CARL WATTS & ASSOCIATES

May 29, 2017

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U.S. Resident Aliens
and Taxation
We have all long become aware that the IRS has its own views and definitions of terms. Whenever the difference is noteworthy, there’s a typical phrase which acts like a magical wand, “ for tax purposes”.

No wonder that, for tax purposes, we first need to clarify the meaning of several terms that may be critical in determining the taxation of an alien.

Let us begin with the easiest one: an alien is an individual who is not a U.S. citizen or U.S. national. For tax purposes, the term "U.S. national" refers to individuals who were born in American Samoa or were born in the Commonwealth of the Northern Mariana Islands who have made the election to be treated as U.S. nationals and not as U.S. citizens.

The taxation of aliens by the United States is significantly affected by the residency status of such aliens.

Although the immigration laws of the United States refer to aliens as immigrants, nonimmigrants, and undocumented (illegal) aliens, the tax laws of the United States refer only to RESIDENT and NONRESIDENT ALIENS.

In general, the controlling principle is that resident aliens are taxed in the same manner as U.S. citizens on their worldwide income, and nonresident aliens are taxed according to special rules contained in certain parts of the Internal Revenue Code. A major distinguishing feature of this special tax regime concerns the source of income: a nonresident alien (with certain narrowly defined exceptions) is subject to federal income tax only on income which is derived from sources within the United States and/ or income that is effectively connected with a U.S. trade or business.

Because residents and nonresident aliens are taxed differently, it's important for you to determine your tax status. You're considered a nonresident alien for any period that you're neither a U.S. citizen nor a resident alien for tax purposes.


You're considered a resident alien if you met one of the following two tests for the calendar year:


1. The greencard test
You're considered to have met the greencard 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you were a lawful permanent resident of the United States according to the immigration laws, and this status hasn't been revoked or administratively or judicially determined to have been abandoned.

2. The substantial presence test
For the purposes of this test, the term United States doesn't include U.S. possessions and territories or U.S. airspace.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.



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.

Even if you meet the substantial presence test, you may still be treated as a nonresident alien if you're present in the United States for fewer than 183 days during the current calendar year, you maintain a tax home in a foreign country during the year, and you have a closer connection to that country than to the United States. You can't claim a closer connection to a foreign country if you've applied for status as a lawful permanent resident of the United States, or you have an application pending for adjustment of status.

As mentioned earlier, a U.S. resident alien's income is generally subject to tax in the same manner as a U.S. citizen. If you are a U.S. resident alien, you must report all interest, dividends, wages, or other compensation for services, income from rental property or royalties, and other types of income on your U.S. tax return. You must report these amounts whether they are earned within or outside the United States.


Income of resident aliens is subject to the graduated tax rates that apply to U.S. citizens. U.S. resident aliens can use the same filing statuses available to U.S. citizens.

You can claim the same deductions allowed to U.S. citizens if you are a resident alien for the entire tax year. You can claim personal exemptions and exemptions for dependents according the dependency rules for U.S.citizens. You can claim the same itemized deduction as U.S. citizens or you can claim the standard deduction for your particular filing status. You can claim the same tax credits using the same rules that apply to U.S. citizens. You use the same forms and mailing addresses as U.S. citizens.

A nonresident must also pay income taxes to the IRS but only on the income that’s effectively connected to the U.S., which generally includes the money you earn while in the U.S. The IRS, however, has no authority to impose tax on the income that non-residents earn in their home countries or in any foreign country for that matter. When you prepare your U.S. tax return, you must use Form 1040NR or the shorter 1040NR-EZ, if eligible. Regardless of the form you use, you will only report amounts that are considered US-source income. Just like resident aliens and U.S. citizens, there are deductions and credits you can claim to reduce your taxable income.


In the year of transition between being a nonresident and a resident for tax purposes, you are generally considered a Dual-Status Taxpayer. A Dual-Status Taxpayer files two tax returns for the year—one return for the portion of the year when considered a nonresident, and another return for the portion of the year considered a resident. In some situations, a taxpayer can elect to be treated as a full-year resident in the transition year to avoid having to file two separate returns.


And, of course, just like U.S. citizens, resident aliens are also advised to enroll help from a tax professional in all their dealings with the IRS.



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