RESIDENT ALIEN AND NON-RESIDENT ALIEN: KNOW THE DIFFERENCE FOR TAX PURPOSES

Introduction 

USA immigration law always employs the word “aliens” to speak about foreigners. Aliens refer to foreigners either legally in the USA or otherwise. But “resident alien in US” and “non-resident alien” vary since they are initially taxation jargon.  

You ought to know them since if you are a “resident alien in US,” you will be required to report every single penny you earn anywhere in the world. Yet “non-resident aliens” get to pay taxes just on earnings from the USA. 

The better you understand these phrases, the better you will see that, much against some people’s hopes, you must not necessarily be a green card holder (i.e., a lawful permanent resident) to be required to pay tax to the USA government. 

Resident aliens in US are taxed on their source income in the USA on the same terms as USA citizens. Non-resident aliens are taxed on certain USA source income by the government. 

This mean, some USA source income, whoever you are, is subject to tax. How do you show your alien status, though? 

This post will help you clarify the difference between resident aliens in USA and non-resident alien, and how this affect tax obligations. 

Tests to decide who is a resident alien in USA 

There are two ways of ascertaining if federal tax code considers a foreigner in the USA to be a resident alien in USA: 

• The green card test for resident alien in USA classification. 

This would encompass all those who possess a green card in USA – i.e., USA permanent or conditional residence, to remain and work here. This is literally an immigrant from another country who has been permitted to remain in the USA on a permanent basis (or, if they possess a conditional green card, two years, after which they can acquire residence). 

Because permanent residents will have to make up for some of the conditions, they are most likely to spend most of their life in USA. To keep your green card, you are not allowed to settle in another country outside of the USA or “abandon” your residence and cannot stay abroad for over one year. 

People who prefer living outside the USA for more than a year may apply for a re-entry permit when they leave to keep their green card. 

• The substantial presence test for resident alien in USA for tax qualification. 

Even though you are not a green card holder, you are a resident alien in USA if you reside 31 days this year and 183 days in the last three years (this year and the last two years) in the USA. 

This applies to the majority of the people residing in the USA but with temporary visas, which are also referred to as nonimmigrant visas. 

There are some exceptions to the tax rule, such as time in transit (less than 24 hours in the USA), time when a person could not leave due to the fact that they required medical treatment, and for teachers, students, scholars, and exchange visitors (on F, J, M, or Q visas) who are not in the USA for a significant period. 

Types of resident aliens 

As per the US Citizenship and Immigration Services (USCIS), resident aliens in USA fall into three groups: 

• Permanent resident: These are resident aliens in USA who have a right to live in the USA conferred by the state. 

• Conditional resident: After obtaining a two-year green card, typically for petitioners who came as residents aliens in USA by marriage or investors by golden visa. They are required to file to remove conditions 90 days before the green card expires or else they could lose their resident status. 

• Returning resident: Any resident aliens in USA abroad returning. They must reapply for readmission if they were abroad for more than one year. 

Who is a non-resident alien? 

If you are here in the USA temporarily and are not a green card holder and are not yet eligible to be considered a resident, then you are probably a non-resident alien in USA. This would be generally applied to visiting students and teachers on their first visit to the USA. 

Comparing resident alien with non-resident alien in USA 

There are some obvious differences between treatment as a non-resident alien and treatment as a resident alien in USA according to the law. A resident alien in USA can receive foreign tax credits, while a non-resident cannot. Resident aliens in USA have to pay up to as much as USA citizens, but non-resident aliens only pay on cash that has been earned in the USA, with capital gains not taxed.  

Resident aliens in USA report all of their income, whether or not the income was earned from receiving earnings within the USA or internationally, on Form 1040. Non-resident aliens use Form 1040NR to report USA earnings. Note that Form 1040NR-EZ is no more in use after the tax year of 2020.  

Unique info to consider 

You are not always going to be obliged to show that you are a resident alien in every case. This is so if you are in the USA on official government business or you are a student or teacher who has been in the USA on temporary visitation. 

In their cases, these exempted individuals can petition for a change of status, where they can stay in the country and become permanent residents. 

Tax treaties 

As tax resident or non-resident alien in USA, you may be able to benefit from an income tax treaty between the USA and your country. An income tax treaty is a treaty between countries to exchange tax rules so that individuals won’t be taxed twice in two countries on the same income. 

Most tax treaties adopt the Organization for Economic Cooperation and Development (OECD) Model Tax Convention. The model convention requires what income or capital can be taxed by the state of origin — the USA in this case. What follows are what they cover: 

1. USA real property income and sale proceeds of such property. 

1. Profit on sale of interest in business in which the taxpayer possesses 50% or more interest. 

1. Income earned in the form of services provided in the USA (provided that service provider stays in the USA for 183 days or longer within any duration of 12 months). 

1. Sportsperson and entertainment income earned due to their occupation in the USA. 

Information on income is applicable for lower rate of taxation: 

• Dividend income not tied with a permanent establishment may be taxed at up to 5%. 

• Interest not related to a permanent establishment can be taxed at a rate of up to 10%. 

Get help! 

Since USA tax and immigration laws can be pretty complicated, it might be a good idea to talk to an immigration lawyer at Gehi and Associates. We knows a lot about helping foreigners with questions about their status and tax responsibilities. 

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