A non-resident alien for tax purposes is a person who is not a citizen of the United States or a green card holder and is not considered “resident” in the United States for tax purposes.
The basic test for “determining tax residency” is the substantial presence test. Under this test, an individual will be considered a U.S. resident for tax purposes if he or she is physically present in the United States on at least: (a) 31 days during the current calendar year; and (b) A total of 183 days during the current year and the 2 preceding years, counting all the days of physical presence in the current year, but only one-third the number of days of presence in the first preceding year, and only one-sixth the number of days in the second preceding year. Unlike U.S. citizens and green card holders, non-resident aliens (“NRAs”) are not subject to U.S. tax on their worldwide income. They can be subject to U.S. tax, however, on certain U.S. source “passive” income (e.g., dividends from a U.S. corporation) and income generated from a U.S. trade or business or from the sale of U.S. real estate.
In such case, a non-resident alien may be required to file a non-resident federal income tax return – the IRS Form 1040-NR. The Form 1040-NR is significantly less complex than the Form 1040 filed by U.S. persons, but it does present a number of information-gathering challenges.
Tax Treaty
The United States government has a number of income tax treaties with foreign countries. Tax treaties can often reduce or eliminate U.S. tax on various types of income of a non-resident alien, including interest, dividends, royalties, capital gains and pensions. Beneficial provisions are usually not available with respect to income from the sale of U.S. real estate. It is important to note that each individual income tax treaty should be reviewed and analysed to determine whether specific types of income are exempt from U.S. tax or taxed at a reduced rate, and what conditions apply to such exemptions and reductions.
It should be noted that in order to utilize a treaty provision, taxpayers must include IRS Form 8833 (Treaty-Based Return Position Disclosure) with their expat tax returns – Form 1040NR or 1040NR-EZ – and disclose their position.
