U.S. Income Taxation of Nonresident Alien Individuals (Portfolio 907)
This Portfolio analyzes the U.S. income tax laws applicable to non-U.S. citizens (i.e., “aliens”) who are classified as “nonresident aliens” rather than as “resident aliens” under the Internal Revenue Code.
Whether an alien is classified as a “resident alien” or a “nonresident alien” is based on detailed rules in §7701(b) and the regulations thereunder. For the most part, these rules are “mechanical,” so that in most factual situations it is possible to know with certainty whether a particular alien is a resident alien or a nonresident alien on a particular day. The rules in §7701(b) may be overridden by the “tie-breaker” provisions of a tax treaty, however, where it is shown that an alien is also classified as an income tax resident of another country having an income tax treaty with the United States.
If a nonresident alien realizes U.S.-source income subject to tax on a gross basis, payments related to that income are normally subject to withholding tax at a 30% rate under §1441. Where a nonresident alien is taxable on a net basis on income that is effectively connected with a U.S. trade or business, he must file a federal income tax return on Form 1040NR. The calculation of his taxable income and of his tax is similar to the rules for U.S. citizens and resident aliens, but with certain important differences. Special rules can apply where an alien comes to the United States to work, becomes a resident, and later receives deferred compensation or pension income from the United States after moving abroad and resuming nonresident alien status.
Many nonresident aliens who are present in the United States and who plan to depart from the United States are required to make a personal visit to an IRS office and apply for a so-called “tax clearance certificate” (or “sailing permit”).
Special rules are applied under §877A to certain U.S. citizens who give up their citizenship and become nonresident aliens, and also to certain long-term immigrant aliens who give up their U.S. immigration visa and become nonresident aliens. In many cases tax is imposed on the unrealized gain inherent in the value of the individual’s worldwide assets.
A special non-tax reporting form (Form TDF 90-22.1) may be required to be filed with the U.S. Treasury Department by resident alien individuals who have foreign bank accounts and similar financial accounts. The IRS has temporarily waived this requirement for all nonresident aliens, but could require filing of this form from many of them in the future.
Finally, a separate albeit similar reporting form (Form 8938) may also be required to be filed with the IRS by certain nonresident and resident alien individuals who file an income tax return and have interests in specified foreign financial assets the value of which exceeds an applicable reporting threshold.
Table of Contents
II. Historical Background
III. Determination of Resident Alien Status
IV. Resident Alien Starting Date and Termination Date
V. Interplay of Income Tax Treaties with § 7701(b)
VI. Income Taxation of Nonresident Aliens – General Rules
VII. Calculation of Taxable ECI
VIII. Tax Return Filing Procedures
IX. Special Categories of Aliens
X. Deferred Compensation and Pensions
XI. Tax Clearance for Departing Aliens