U.S. Tax Rules Applicable to Foreign Nationals


1. Does a foreign national have to pay U.S. income taxes? Anyone who has income from U.S. sources may be obligated to pay U.S. income taxes. A foreign national's federal income tax is determined by the individual's tax status, resident alien or nonresident alien.

2. How is tax status determined? A foreign national's tax status is determined by the individual's U.S. immigration classification and physical presence in the Untied States under some relatively complex tax rules.

3. How can a foreign national determine his or her tax obligations? IRS Publication 519, "U.S. Tax Guide for Aliens," describes federal income tax rules and tax-return filing obligations for foreign nationals.

4. What are the general rules determining tax status? An F, M, J,or Q student in the United States for no more than 5 calendar years, including part years, is a nonresident alien.

A J or Q nonstudent who was previously in the United States in an F, M, J, or Q status for 2 calendar years, including part years, in the previous 6 years is a resident alien. The 2-year limit is increades to 4 years if all the foreign national's income for services performed in the United States is from foreign sources.

The same rules apply to family members in F, M, J,and Q status. Since each family member's presence in the United States may have been different from the spouse's or parent's presence, the family member's tax status may be different from that of the primary visaholder.

A foreign national on a foreign-government related visa such A-1or G-1 is a nonresident alien.

A foreign national who is a U.S. lawful permanent resident ("green card" holder) is a resident alien.

A foreign national who has any other immigration status, or who is out of status or in the United States illegally, is a nonresident alien until he or she has been in the United States for 183 days in the current year or for 183 days in the current and prior 2 years based on the following formula: all of the days in the current year plus one-third of the days in the prior year plus one-sixth of the days in the second preceding year.

NOTE: There are exceptions to these rules. All facts and circumstances must be reviewed before advising a foreign national of his or her U.S. tax obligations.

5. How is a nonresident alien's U.S. tax obligation determined? A nonresident alien is taxed only on income from U.S. sources, which includes compensation for services performed in the United States regardless of the location or currency of the payment.

Income effectively connected to a U.S. trade or business, compensation for services, and the taxable portion of scholarships and fellowships are taxed at graduated rates using "single" or "married-filing-separately" rates. Other fixed or determinable annual or periodic income is taxed at a 30-percent rate.

Most nonresident aliens are limited to one personal exemption; the amount of this exemption varies each year. A nonresident alien can only claim certain itemized deductions, not the standard deduction. (See IRS Publication 519.)

The foreign national may be eligible for tax treaty benefits that may reduce or eliminate his or her tax obligation. Certain types of income may be exempt under Internal Revenue Code provisions as well.

6. What tax return does nonresident alien file? A nonresident alien files Form 1040NR or Form 1040NREZ. A return is required if the individual has any income subject to graduated tax rates, is claiming tax treaty benefits, or has had insufficient withholding on fixed or determinable, annual or periodic income. (See Form 1040NR instructions.)

7. Where can the individual obtain forms? Forms can be obtained by calling the IRS at (800) 829-3676 or they can be obtained from the IRS web site at www.irs.ustreas.gov.

8. Where can the individual obtain tax treaty information? General information on tax treaties is available in IRS Publication 901, "U.S. Tax Treaties." This publication is available on the IRS web site. Information on specific treaties appears in the Cumulative Bulletin. (Government Printing Office, Washington D.C.; see ordering instructions in Publications 519 or 901). The Cumulative Bulletin is also available at law libraries.

9. How is a resident alien taxed? A resident alien is taxed on worldwide income in the same manner as a U.S. citizen. Special rules and filing requirements apply to the year in which the individual's status changes from resident alien to nonresident alien, usually in the calendar year of arrival in or departure from the Untied States. (See IRS Publication 519.)

10. How does a resident alien claim tax treaty benefits? Some tax treaties allow benefits to be claimed by a foreign students, teachers and researchers regardless of the individual's tax status.

11. How does a resident alien claim tax treaty benefits? To claim treaty benefits on a Form 1040, the individual must 1) write Tax Treaty Benefit Claim under US/name treaty country Treaty at the to of page 1 of the Form 1040, 2) attach a completed page 5 questionaire from Form 1040NR, and 3) submit the Form 1040 to the Internal Revenue Center in Philadelphia, PA.

12. Do the same income tax withholding rules apply to resident and non resident aliens? No. Withholding rules for nonresident aliens are different. A nonresident alien can only claim "single" status (regardless of actual marital status) and one exemption on Form W-4 to reduce withholding taxes. The IRS requires an additional $4 per week to be withheld because a nonresident is not entitled to claim the standard deduction amount that is included in compiling the withholding tables. Also, special withholding rules apply to the taxable portion of scholarships and fellowships. A 30-percent or lower treaty rate applies to fixed or determinable annual or periodic income payments from U.S. sources unless an Internal Revenue Code or income tax treaty exemption applies. (See IRS Publication 515, "Withholding Tax on Nonresident Aliens and Foreign Corporations".)

13. Is a foreign national subject to social security taxes? Yes. Foreign nationals employed in the United States are subject to social security taxes with certain exceptions:

(a) F-I, J-I, M-I, and Q-1 nonresident aliens are exempt from social security taxes on authorized employment. F-I, J-I, M-I, and Q-1 resident aliens are not exempt. A foreign student who has been physically present in the United States for more than 5 years is a resident alien unless the student can prove he or she is not intending to reside here permanently.

(b) Students enrolled in and employed by an academic institution are exempt from social security taxes under the same rules that apply to U.S. citizens.

(c) A foreign national sent to work temporarily in the United States by his foreign employer may be exempt from U.S. social security taxes under a social security (totalization) agreement. However, the individual must be paying foreign social security taxes to receive such exemption. Booklets on specific treaties are available from the Social Security Administration (SSA) or can be downloaded from the SSA's web page at www.ssa.gov.

14. Is a foreign national subject to state income taxes? A foreign national who has income from U.S. sources may have a state income tax obligation as well. The rules determining income and tax vary by state.

15. What are the state income tax rules applying to foreign nationals? The rules on residency and nonresidency for state income tax purposes are the same as the rules for U.S. citizens. The rules vary by state.

16. Can a foreign national who cannot obtain a social security number file a tax return? Yes. In 1996 the IRS introduced new procedures for obtaining Individual Taxpayer Identification Numbers (ITIN). An ITIN can be obtained by anyone not eligible to obtain a social security number (SSN) by submitted completed Form W-7 together with required documentation to the IRS. The IRS will reject a tax return that does not include an SSN or ITIN for the taxpayer and all dependents for which an exemption is claimed. Form W-7 is available on the IRS web site.

17. Can an ITIN be obtained anywhere else? Yes. An ITIN can be obtained abroad at a U.S. embassy or consulate. It can also be obtained from an Acceptance Agent such as a college, university or accounting firm that has entered into an agreement with the IRS to provide processing for issuing ITINs.

18. How will the tax authorities know if a foreign national does not file required tax returns and pay U.S. tax obligations? IRS computers compare forms submitted by employers and other payors to report income (Forms W-2, 1099, and 1042S) with individual tax returns. If an individual return is found to be missing, the IRS contacts the individual concerned. The IRS's computerized information is shared with state tax authorities, who may also contact the individual. Also, the IRS now requires all applicants for permanent residence in the United States to submit Form 9003 to disclose tax-related information. The individual must answer questions about physical present in the United States, income from U.S. sources, and U.S. tax returns submitted for the preceding three calendar years.

Every attempt has been made to include all relevant information in a concise and accurate manner. Please consult your tax advisor for assistance with your particular case.