An alien is any individual who is not a U.S. citizen or a U.S. national. A nonresident alien is an alien who does not meet the green card test or substantial presence test.
A nonresident alien's income that is subject to U.S. income tax must generally be divided into two categories:
- Income that is Effectively Connected with a trade or business in the United States
- U.S. source income that is Fixed, Determinable, Annual, or Periodical (FDAP)
Effectively Connected Income, after allowable deductions, is taxed at graduated rates. These are the same rates that apply to U.S. citizens and residents. FDAP income generally consists of passive investment income; however, in theory, it could consist of almost any sort of income. FDAP income is taxed at a flat 30 percent (or lower treaty rate, if qualify) and no deductions are allowed against such income.
Nonresident aliens file Form 1040NR, U.S. Nonresident Alien Income Tax Return. Nonresident aliens can often benefit from the application of U.S. tax treaties. Tax treaties are complex to navigate and apply. It’s important to work with a Certified Public Accountant that is knowledgeable of tax treaty application to nonresident aliens.
We can help you navigate the complexities of nonresident taxation. Call or email us today for a free, no-obligation consultation.