Concise Takeaway
Foreign taxpayers must determine whether they are resident aliens or nonresident aliens, because filing status, income sourcing, withholding, and reporting obligations differ significantly. Additional rules apply for FATCA, FBAR, and foreign financial accounts.
Resident Alien vs. Nonresident Alien
A taxpayer who is not a U.S. citizen must determine their status for tax purposes.
Resident Alien
A taxpayer is a resident alien if they meet either:
- Green Card Test — lawful permanent resident at any time during the year
- Substantial Presence Test — physically present:
- 31 days in the current year, and
- 183 days over the 3‑year lookback using:
- All days in current year
- 1/3 of days in prior year
- 1/6 of days in second prior year
Resident aliens report worldwide income on Form 1040.
Nonresident Alien
A taxpayer who does not meet either test is a nonresident alien unless a tax treaty overrides the result.
Nonresident aliens report only U.S.‑source income and file Form 1040‑NR.
Election to Be Taxed as a Resident
A nonresident alien married to a U.S. citizen or resident may elect to be treated as a U.S. resident for the entire year if:
- Married at year‑end
- Spouse is a U.S. citizen or resident
- They file a joint return (Form 1040 or 1040‑SR)
Worldwide income becomes taxable for the full year.
Dual‑Status Tax Year
A dual‑status year occurs when a taxpayer changes status between nonresident and resident. Arrival and departure years are the most common examples.
Different rules apply to each portion of the year.
Nonresident Alien Withholding (NRA Withholding)
Nonresident aliens are taxed under two regimes:
Effectively Connected Income (ECI)
- Income from a U.S. trade or business
- Taxed at graduated rates
- Includes wages, self‑employment income, and business income
FDAP Income
Fixed or determinable, annual or periodic income, including:
- Interest
- Dividends
- Rents
- Royalties
FDAP is generally taxed at a 30% flat rate, unless reduced by a treaty.
The withholding agent is responsible for withholding and is personally liable for the tax.
Illegal Aliens
Foreign workers who are illegal aliens are still subject to U.S. tax. Payments to them are subject to the same withholding and reporting rules as other workers.
Effectively Connected Income Tests
Income is ECI if it meets:
- Business Activities Test — U.S. business activities were a material factor
- Asset Use Test — U.S. assets were used or held for use in the business
Source of Income Rules
General sourcing rules for nonresident aliens:
- Wages → where services performed
- Business income → where services performed
- Interest → residence of payer
- Dividends → U.S. or foreign corporation rules
- Rents & royalties → location of property
- Real property sales → location of property
- Personal property sales → seller’s tax home
- Pensions → where services were performed
- Scholarships → residence of payer
Form 1040‑NR Filing Requirements
A nonresident alien must file Form 1040‑NR if:
- Engaged in a U.S. trade or business
- Received U.S.‑source income not fully withheld
- Received HSA, Archer MSA, or Medicare Advantage MSA distributions
- Had self‑employment income (unless exempt by treaty)
- Received advance premium tax credit payments
- Represent a decedent or estate required to file
- Held a Qualified Opportunity Fund investment
- Electing nonresident treatment as a dual‑resident taxpayer
Exceptions
Form 1040‑NR is not required if:
- Certain students/teachers under F, J, M, Q visas with no taxable U.S. income
- Certain India treaty students under Article 21(2)
- Partners in U.S. partnerships with only NEC income
Nonresident Filing Status
Nonresidents generally may not file:
- Married Filing Jointly
- Head of Household
Allowed statuses:
- Single
- Married Filing Separately
- Qualifying Surviving Spouse (if eligible)
Nonresident Deductions
Nonresident aliens:
- Cannot claim the standard deduction (except India treaty students)
- May claim itemized deductions related to ECI
- Use Schedule A (Form 1040‑NR)
Due Dates for Form 1040‑NR
- With wage withholding → April 15
- Without wage withholding → June 15
- Estates/trusts with U.S. office → April 15
- Estates/trusts without U.S. office → June 15
Form 4868 provides a 6‑month extension to file.
FATCA Reporting (Form 8938)
U.S. citizens, resident aliens, and certain nonresidents must file Form 8938 if foreign financial assets exceed:
- $50,000 at year‑end, or
- $75,000 at any time during the year
Higher thresholds apply for MFJ.
FATCA does not replace FBAR.
FBAR Reporting (FinCEN Form 114)
FBAR is required if:
- A U.S. person
- Has financial interest in or signature authority over
- Foreign financial accounts
- With aggregate value over $10,000 at any time
Due April 15 with an automatic extension to October 15.
FBAR is filed electronically with FinCEN, not the IRS.
FBAR Definitions
Includes definitions for:
- Financial account
- Joint account
- Foreign financial account
- Financial interest
- Signature authority
- U.S. person
Entities disregarded for income tax purposes must still file FBAR if required.