Taxation rules for non-resident aliens: A complete guide:

More than 41 million foreigners live in the USA, and many earn from America. But many people feel confused about tax-related issues and aren’t aware of the basic definitions. However, if you want to understand the difference between both, then look at the descriptions. If you live in or outside of the USA, every person is obliged by the law. For instance, all citizens must pay personal income tax on global earnings and inheritance tax on international assets. Apart from this, the law has some reporting requirements. But if you want to understand all these terms, let’s start by understanding the difference between resident & non-resident.

Who is a non-resident alien in the USA?

The resident and non-resident aliens both are different terms. According to USA law, a resident alien is the one:

“Who isn’t a US citizen but has the green card that allows them to work and live in the USA. Besides, the non-resident term covers those living in the country for at least 180 days over three years.”

Non-resident aliens must pay taxes on income they earn within the USA or from a US source. So, it means people who aren’t residents don’t need to pay taxes they are making from foreign sources. A non-resident alien did not pass the green card test and didn't qualify to live permanently in the country. So, both terms resident and non-resident are different, and the state has separate rules for these.

Factors that decide non-resident status:

Earlier, we discussed that non-resident people have the citizenship of one country and have an interest in another. However, the residency status helps to decide the eligibility for the following things:

So, you can achieve this status by living in the country for a specific period during one calendar year. But if a person has a resident status for one state but works in another, they will file two tax returns. For instance, one tax return will be according to resident status and another in the state where they work. Moreover, the same tax rule applies even if you have a remote business model registered in the USA.

What are the taxation rules for non-resident tax aliens?

If we look at the official stats, then each year, there are thousands of people who register tax returns as non-resident aliens. For instance, these people pay taxes because they have a rental property and earn interest or dividends from the USA investment. So, here are tax filing requirements for non-resident aliens in the USA:

Determine your status:

The first step is to determine your status in the USA. You will be considered a non-resident unless you meet one of the following tests:

• The green card tests

• Or your presence in the country for a specific period

But if you cannot meet either of these, you will be considered a non-resident. If you meet the criteria, you will be taxed similarly to US citizens. It means that you will have to fill out these forms to file your tax return:

But the above requirements don’t apply, and you don’t need to fill out these documents in case of non-resident status.

Fill out the requirements:

After determining you are a non-resident, the next step is to fill out the requirements. Usually, the non-resident people are subject to pay tax on only USA source-based income. But according to law, there are following two different tax rates for this category:

The effectively connected income (ECI) is the income earned by operations in the USA. Apart from this, personal service or self-employed income also falls under this category. You can keep track of your salary-based expenses by taking the help of a real paystub generator. However, the tax rate is the same that applies to US citizens.

On the other hand, FDAP income is passive and earned in different forms like interest, dividends, rents, or loyalties. Thus, the tax ratio for this category is flat at 30% unless a tax treaty lowers it.

File taxes as non-resident aliens:

Before filing income tax, you must see if you are eligible for any discount. For instance, the USA has income tax treaties with many countries. So, these treaties reduce the taxes you will pay to the state. The tax treaty usually applies to personal service-based professions like pensions, interest, dividends, royalties, and capital gains. However, after finalizing all things, you can file taxes using these forms:

So, it’s crucial to understand how residency status can affect your rules and obligations while doing business somewhere. But if you can’t file on time, it’s better to ask for an extension as it’s the best way to avoid penalties. So, to get an extension, you should fill out form 4868 for getting an automatic extension.

Conclusion:

Every year America welcomes millions of new residents, citizens, and businesspeople. So, the state department frequently changes the rules to accommodate more people. But generally, the following tax rules are applicable:

But you will immediately move from the non-resident column if your status changes. However, in that situation, you will have to file taxes according to the resident tax rules. Besides, if things are overwhelming for you, you can take a financial advisor's help.