Publication 519: Tax Requirements for Aliens

IRS Publication 519, the U.S. Tax Guide for Aliens, provides guidance for non-U.S. citizens to understand their federal tax obligations. The publication’s primary function is to help individuals determine their correct U.S. tax status for a given year. This determination is the first step, as tax rules depend on whether an individual is classified as a resident alien or a nonresident alien for tax purposes. The publication explains the tests for this classification and the corresponding tax laws for each status.

Determining Your Tax Status

For U.S. tax purposes, any individual who is not a U.S. citizen is considered an alien and is classified as either a resident or nonresident alien. This distinction is not based on immigration status but on specific tests outlined by the IRS. An individual’s tax liability, the income subject to tax, and the required forms all hinge on this classification.

The most direct path to being classified as a resident alien is through the Green Card Test. An individual meets this test if they are a Lawful Permanent Resident of the United States at any time during the calendar year. This status is conferred when U.S. Citizenship and Immigration Services (USCIS) issues an Alien Registration Card, known as a “green card.” The residency starting date is the first day the person is present in the U.S. as a Lawful Permanent Resident.

If an individual does not hold a green card, their tax status is determined by the Substantial Presence Test. This test is a formula based on the number of days a person is physically present in the United States over a three-year period. To meet the test, an individual must be present in the U.S. for at least 31 days during the current tax year and a combined total of 183 days during the three-year period that includes the current and two preceding years.

The 183-day total is calculated by counting every day of physical presence in the current year, adding one-third of the days from the first preceding year, and one-sixth of the days from the second preceding year. For example, if an individual was 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 is 120 + (1/3 150) + (1/6 180). This equals 200 days, meeting the requirement.

Certain individuals can exclude their days of physical presence in the U.S. when applying the Substantial Presence Test. These exempt individuals include students on an F, J, M, or Q visa, who can generally exclude days for their first five calendar years. Teachers or trainees on a J or Q visa are also exempt, typically for two of the last six years. Individuals present on behalf of a foreign government with an A or G visa are also exempt. To claim this exemption, Form 8843, Statement for Exempt Individuals and Individuals With a Medical Condition, must be filed.

An exception exists for individuals who meet the Substantial Presence Test but can demonstrate a stronger connection to a foreign country. The Closer Connection Exception allows an individual to be treated as a nonresident alien. To qualify, the 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 for the entire year, and have a closer connection to that country than to the U.S. Claiming this exception requires filing Form 8840, Closer Connection Exception Statement for Aliens.

How Nonresident Aliens Are Taxed

Once an individual determines they are a nonresident alien, a different set of rules governs their U.S. tax liability. Nonresident aliens are taxed only on their income from U.S. sources. This income is separated into two distinct categories, each with its own method of taxation.

The first category is income Effectively Connected with a U.S. Trade or Business (ECI). This includes earnings from personal services performed in the U.S., such as wages and self-employment income. ECI is taxed at the same graduated rates that apply to U.S. citizens and residents, and individuals can claim allowable deductions. Nonresident aliens with ECI must file Form 1040-NR, U.S. Nonresident Alien Income Tax Return, to report this income.

The second category is Fixed, Determinable, Annual, or Periodical (FDAP) income. This encompasses passive income from U.S. sources, such as interest, dividends, rents, and royalties. FDAP income is taxed at a flat 30% rate on the gross amount, with no deductions allowed. This tax is usually collected through withholding by the payer of the income.

The 30% flat tax on FDAP income can be altered by international tax treaties. The U.S. has income tax treaties with numerous foreign countries to prevent double taxation. These treaties often provide for a reduced rate of tax, or even a complete exemption, on certain types of FDAP income like dividends or interest.

To take advantage of these benefits, a nonresident alien must be a resident of a treaty country and provide the U.S. payer with a completed Form W-8 BEN. This form certifies the individual’s foreign status and claims the treaty benefits, instructing the payer to withhold tax at the lower treaty rate. It is the individual’s responsibility to understand the provisions of the specific treaty.

How Resident Aliens Are Taxed

An individual who meets either the Green Card Test or the Substantial Presence Test is classified as a resident alien for tax purposes. This status carries tax obligations broadly similar to those of U.S. citizens, as resident aliens are subject to U.S. income tax on their worldwide income.

This means that all income, regardless of its source, must be reported on a U.S. tax return. Whether the income is from employment in the U.S., investments in a foreign country, or a business operated overseas, it is subject to U.S. taxation. This is a significant difference from nonresident aliens, who are only taxed on their U.S. source income.

Resident aliens file Form 1040, U.S. Individual Income Tax Return, the same form used by U.S. citizens. They are eligible for the same deductions, exemptions, and credits as citizens. The tax is calculated using the same graduated tax rate schedules.

Resident aliens are also subject to the same information reporting requirements as U.S. citizens concerning foreign financial assets. This includes the annual requirement to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), if the aggregate value of their foreign financial accounts exceeds $10,000. They may also need to file Form 8938, Statement of Specified Foreign Financial Assets, with their tax return if the value of those assets exceeds certain thresholds.

Special Situations and Filing Requirements

Certain circumstances create unique tax responsibilities for aliens. These situations often involve a change in status during the year or specific rules that differ from those for U.S. citizens.

Dual-Status Aliens

An individual can be both a nonresident alien and a resident alien in the same tax year. This occurs in the year of arrival to or departure from the United States. In this scenario, the individual is a dual-status alien and must file a special tax return. For the part of the year the individual is a resident, they are taxed on worldwide income; for the nonresident part, they are taxed only on U.S. source income.

The filing process for a dual-status return depends on the individual’s status at the end of the year. If a resident on the last day of the tax year, the person files Form 1040 and writes “Dual-Status Return” at the top, attaching Form 1040-NR as a statement. If a nonresident on the last day of the year, Form 1040-NR is the main return, with Form 1040 attached as the statement.

Filing Status and Dependents

The rules for filing status and claiming dependents are more restrictive for nonresident aliens. A nonresident alien must file using either the “Single” or “Married Filing Separately” status and cannot use the “Head of Household” status. A joint return is not permitted unless the nonresident alien is married to a U.S. citizen or resident and they both elect to treat the nonresident spouse as a U.S. resident for the entire tax year. In contrast, resident aliens follow the same filing status and dependent rules as U.S. citizens.

Claiming dependents is also limited for nonresidents. Dependents must generally be residents of the U.S., Canada, or Mexico, though exceptions exist for residents of certain treaty countries. Any dependent must have a Social Security Number (SSN) or an Individual Taxpayer Identification Number (ITIN) to be claimed.

Departing the United States

Certain aliens leaving the U.S. must obtain a certificate of compliance, often called a “sailing permit,” from the IRS before their departure. This document certifies that the individual has satisfied their U.S. income tax obligations. This requirement applies to most aliens, with specific exceptions for individuals like foreign diplomats, certain students on F or J visas, and some industrial trainees who have no U.S. source income subject to tax.

To get a sailing permit, an individual must file either Form 2063, U.S. Departing Alien Income Tax Statement, or Form 1040-C, U.S. Departing Alien Income Tax Return. Form 2063 is a simpler statement for aliens who have no taxable income for the year of departure. Form 1040-C is a more detailed return that calculates the tax liability up to the departure date, and any tax due must be paid to receive the permit. Filing for a sailing permit does not replace the requirement to file a final annual income tax return for that year.