Foreign Citizens: Resident or Non-Resident Aliens?
Foreign citizens who earn income in the United States are subject to US income tax. But calculation of the tax depends upon whether the individual is a resident or nonresident alien. One of the important procedures for professionals with enrolled agent careers is knowing the difference.
There are two tests for determining whether a foreign citizen is a resident alien. The first analysis is the “green card test.” Any foreign citizen who possesses status under US immigration laws as a lawful permanent resident of the United States is a resident for tax purposes. The individual must not have abandoned this status or had it rescinded.
The second test requires some calculation effort. This is where training for an enrolled agent job is deployed. The “substantial presence test” considers how many days an alien was present in the United States, including the District of Columbia as well as US possessions, territories, airspace, or territorial waters.
An alien meeting the substantial presence test must have a physical presence in the US on at least 31 days during the current year plus 183 days during the current year and the preceding two years. Enrolled agent continuing education covers the unusual nuances of computing the days. All of the days present in the current year count as full days. But the calculation counts only one-third of the days present in the US during the immediately preceding year and one-sixth of the days two years ago.
There’s even more detail to this test covered in EA training. Some days are not counted at all. These are days that an alien regularly commutes to work in the US from a residence in Canada or Mexico. Regular commuting is considered to occur when it involves more than 75 percent of all workdays. Also not counted are days in the US for less than 24 hours when in transit between locations outside the US. The other days not counted are those when someone is only in the US as a crewmember of a foreign vessel or unable to leave the US due to uncontrollable circumstances, such as a medical condition.
In addition, some individuals are exempt from the substantial presence test. These aliens include officials of foreign governments, teachers or trainees with temporary visas, students with temporary visas, and professional athletes competing in charitable sports events.
Further complicating matters is that any foreign citizen in the US for less than 183 days during the current year may still receive treatment as a nonresident alien. Furthermore, some countries have treaties with the US providing special rules for determining residency.
Nonresident aliens report their US taxable income on Form 1040NR. These returns are due on April 15 for individuals who had US wages with income tax withholding. But the returns are due June 15 if there were no US wages subject to withholding.
Resident aliens follow the same tax laws as US citizens. They are taxed on income from all sources whether received from sources inside or outside the United States. Aliens with residency status that changes during the year generally have dual status for that year. The income for these individuals is taxed differently for the two periods.
Correctly determining all reportable income is a requirement of enrolled agent ethics. Foreign citizens with US income should consult tax experts. They will find that enrolled agents are among the most highly trained professionals on tax matters.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.