Do Foreigners Have to Pay Taxes in the U.S.?

The obligation for a foreign national to pay taxes in the United States is not determined by citizenship but by tax residency status. Whether a person from another country must file a U.S. tax return depends on their immigration status and the amount of time they spend within the United States.

The U.S. tax system is comprehensive, and its rules extend to many individuals who might not consider themselves U.S. residents in a traditional sense. Understanding these rules is the first step for any foreign national earning income or spending significant time in the country.

Determining Your U.S. Tax Status

A foreign national’s U.S. tax liability hinges on their classification as either a “resident alien” or a “nonresident alien” for tax purposes. These categories are defined by the Internal Revenue Service (IRS) and are not directly related to an individual’s immigration status. A resident alien is taxed in the same manner as a U.S. citizen, while a nonresident alien is subject to a different set of rules. The determination of this status is made by applying two specific tests.

The Green Card Test is met if an individual has been granted lawful permanent resident status. Anyone who holds a green card at any point during a calendar year is considered a resident alien for tax purposes.

The Substantial Presence Test is a calculation based on physical presence in the U.S. over three years. To meet this test, an individual must be physically present in the U.S. for at least 31 days during the current year and a total of 183 days during the three-year period. The 183-day total is calculated using a weighted formula: each day in the current year counts as a full day, each day in the first prior year counts as one-third of a day, and each day in the second prior year counts as one-sixth of a day.

For example, consider an individual who was present in the U.S. for 120 days in the current year, 150 days in the first prior year, and 180 days in the second prior year. The calculation would be (120 x 1) + (150 x 1/3) + (180 x 1/6), which equals 120 + 50 + 30, for a total of 200 days. Since this individual was present for more than 31 days in the current year and the three-year total exceeds 183 days, they would be considered a resident alien for tax purposes for the current year.

Certain days of presence do not count toward the Substantial Presence Test for “exempt individuals.” This category includes foreign government-related individuals, teachers or trainees on a “J” or “Q” visa, and students on an “F,” “J,” “M,” or “Q” visa. For students, days of presence are not counted for the first five calendar years they are in the U.S. For teachers and trainees, the exemption applies for two of the last six years.

An exception to the Substantial Presence Test exists for individuals who can demonstrate a closer connection to a foreign country. To qualify, an individual must be present in the U.S. for fewer than 183 days in the current year, maintain a tax home in a foreign country, and have more significant contacts there than with the U.S. This exception is claimed by filing Form 8840, Closer Connection Exception Statement for Aliens.

Tax Rules for Nonresident Aliens

A nonresident alien’s (NRA) U.S. tax obligations are confined to income from U.S. sources. This income is divided into two categories: Effectively Connected Income (ECI) and Fixed, Determinable, Annual, or Periodical (FDAP) income.

ECI is income earned from performing personal services or operating a business in the U.S., such as a salary. This income is taxed at the same graduated rates that apply to U.S. citizens, and NRAs can claim related deductions.

FDAP income includes passive income like interest, dividends, rents, and royalties from U.S. sources. This income is taxed at a flat 30% rate, which is collected at the source through withholding by the payer.

For instance, if an NRA works a temporary job in the U.S., the wages are ECI and taxed at graduated rates. If that same person owns stock in a U.S. company and receives a dividend, that is FDAP income, and the company will withhold 30% tax before payment.

The sourcing rules determine if income is from the U.S. Compensation is sourced to where services are performed, interest is based on the payer’s residence, and rent is sourced to the property’s location.

Tax Rules for Resident Aliens

Individuals classified as resident aliens face a tax framework nearly identical to that of U.S. citizens. The primary rule is that they are taxed on their worldwide income, meaning all income must be reported on a U.S. tax return, regardless of the country where it is earned. For example, a resident alien living in the U.S. who owns a rental property abroad must report both their U.S. salary and the foreign rental income to the IRS.

Resident aliens are entitled to claim the same tax deductions and credits as U.S. citizens, including the standard deduction. To prevent double taxation on foreign income, they can use the Foreign Tax Credit. This credit reduces their U.S. income tax liability by the amount of income taxes already paid to a foreign government, ensuring the income is not taxed twice.

Impact of U.S. Tax Treaties

Income tax treaties between the United States and other countries can modify the general tax rules for foreign nationals. The purpose of these treaties is to prevent double taxation and establish measures to prevent tax evasion. An individual can check for a treaty with their country on the IRS website.

A common treaty benefit is a reduced tax rate on FDAP income for nonresident aliens. For example, the standard 30% withholding tax on dividends might be reduced to 15% or 5%. Interest income may be completely exempt from U.S. tax under certain treaties.

Treaties also frequently contain articles benefiting students, teachers, and researchers temporarily in the U.S. These provisions may allow them to exempt a certain amount of their U.S. income from U.S. taxation for a specified period. For instance, a treaty might state that a professor from a foreign country teaching at a U.S. university for up to two years will not be taxed by the U.S. on their salary.

Claiming treaty benefits is not automatic. To receive a reduced withholding rate, a nonresident alien must provide a completed Form W-8BEN to the U.S. payer. To claim other treaty benefits on a tax return, an individual may need to file Form 8833.

Required Tax Forms and Filing Process

To file a U.S. tax return, a foreign national must have a valid Taxpayer Identification Number. Individuals authorized to work in the U.S. will have a Social Security Number (SSN). Those ineligible for an SSN must obtain an Individual Taxpayer Identification Number (ITIN) by filing Form W-7 with their tax return, along with proof of foreign status and identity.

The tax return filed depends on an individual’s status. Resident aliens file Form 1040, the same form used by U.S. citizens. Nonresident aliens must file Form 1040-NR to report their U.S. source income.

Exempt individuals, like students on specific visas, must file Form 8843 to document days excluded from the Substantial Presence Test. This is required even if they have no U.S. income and do not need to file a Form 1040-NR.

The filing deadline for resident aliens is April 15. For nonresident aliens who received wages subject to U.S. withholding, the deadline is also April 15. An NRA who did not receive such wages has until June 15 to file Form 1040-NR.

Completed forms must be submitted to the IRS. The correct mailing address depends on the form being filed and whether a payment is included. The IRS provides a “Where to File” page on its website to direct filers to the correct processing center.