This guide is for anyone who is not a US citizen or Green card holder, but has a US tax filing requirement. Situations which may bring about such a requirement are:
- You have income from the US (ie - US rental income, part year employment, investment income) but do not meet the substantial presence test which would require a U.S. resident tax return.
- You were a nonresident alien engaged in a trade or business in the United States during the calendar year, even if this generated no income, or if the income is exempt from US tax under a tax treaty or any section of the Internal Revenue Code.
Understanding how US taxation works for non-residents is crucial to determining if investments are worthwhile and what you will receive after-tax if you obtain employment in the US. Quite often, non-residents leave cash on the table by failing to file for a return (and generate a refund).
Similarly, if you are a US citizen/GC holder, and considering expatriation but have US investments, it is important to understand how this may be taxed after you give up your citizenship.
Apply the considerations we discuss below is vital in understanding your taxable obligations as a non-resident. If deciding whether to invest in the US, how to handle existing investments, and planning your US visits accordingly may have a dramatic impact on your bottom line.
Before delving into investments, understanding whether one is a nonresident alien is crucial - this guide explains this concept in depth.
What are the key differences between a Resident and Non-Resident tax return?
If you file form 1040 (U.S. resident return), you must report, and are subject to taxation on your worldwide income. Non-Residents, who file form 1040NR, must only report their US sourced income. If you are a foreign national investing in the US, if your US visits make you a US tax resident for tax purposes, your worldwide income will become taxable.
For Form 1040, US citizens and GC holders have minimum filing requirements. As opposed to U.S. residents, non-residents do not have minimum income threshold for filing as long as they receive income from U.S. sources. On the same note, if you were a non-resident alien engaged in a trade or business in the United States, you must file even if you have no income from a trade or business conducted in the United States, or your income is exempt from U.S. tax under a tax treaty or any section of the Internal Revenue Code.
Why should I be filing a Non-Resident Tax Return?
Filing a tax return is in the best interest of anyone who has earned U.S. dollars, regardless of their status. Many non-residents fail to file because they assume they do not owe. The problem usually lies, however, in overpayment. The amount withheld from the average non-resident's paycheck is normally over the amount that would be due at the end of the year. Failing to file means the loss of a refund.
Resident aliens have an added incentive to file. Visa terms require holders to fully comply with U.S. laws. This includes the obligation of filing a tax return. In order to make changes to your visa terms, visa holders will most likely be required to show proof that they have filed a return. This may prove essential for those who have left U.S. soil and are seeking reentry. Not filing a return could put their U.S. residency status at risk.
Don’t leave money on the table; filing 1040NR can help you get a refund of tax withheld
Can I be a Resident and a Non-Resident at the same time?
It is possible for an individual to qualify as both a resident and nonresident in the same year. In this case, the most likely status is dual status alien. Special rules apply for this status. It is important to note that one's immigrant status does not necessarily coincide with their tax relevant status. One might hold the immigration status of alien but still earn and live in the U.S. enough to hold resident status for tax purposes.
For example, if you expatriate, you must file a dual status return: Form 1040 & Form 1040NR. In the year of expatriation, you are a US citizen from Jan 1 until the date of expatriation. You must file a resident tax declaration (Form 1040) to cover your worldwide income between those dates. You must also file a non-resident tax return (Form 1040NR) to report your US sourced income between the date of expatriation and Dec 31.
How do I know if I am a Nonresident Alien?
There are two different ‘tests’ the IRS uses to determine if you are required to file a US income tax return as a Nonresident. The first test is whether or not you have a Green Card, and the second test is the Substantial Presence Test.
The first test is the "green card test." If at any time during the calendar year you were a lawful permanent resident of the United States according to the immigration laws, and this status has not been rescinded or administratively or judicially determined to have been abandoned, you are considered to have met the green card test.
The second test is the "substantial presence test". For the purposes of this test, the United States includes the following areas:
- All 50 states and the District of Columbia
- The territorial waters of the United States, and
- The seabed and subsoil of those submarine areas that are adjacent to U.S. territorial waters and over which the United States has exclusive rights under international law to explore and exploit natural resources.
- The term does not include U.S. possessions and territories or U.S. airspace.
To meet the substantial presence test*, you must have been physically present in the United States on at least 31 days during the current year, and 183 days during the 3 year period that includes the current year and the 2 years immediately before.
- To satisfy the 183 days requirement, count all of the days you were present in the current year, and one-third of the days you were present in the first year before the current year, and one-sixth of the days you were present in the second year before the current year
That seems like a lot - are there exemptions?
For purposes of the substantial presence test, do not count the following days of presence in the United States:
- Days you commute to work in the United States from a residence in Canada or Mexico if you regularly commute from Canada or Mexico. You are considered to commute regularly if you commute to work in the United States on more than 75% of the workdays during your working period.
- Days you are in the United States for less than 24 hours when you are in transit between two places outside the United States.
- Days you are in the United States as a crew member of a foreign vessel engaged in transportation between the United States and a foreign country or a U.S. possession. However, this exception does not apply if you otherwise engage in any trade or business in the United States on those days.
- Days you intend to leave, but could not leave the United States because of a medical condition or problem that arose while you were in the United States. Whether you intended to leave the United States on a particular day is determined based on all the facts and circumstances.
- Days you are an exempt individual*.
An exempt individual may be anyone in the following categories:
- An individual temporarily present in the United States as a foreign government-related individual
- A teacher or trainee temporarily present in the United States with a J or Q visa who substantially complies with the requirements of the visa
- A student temporarily present in the United States with an F, J, M, or Q visa who substantially complies with the requirements of the visa; or
- A professional athlete temporarily present to compete in a charitable sports event
Frequently Asked Questions
Rental properties in the U.S. require annual nonresident tax return 1040NR to report gain or loss from rental activity.
Annual non-resident state return is required as well Annual reporting is required even if you generate a loss. Furthermore, when you choose to sell your property, all accumulated losses (if any) are deducted from sales proceeds. Without annual reporting, these losses cannot be recovered. If property is idle (no rental activity), no reporting is required.
You are a U.S. resident in the current year for tax purposes if you meet the substantial presence test beginning on the first day you are present in the United States. You are not considered present in the United States while you are an "exempt individual."
- If you meet the test and have been in the U.S. on an H-1B visa for the entire calendar year, you are a full-year resident for U.S. tax purposes.
- If you fail the substantial presence test you are a nonresident alien unless you qualify for and make a special election.
As a nonresident alien, you are required to file a tax return each year you are here if you have any income subject to U.S. income tax. If you are married, you and your spouse must file separate returns; joint returns are not allowed.
There is a special election [IRC Sec. 7701(b)(4)] to be treated as a resident alien from your arrival date if you satisfy the following tests -
- You are not otherwise a resident alien for the year,
- You were not a resident alien at any time in the immediately preceding year,
- You are a resident alien under the substantial presence test for the immediately following year,
- You are present in the United States during the election year for a period of 31 consecutive days,
- Your days of U.S. presence are 75% or more of the total days between the beginning of the earliest 31 day consecutive U.S. day period and December 31.
Alternatively, a further election is available, when combined with the first election, to file a joint resident return with your spouse and be treated as a U.S. resident for the entire year [IRC Sec. 6013(g)]. Under this election, you can claim the standard deduction and other tax benefits available to U.S. citizens and residents, but you are subject to tax on your worldwide income for the entire calendar year. In order to eliminate double taxation, the foreign tax credit is generally available to claim against foreign taxes paid on foreign source income.
A U.S. Partnership with non-US partners must pay the withholding tax regardless of the amount of foreign partners' ultimate U.S. tax liability and regardless of whether the partnership makes any distributions during its tax year. Tax reduces the foreign partner's share of income. The foreign partner should then file form 1040NR to claim a refund for overpayment of tax withheld from his share of partnership income.