Key Takeaways
- Nonresident alien fails green card and presence tests.
- Taxed only on U.S.-source income.
- Files Form 1040-NR for U.S. income reporting.
What is Nonresident Alien?
A nonresident alien (NRA) is an individual who is neither a U.S. citizen nor a resident for tax purposes, based on failing the IRS green card or substantial presence tests. This classification determines how your income is taxed in the U.S., focusing only on U.S.-source income rather than worldwide earnings.
Understanding NRA status helps clarify your taxation obligations and filing requirements if you earn income connected to the United States.
Key Characteristics
Nonresident aliens have distinct tax features that affect their U.S. income and filing status:
- Tax Status: Determined annually by the green card or substantial presence tests, which consider your legal residency and physical presence in the U.S.
- Income Taxation: Only U.S.-source income is taxable, unlike residents who report global income.
- Withholding: Fixed 30% tax on certain income types like dividends unless reduced by tax treaties.
- Filing Forms: Use Form 1040-NR to report taxable income and claim treaty benefits.
- Exemptions: Certain visa holders (e.g., F-1 students) have specific exemption periods affecting their status.
How It Works
The IRS uses two main tests to classify aliens: the green card test and the substantial presence test. If you do not meet either, you are an NRA for that tax year. This distinction guides which income is subject to U.S. tax and at what rates.
NRAs pay tax on income effectively connected with a U.S. trade or business at graduated rates, similar to residents, but fixed rates generally apply to passive income such as interest or dividends. Your obligation to file depends on your income sources and amounts, with specific forms and deadlines.
Examples and Use Cases
Nonresident alien status applies to many individuals working or investing in the U.S. but not qualifying as residents for tax purposes:
- Students: An F-1 visa holder present fewer than five years remains an NRA, paying tax only on U.S. income.
- Investors: Shareholders in U.S. companies like Delta may be NRAs taxed on dividends withholdings.
- Employees: Temporary workers on J visas meeting nonresident criteria file as NRAs for their U.S. income.
- Real Estate: NRAs selling U.S. property must comply with FIRPTA withholding rules.
Important Considerations
Being classified as a nonresident alien impacts your tax rates, withholding, and filing requirements, which can differ significantly from resident aliens. Understanding your status helps avoid penalties and ensures compliance with U.S. tax laws.
If you have income from stocks or ETFs, consider exploring best ETFs for beginners to understand tax implications. Also, check the rules carefully if married to a resident alien, as you may elect joint filing under certain conditions.
Final Words
Nonresident aliens are taxed solely on U.S.-source income, which can affect your filing requirements and tax liabilities. Review your visa status and residency tests carefully each year to ensure accurate tax reporting and consider consulting a tax professional to optimize your situation.
Frequently Asked Questions
A Nonresident Alien (NRA) is an individual who is not a U.S. citizen or national and does not meet the IRS green card or substantial presence tests. This means they don’t have lawful permanent resident status or enough physical presence in the U.S. during the calendar year.
The IRS uses two tests: the green card test and the substantial presence test. If a person does not have a green card or hasn’t been physically present in the U.S. for the required number of days, they are classified as a Nonresident Alien.
Yes, Nonresident Aliens are only taxed on income sourced within the U.S., unlike residents who are taxed on worldwide income. Their U.S.-source income may be taxed at graduated rates if engaged in a U.S. trade or business, or at a flat 30% rate on certain passive income.
Fixed, determinable, annual, or periodical (FDAP) income such as dividends, rents, and royalties is taxed at a flat 30% rate for Nonresident Aliens, unless a tax treaty reduces this rate.
Yes, a Nonresident Alien married to a U.S. resident alien can elect to file a joint tax return on Form 1040. This treats the Nonresident Alien as a resident for tax purposes.
Nonresident Aliens must file Form 1040-NR if they have U.S.-source income above certain thresholds or want to claim refunds or treaty benefits. IRS Publication 519 provides detailed filing guidance.
Certain visa holders such as F, J, M, or Q students are exempt from counting days for the first five years, and J or Q non-student visa holders are exempt for the first two years. Also, the closer connection exception applies if the individual has a tax home abroad and files Form 8840.
