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Banks & Taxes in the US
US Taxes for Non-Resident Aliens
If you aren’t considered a fiscal resident, doing your US taxes comes with its own set of potential pitfalls. Our guide summarily covers taxation for non-resident and dual-status aliens, as well as other issues of interest to expats: tax treaties and the final departure permit from the IRS.
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If you count as a resident alien for matters of taxation in the US, we have explained filing your US taxes at length in our guide to federal income tax in the United States. We strongly advise you to read the linked article first, as it outlines the basics of the US tax system and explains such essential concepts as fiscal residency.
For non-resident aliens, however, US taxes work a little differently than for citizens and foreign tax residents. Of course, you still need to send in your annual tax return to the IRS by the deadline on April 15. You’ll need a social security number, or taxpayer identification number, as well.
But as always, the devil’s in the details. If you don’t pass the fiscal residency test, you are subject to different regulations concerning US taxes.
Taxation According to the Territorial Principle
When you determine all your income sources in order to do your taxes, please note that for non-resident aliens, US taxes are only due on income from sources within the United States. This could refer to, for example, rent from property on US soil, a company pension from previous employment in the US, interest from a US money market fund, dividends from domestic corporate stock, as well as most wages for services performed in the US, e.g. as part of your current job.
Some fringe benefits for employees are also sourced on a geographical basis, mostly depending on where your principal place of work is located. If you live in company housing, for instance, or if your employer reimburses you for international moving expenses, this rule will also apply to you. In that case, you may have to count such benefits among your employment income, provided your primary workplace is in the United States.
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Further Distinctions Regarding Income Sources
While only your income from US sources will be taxed, US taxes also depend on whether or not this income is “effectively connected with a US trade or business”. If it falls under that definition, rates for US taxes are the same as those for citizens and resident aliens. However, if you cannot establish such a connection, the IRS usually taxes your income at a flat rate of 30% (or lower, if subject to tax treaty regulations).
For example, if you are a non-resident alien and have to tax your salary from a company in the United States, it is subject to the normal, progressive, tax rates. But if you are entitled to social security benefits, these do not count as “connected with a trade or business”. Therefore, the US taxes on benefits have the much higher flat rate.
Non-resident aliens for tax purposes have only two different filing statuses to choose from: single or married. Married taxpayers need to file their US tax return separately from their spouse, though. Generally, married (filing jointly) is not an option.
There is, however, a loophole for the latter case. If you are married to a US citizen or resident alien at the end of the tax year, you can opt to file your US taxes jointly with your spouse. Then you will both be treated as resident aliens, even though one of you would normally be considered a non-resident alien for fiscal purposes.
Non-resident taxpayers are also subject to different IRS rules for tax deductions. You can only make deductions from income “effectively connected to a US trade or business”, and only itemized deductions are possible.
You cannot choose the lump-sum standard deduction of, for example, $6,100 for single taxpayers that resident aliens have a right to! Instead, you must always list the individual expenses you’d like to deduct (e.g. moving costs for relocating to the United States, charitable donations, payments for state or local income tax, etc.).
So, your income tax as a non-resident alien can roughly be calculated as follows:
- Add all domestic income from sources connected with a trade or business in the United States. Subtract your itemized tax deductions from that amount. Tax the result at the normal, progressive tax rate of 10-39.6%, depending on the respective bracket.
- Add all US income from sources not connected with a US trade or business. Tax it at a flat rate of 30%, or lower, if you are covered by an international tax treaty.
- Add these two sums. From the total, you may be able to directly deduct certain tax credits for non-residents. The result is the final amount due.
For fiscal non-residents, the options for tax credits are rather limited. First of all, to lay claim to any credit deductions at all in your annual tax return, you need some income that is connected with a US business or trade, however little.
Furthermore, there are very strict requirements to fulfill for most types of tax credits, and some kinds are excluded as a matter of course. However, most non-resident aliens can claim the foreign tax credit if they also pay income tax in another country.
For more information on paying tax as a non-resident alien, have a look at the IRS booklet Publication 519, US Tax Guide for Aliens.