The relative off-season for taxes is the perfect time to review basics and get your affairs in order. For taxpayers who are not U.S. citizens, identifying the correct tax status is the first step toward filing correctly during tax season.
The IRS defines those taxpayers who are not U.S citizens as “aliens.” Within that grouping, there are resident aliens and non-resident aliens. Resident aliens are taxed, for the most part, in the same ways as U.S. citizens. This means they are expected to report all interest, wages, dividends, and other compensation—regardless of where it was earned, in the country or elsewhere—on a tax return, and it will be subject to the same graduated tax rates that apply to citizens. Most other elements of the tax code, such as credits, deductions, and exemptions, also function the same way.
The rules are different for non-resident aliens. Among that category, those who must file include individuals who engaged in business in the U.S. during the year (and earned an amount that exceeds the personal exemption) or who earned income from another source that did not withhold taxes.
The two categories of income a non-resident alien must report are money earned from a U.S. trade or business (this is called “Effectively Connected” income) and that received from other sources, including proceeds from selling a home or property, scholarships and grants, commissions, interest and annuities, alimony, and numerous others (these are grouped as Fixed, Determinable, Annual, Periodical income). The Effectively Connected income is generally taxed at the same graduated rate as applies to U.S. Citizens; the FDAP income is typically taxed at a flat 30 percent.
Two methods exist for determining which status applies to you: the “green card test” and the “substantial presence test.” Both seek to establish residency. The green card test—as its name implies—says that individuals who have received their “green card,” or alien registration card, from U.S. Citizenship and Immigration Services and are thereby “Lawful Permanent Residents,” are considered resident aliens for tax purposes.
The substantial presence test takes into account the number of calendar days in a year that a person physically lived in the country to determining residency. This test hinges on being present in the U.S. for at least 31 days in the current year, and 183 during the current year and the two before it, adding up all the days for the current year; 1/3 of the days in the year before; and 1/6 of the days from two years before. (These seemingly arbitrary calculations might be simple for one person and challenging for the next, based on the frequency of travel between the U.S. and neighboring countries. For example, some people live in Canada or Mexico near the U.S. border but commute across every day for work.)
Your status can be different from one year to the next if your circumstances change. So be sure to revisit the question each time you fill out tax-related paperwork or file your returns. If you are having difficulty figuring out which category you fit into, consult your local tax professional for advice.