What is a Non-Resident Alien?
A non-resident alien refers to a foreign national who resides in the United States and who has not passed the Substantial Presence Test (SPT) or Green Card Test (GCT) in the current calendar year. The US Government requires every person who earns an income within the country to pay tax on the income generated, regardless of whether they are US citizens or foreign nationals.
The US Internal Revenue Service classifies foreign nationals who earn an income in the US as either resident aliens or non-resident aliens. Foreign nationals who’ve lived in the US for more than 31 days in the calendar year may qualify as resident aliens under the Substantial Presence Test. They must also have lived in the US for at least 183 days over a three-year period, including the current year that runs from January 1 to December 31 and the two years before that.
If an individual does not meet the requirements listed above, the taxpayer is considered a non-resident alien and is required to pay tax on the income earned in the United States if it exceeds the annual personal exemption amount.
- A non-resident alien refers to a foreign national residing in the United States who does not pass the Substantial Presence Test (SPT) or Green Card Test (GCT).
- Non-resident aliens are required to pay taxes on income earned within the United States.
- Non-resident aliens who earn an income within the US are required to file tax Form 1040NR or the simplified Form 1040NR-EZ.
Tax Implications for Non-Resident Aliens
The IRS requires non-resident aliens to pay tax on all income earned in the United States at the same rate as permanent US citizens. The income earned is taxed based on whether it is effectively connected to a trade or business transacted within the US. Some of the incomes that are considered to be effectively connected are wages, salaries, and commissions earned from offering personal service, investment income, and certain business income.
The income is taxed at the same rate as the tax rate that applies to permanent US citizens. Income earned within the US but not effectively connected to a trade or business is taxed at a flat rate of 30%.
The IRS also subjects the income sources of non-resident aliens to taxation if they originate from within the US. Such income sources include royalties on natural resources extracted from US soil and rental income from residential or commercial real estate properties in the US.
Non-resident aliens must disclose all their income-generating activities in the US when filing their annual taxes. They are required to file Form 1040NR or 1040NR-EZ (for those with no dependents).
The Two Tests for a Non-Resident Alien
An individual is considered a non-resident alien if he/she does not meet either of the following tests.
1. Substantial Presence Test (SPT)
A foreign national can become a US resident for tax purposes if they pass the Substantial Presence Test (SPT). An individual is required to meet the following requirements:
- Be physically present in the US for at least 31 days in the current calendar year.
- Have been present for at least 183 days in the three-year period including the current calendar year. The requirement is satisfied by counting:
- All the days the person was present in the US in the current year
- 1/3 of the days the individual was present in the year before the current year
- 1/6 of the days the individual was present in the second year before the current year.
2. Green Card Test (GCT)
A non-resident alien can be considered a permanent resident citizen of the United States if they’ve been given the privilege of residing permanently in the country as an immigrant. The status is issued by the US Citizenship and Immigration Service (USCIS), and qualified foreign nationals are issued an alien registration card Form I-551, commonly referred to as a green card.
An individual retains their resident alien status unless they voluntarily renounce the status in writing to the USCIS. The resident’s status can also be terminated either by the USCIS or through the judiciary by a US federal court.
Tax Return Forms for Non-Resident Aliens
If an individual is a foreign national residing in the United States, they are considered a non-resident alien for tax purposes unless they qualify for the Green Card Test or Substantial Presence Test. A non-resident alien is required to file Form 1040NR if they earned income from US sources in the current year or they engaged in business within the country in the current year.
A representative of a deceased foreign national who was required to file Form 1040NR may also file the form. The form must be completed, signed, and posted via mail to the appropriate physical address. Filing Form 1040NR is important, especially when an individual plans to re-enter the US in the future.
Non-resident aliens who earned income from salaries, wages, tips, scholarship grants, local income taxes, and other eligible incomes are required to file Form 1040NR-EZ. It is a simplified version of Form 1040NR and is a two-page document.
The taxpayer is required to provide their personal information, such as name, physical address, filing status, and income. It also requires taxpayers to disclose information about their nationality, country of residence, and immigration status.
Taxpayers with dependents cannot file Form 1040NR-EZ and are instead required to file Form 1040NR.
CFI is the official provider of the Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to transform anyone into a world-class financial analyst.
In order to help you become a world-class financial analyst and advance your career to your fullest potential, these additional CFI resources will be very helpful: