aliens may reduce their tax obligations or receive refunds, beyond taxes paid, under the same rules that apply to U.S. citizens. Referred to as tax credits, these special treatments may apply to elderly or disabled taxpayers, working families with children, taxpayers who spend money for child and dependent care, education, or adopting a child, and taxpayers with low to moderate incomes. Non-residents would not have these options.

Resident or Nonresident: What Determines the Answer?

A taxpayer is considered a nonresident alien, unless they have been issued a green card by the U.S. Immigration Service, or, in the absence of a green card, if they have been physically present in the U.S. for a certain period of time. The requirements for physical presence are complex. In general, if a person is in the U.S. for 330 full days within a 12 month period, they are considered physically present. It is imperative to know your status in order to remain compliant with the IRS. Also, what you are considered according to the IRS./U.S. Tax standards does not always correlate with your U.S. Immigration status.

Even if a taxpayer does not have a green card or completely meet physical presence tests, they may choose to be treated as a U.S. resident for part of a year, if certain qualifications of the physical presence requirements are met. The rules described here do not override residency definitions for a tax treaty between the U.S. and the taxpayer’s country of citizenship.

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There is no one-size-fits-all answer about whether it is better to be treated as a resident or a non-resident for tax purposes. That determination is largely driven by your unique circumstances. Selecting the right filing status requires careful analysis to avoid over and under payment of taxes. We strongly suggest you call the International department of the IRS or schedule a consultation with the tax accountants at 212 Tax & Accounting Services to find out how we can help you comply with U.S. tax laws and keep more of what you earn.