Helping You Decipher the U.S. Tax Question, Resident Alien or Nonresident Alien?

By: Katie Marshall, Tax Professional

The U.S. income tax differences between a resident and nonresident alien can be dramatic. It is important to understand the differences to make informed decisions especially when it comes to end of year planning. You may find that there can be a dramatic swing in how you are taxed by moving just one day earlier! This article will focus on these four questions:

1. Who is a nonresident alien?
2. Who is a resident alien?
3. What type of tax return do I need to file?
4. What income is subject to U.S. tax?

A nonresident alien is an individual who is not a U.S. citizen and is not a U.S. resident by U.S. tax standards. A nonresident is required to file a U.S. income tax return only if he/she has U.S. sourced income. No U.S. sourced income = no U.S. tax return.

If the nonresident does have U.S. sourced income such as wages, rental, business, etc. it would be reported on a U.S. Nonresident Alien Income Tax Return, Form 1040-NR. Only the U.S. income is reported, the individual does not pay U.S. tax on worldwide income. Pretty great, right?!

A U.S. resident alien is an individual that meets either 1) Green Card Test or 2) Substantial Presence Test which is discussed below. A resident alien is required to file a U.S. Individual Income Tax Return, Form 1040. As such, a resident alien is treated the same as a U.S. citizen for tax purposes and, therefore, the individual’s worldwide income is subject to income tax in the U.S.

Green Card Test. If you have received a Permanent Resident Card, Form I-551, commonly referred to as a “green card,” then you are considered a U.S. resident. You will continue to have U.S. residency unless you do one of the following:

1. You voluntarily renounce and abandon this status in writing to the USCIS,
2. Your immigrant status is administratively terminated by the USCIS, or
3. Your immigrant status is judicially terminated by a U.S. federal court.

Your U.S. residency begins the first day on which you are present in the U.S. as a lawful permanent resident. (There are some exceptions which should be discussed with your trusted tax adviser.)

Substantial Presence Test. You become a U.S. resident if you are physically present for at least:

1. 31 days during the current year, and
2. 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:
   • All the days you were present in the current year, and
   • 1/3 of the days you were present in the first year before the current year, and
   • 1/6 of the days you were present in the second year before the current year.

For example, Elizabeth is a German citizen. She moves to New York City to become a model in 2021. She visited the U.S. in 2019 for 24 days. She visited the U.S. in 2020 for 30 days. She moved to the U.S. on August 1, 2021. To determine if she meets the substantial presence test we count how many days in the 3-year period was present in the U.S.

• 2019: 24 days X 1/6 = 4 days
• 2020: 30 days X 1/3 = 10 days
• 2021: August 1 to December 31 = 153 days
• 4+10+153=167 days

Since Elizabeth has not been in the U.S. for 183 days over the last 3-year period, she would not meet the substantial presence test and not be a U.S. resident for U.S. tax purposes. However, in 2022 she most likely will meet the substantial presence test; as such, would file a Form 1040 for 2022 and report her worldwide income. No return would be filed in 2021 if she does not have any U.S. sourced income.

Nonresident scenarios can be tricky and no one situation is the same. There are exceptions, and exceptions to exceptions, tax treaties between countries which change the rule, and more. If you have specific questions please contact us.