Please remember that, unless we note otherwise, the answers below depict the general rules applicable to each corresponding question. Often, however, U.S. federal and/or state income taxes can be reduced, or even eliminated altogether, with proper planning by a U.S. tax professional.
If you have additional questions, seek clarification of a certain Q&A, or would like to know how simple or complex planning may alter any of the scenarios described below, please contact Attorney Portman at firstname.lastname@example.org.
Q: How do I know if I’m treated, for U.S. income tax purposes, as a Resident Alien or a Nonresident Alien (“NRA”)?
A: Under the Internal Revenue Code (“Code”), a non-United States citizen is generally treated as an NRA unless such individual meets either (1) the Green Card test, or (2) the Substantial Presence test.
“Green Card test” is met when an individual, at any time during the tax year in question, resides in the U.S. as a lawful immigrant in accordance with U.S. immigration laws.
“Substantial Presence test” is met when an individual is physically present in the U.S. on at least (a) 31 days during the tax year in question, and (b) 183 days during a three-year period that includes the current tax year and the two preceding years. The latter portion of this test (found in (b) above) requires the individual in question to count the days as follows when determining if the 183 day requirement is met: (i) all days such individual was present in the current tax year are counted, (ii) 1/3rd of the days such individual was present, in the first year before the current year, are counted, and (iii) 1/6th of the days such individual was present, in the second year before the current year, are counted.
Q: If I am considered a resident alien under either the Green Card test or Substantial Presence test, which of my sources/streams of income are subject to U.S. federal and/or state taxes?
A: Individuals considered resident aliens are subject to essentially the same tax rules and regulations applicable to U.S. citizens. As the United States taxes its citizens on their worldwide income, resident aliens must report and pay U.S. federal income tax and, to a lesser but substantial degree, state income tax on all of their income without regard to where the income is earned or generated.
Q: If I meet the definition of a nonresident alien, which of my sources/streams of income are subject to U.S. federal and/or state taxes?
A: NRAs are typically subject to U.S. income tax on two distinct categories of income: (1) income that is Effectively Connected with a U.S. trade or business (“ECI”), and (2) Fixed, Determinable, Annual, or Periodical income that is derived from U.S. sources (“FDAP”).
“ECI” is typically income generated by a foreign person in connection with the foreign person’s active conduct of a trade or business in the United States.
“FDAP” is typically passive investment income, including dividends, interest, rents, royalties, and the like, but specifically excludes (a) gains from the sale of real or personal property, and (b) certain items of income generally excluded from any individual’s U.S. gross income, such as tax-exempt municipal bond interest or qualified scholarship income.
Q: I am currently residing in the United States with a visa that is a non-immigrant student visa; does that mean I am considered a resident alien under the Substantial Presence test who owes U.S. federal income tax?
A: For purposes of the Substantial Presence test, certain individuals are considered “exempt” and, if so considered, these individuals do not have to count days spent in the U.S. pursuant to a non-immigrant visa for purposes of the Substantial Presence test for a period of up to two-to-five years. The following individuals present in the U.S. are considered exempt individuals for this purpose if they substantially comply with the requirements of their particular non-immigrant visa: (1) students with a F, J, M, or Q visa; (2) teachers or trainees with a J or Q visa; (3) foreign government related persons with a A or G visa; and (4) certain professional athletes who are competing in charitable sporting events.
Q: I know that my daughter technically meets the resident alien requirements as a result of the Substantial Presence test; however, I seem to remember that there are exceptions that can be used to treat her as a NRA… Is this true?
A: Yes; the Code provides two exceptions, specifically to the substantial presence test, which can be used by resident aliens seeking to maintain their NRA status: (1) the Closer Connection exception that is applicable to all resident aliens, and (2) the Closer Connection exception that is applicable to certain foreign students. In order to qualify for either of these exceptions, an applicant must file Form 8840, Closer Connection Exception Statement for Aliens, or Form 8843, Statement for Exempt Individuals and Individuals With a Medical Condition, respectively.
Q: My son is currently studying in the U.S. in pursuit of a bachelor’s degree. A friend told me that my son is subject to U.S. income tax on capital gains that are not FDAP, and not ECI, even if he is considered exempt under the Substantial Presence test, because he physically spent 183 days or more in the U.S. last year; is this somehow true?
A: Yes; this is true. Individuals residing in the U.S., those in substantial compliance with non-immigrant visa requirements, are exempt from the Substantial Presence test in determining whether they’re a resident alien or NRA. However, a separate Code provision, specifically found in § 871(a)(2), requires the application of a flat 30% U.S. income tax on U.S. sourced capital gains of NRAs if such NRAs were physically present in the U.S. for 183 days or more in the particular year in question. For purposes of this 183-day requirement, the exempt rule discussed in this paragraph and the preceding Q&A section is not applicable as the 183-day requirement is distinct from the 183-day requirement used to classify an individual as a resident alien or NRA under Code §§ 7701(b)(3) and (b)(5). Note, however, that if your child is a citizen or resident of a country with which the U.S. has a tax convention, the rate of capital gains will likely be reduced to a lower rate set by the particular tax convention. Furthermore, this lower rate is often 0% but requires the citizen or resident of a foreign country to properly disclose the treaty position they seek to rely on by way of a timely filed Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b).
Q: I am scheduled to visit the U.S., where I will receive an honorarium payment from a U.S. university, but the university is requesting my social security number (“SSN”) or individual taxpayer identification number (“ITIN”); do I really need a SSN or an ITIN to receive a one-time honorarium?
A: No, not necessarily. Technically, all foreign individuals visiting the U.S., if scheduled to receive any sort of pay for their services regardless of the amount received, must have and present a SSN or an ITIN as such persons will be considered to be engaged in a U.S. trade or business requiring the eventual filing of Form 1040-NR, U.S. Nonresident Alien Income Tax Return, and the filer’s SSN or an ITIN. Even though individuals in this position should apply for, after entering the U.S., a SSN or an ITIN via Form W-7, Application for IRS Individual Taxpayer Identification Number, vis-a-vis the Internal Revenue Service (“IRS”) or a reputable Acceptance Agent, nonimmigrant persons with a B-1, B-2, WT or WB visa status are not generally eligible for a SSN or an ITIN.
Generally, unless international visitors secure a job in the U.S. or previously filed U.S. tax returns, it would be almost impossible for an international visitor to get a SSN or an ITIN before receiving an honorarium payment. Regardless if you have applied for and received a SSN or an ITIN, however, an honorarium will be viewed as compensation in exchange for services and, accordingly, the honorarium will be subject to certain withholding requirements that generally amount to a flat 30% withholding tax rate applied to the honorarium payment and withheld at the source by the payor. While international visitors may request an exemption from this withholding requirement by filing Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual, only individuals with a SSN or an ITIN can properly file the form and be afforded the exemption.
Q: My wife is travelling to the U.S. as a visiting scholar in a few months; is it illegal for her incidental or per diem expenses to be reimbursed by the University she is scheduled to visit if she doesn't apply for and obtain a SSN or an ITIN?
A: No, the reimbursement of incidental expenses and per diem expenses, under these circumstances is legal, and not subject to U.S. tax, withholding, or reporting requirements, so long as the reimbursements are made pursuant to, for example, IRS accountable plan rules, which are found in Treasury Regulation § 1.62-2, or other IRS rules found in Treasury Regulation § 1.132-1(b)(2). However, if certain applicable Code and/or Treasury Regulation requirements are not met, withholding will be made by the payor/reimbursor in an amount of up to 30% of the reimbursement.