Are Non-Resident Aliens Exempt From Taxes?

The United States tax system requires non-resident aliens to pay taxes on income earned from U.S. sources. This contrasts with U.S. citizens and resident aliens, who are generally taxed on their worldwide income. Understanding the specific rules for non-resident aliens is important for compliance and effective financial planning. While some exemptions or reduced rates may apply, particularly through tax treaties, the general principle is that U.S.-sourced income is subject to U.S. taxation for non-resident aliens.

Determining Tax Status

An individual’s tax status, whether a resident alien or a non-resident alien, dictates their U.S. tax obligations. The Internal Revenue Service (IRS) uses two primary tests to make this determination: the Green Card Test and the Substantial Presence Test. If an individual meets either of these criteria, they are generally considered a resident alien for tax purposes and are taxed on their worldwide income.

The Green Card Test is met if an individual is a lawful permanent resident of the United States at any point during the calendar year. This status is typically evidenced by an Alien Registration Card, commonly known as a “green card.” Once this status is granted, the individual is treated as a resident alien for tax purposes from that date onward, regardless of their physical presence in the U.S.

The Substantial Presence Test assesses the number of days an individual is physically present in the U.S. over a three-year period. To meet this test, an individual must be present for at least 31 days in the current year and 183 days during the three-year period that includes the current year and the two preceding years. The calculation for the 183-day threshold involves counting all days present in the current year, one-third of the days present in the first preceding year, and one-sixth of the days present in the second preceding year. Some days are excluded from this count.

There are also “exempt individuals” whose days of presence do not count towards the Substantial Presence Test. This category includes foreign government-related individuals, teachers or trainees on J or Q visas, and students on F, J, M, or Q visas, provided they comply with visa requirements. Even if an individual meets the Substantial Presence Test, they might still be treated as a non-resident alien if they meet the “closer connection exception.” This exception requires being present in the U.S. for fewer than 183 days in the current year, maintaining a tax home in a foreign country, and having stronger contacts with that foreign country than with the U.S. This exception generally requires filing Form 8840, “Closer Connection Exception Statement for Aliens.”

Types of US Income and Taxation

Non-resident aliens are generally subject to U.S. income tax only on their U.S.-sourced income. This income is categorized primarily into two types: Fixed or Determinable, Annual or Periodical (FDAP) income and Effectively Connected Income (ECI). Each category is subject to different tax treatments and rates.

FDAP income includes passive income such as interest, dividends, rents, royalties, pensions, annuities, and certain gambling winnings. This type of income is typically taxed at a flat rate of 30% on the gross amount, meaning no deductions are allowed to reduce the taxable base. This 30% tax is usually withheld at the source by the payer of the income, ensuring collection even if the non-resident alien does not file a U.S. tax return.

Effectively Connected Income (ECI) is income derived from a U.S. trade or business, including most salaries, wages, and other compensation for personal services performed in the U.S. Income from active business operations within the U.S. also falls under ECI. ECI is taxed at the same graduated rates that apply to U.S. citizens and resident aliens. Unlike FDAP income, non-resident aliens with ECI can claim allowable deductions and credits to reduce their taxable income, similar to U.S. residents. Foreign-source income is generally not subject to U.S. tax for non-resident aliens unless it is effectively connected with a U.S. trade or business.

Impact of Tax Treaties

Bilateral tax treaties between the United States and various foreign countries can significantly modify the general rules of taxation for non-resident aliens. These treaties are agreements designed to prevent double taxation and can reduce or eliminate U.S. tax on certain types of U.S.-source income. The specific benefits vary depending on the treaty between the U.S. and the non-resident alien’s country of residence.

Common treaty benefits include reduced withholding rates on FDAP income, such as interest, dividends, and royalties, or even complete exemptions from tax on these income types. Treaties also often provide specific exemptions or reduced taxation for individuals temporarily present in the U.S., such as students, teachers, and researchers, on income like scholarships, fellowship grants, or compensation for personal services. These exemptions often have limits, such as specific dollar amounts or a maximum number of years the individual is eligible.

To claim benefits under a tax treaty, non-resident aliens generally need a U.S. Taxpayer Identification Number (TIN). They must also properly report their claim on their U.S. tax return, often by attaching Form 8833, “Treaty-Based Return Position Disclosure,” to their Form 1040-NR. Without a valid TIN and proper reporting, treaty benefits may not be granted, leading to the application of standard U.S. tax rates. Each treaty has unique provisions, so it is important to consult the specific treaty between the U.S. and the individual’s country.

Filing US Tax Returns

Non-resident aliens who earn U.S.-sourced income subject to U.S. tax generally have a filing requirement, even if a tax treaty exempts some or all of that income. The primary form used by non-resident aliens to report their U.S. income is Form 1040-NR. This form is used to report both Effectively Connected Income (ECI) and FDAP income. For ECI, the form allows for deductions and credits, while FDAP income is reported on Schedule NEC (Form 1040-NR), where deductions are generally not permitted.

The general filing deadline for Form 1040-NR depends on the type of income received. If a non-resident alien received wages subject to U.S. income tax withholding, or had an office or place of business in the U.S., the deadline is typically April 15 of the following year. If they did not receive wages subject to U.S. tax withholding and did not have an office or place of business in the U.S., the deadline is generally June 15 of the following year. An automatic six-month extension to file can be requested using Form 4868, but this extends only the time to file, not the time to pay any taxes due.

To file a U.S. tax return, non-resident aliens need a Taxpayer Identification Number (TIN). If they are not eligible for a Social Security Number (SSN), they must obtain an Individual Taxpayer Identification Number (ITIN). An ITIN is a nine-digit tax processing number issued by the IRS for individuals who need a U.S. taxpayer identification number but are not eligible for an SSN. To apply for an ITIN, individuals must complete Form W-7, and submit it along with documentation proving foreign status and identity, such as a passport. This application can be submitted with the tax return, through an IRS-authorized Certifying Acceptance Agent, or at an IRS Taxpayer Assistance Center.