A Resident Alien or Non-Resident Alien for US Tax Purposes

Nonresident Alien (NRA) vs Resident Alien

Nonresident Alien (NRA) vs Resident Alien

Unlike a Resident Alien, a Nonresident Alien is treated much differently by the IRS for US tax purposes. Generally, a Nonresident Alien has no US tax filing or reporting requirement, unless they proactively make themselves subject to US tax — either by acquiring US assets or generating US income. Oftentimes, due to the overbearing US tax system, a Nonresident Alien unknowingly becomes subject to US tax on their worldwide income or is required to disclose their global assets. But, with proper planning, these results can usually be avoided. Let’s take a look at some key tax differences between a Nonresident Alien and Resident Alien.

Worldwide Income vs US-Sourced Income

One of the main and most important differences between the tax rules for a Nonresident Alien vs a Resident Alien relates to the categories of income that are subject to US tax. For Resident Aliens, the United States taxes them on their worldwide income. Nonresident Aliens are generally only taxed on their US-sourced income. This is why it is important to maintain a safe distance from the US tax system. For example, when a Nonresident Alien overstays their welcome in the United States, they become subject to the Substantial Presence Test — and the tax consequences can be significant.

Substantial Presence Test (Non-Permanent Residents)

In order for a Nonresident Alien to become subject to US income tax on their worldwide income, they must meet the Substantial Presence Test. When the nonresident remains in the United States for more than 183 days over a three-year period using a 1:1, 3:1, and 6:1 ratio, they become subject to US tax on their worldwide income. They are also required to disclose their offshore assets to the IRS on an array of different international reporting forms such as the FBAR and FATCA Form 8938. Resident Aliens who meet the Substantial Presence Test may still be able to avoid US tax by showing a Closer Connection or other exception.

Form 8840 Closer Connection Exception (Non-Permanent Residents)

Even when a Nonresident Alien meets the Substantial Presence Test, they may still qualify to avoid being taxed on their worldwide income if they are able to show a “closer connection” to one or more foreign countries. There are various factors and tests the Nonresident Alien must consider when making the application to show a closer connection. But, if a Resident Alien meets the Substantial Presence Test and qualifies for the Closer Connection Exception, they can avoid US tax on their worldwide income.

*There are some very strict requirements for meeting the requirements of Form 8840, such as if the person has already applied for Lawful Permanent Resident status, then they do not qualify.

Form 8843 Exemption (Non-Permanent Residents)

Some Nonresident Aliens who meet the Substantial Presence Test can be considered exempt and don’t have to prove a closer connection. There are various categories of individuals who may qualify — one of the most common exemptions is students on F1-Visa for the first five years.

Treaty Position (Permanent Resident)

A Lawful Permanent Resident is taxed on their worldwide income and does not qualify for the Closer Connection Test — but still may be able to qualify to be treated as a nonresident. To do so, the LPR makes a treaty application on Form 8833 and needs to show significant contacts with a foreign country.*

*If the taxpayer is already considered a Long-Term Lawful Permanent Resident, then they need to be careful before making such an application because this will be considered an expatriating act and may lead to Covered Expatriate status — and possibly US Exit Tax.

Elections to be Treated as a Resident

On the flip side, even a Nonresident Taxpayer may still request to be treated as a US person for tax purposes when their spouse is considered a US person. Therefore, they can file their tax returns as Married Filing Jointly and take all the deductions that may not be available under other circumstances (MFS). It is important to note that in this type of situation (absent dual-status taxpayer status), the Nonresident is required to report all of their US and foreign income as well.

Foreign Asset Reporting

One major complication for Nonresident Aliens who are now considered Resident Aliens because they meet the Substantial Presence Test, is that they are required to report their foreign assets to the United States on forms such as Form 8938, etc. If the Taxpayer has a significant amount of foreign assets, this can be a costly and overwhelming experience — especially if the Resident Alien has been out of compliance for multiple years beforehand.

Expatriation

One very important difference between a Nonresident Alien and a Resident Alien is that even if a Nonresident Alien overstays their welcome in the United States while on a visa, they are not subject to US Expatriation rules and Exit Tax consequences.  On the other hand, Permanent Residents (Long-Term Lawful Permanent Residents) may become subject to expatriation, Covered Expatriate status, and the dreaded exit tax. Therefore, a Nonresident Alien should carefully consider if they intend to stay in the United States before obtaining a Permanent Resident status in the US.

Resident and Nonresident Aliens are Taxed Differently

Nonresidents and Resident Aliens are taxed differently. Resident Aliens are taxed on worldwide income and Nonresident Aliens are taxed on their US-sourced income. A Nonresident should consider pre-immigration tax planning before becoming a Permanent Resident. If they will be staying long-term, then they may need to consider expatriation planning and exit tax consequences. 

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who are considered U.S. persons for tax purposes did not timely file their FBAR and other international information-related reporting forms and do not qualify for an exception or exclusion to FBAR filing, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.