How Do Foreign Citizens Living in the U.S. Get Taxed?

There's no single simple formula, so before you start crunching numbers, you need to determine your status.

Daniel B. Kline
Daniel B. Kline
Jun 5, 2017 at 3:05PM
Investment Planning

Whether you're an American citizen or not, if you live in the United States, Uncle Sam wants his cut of your income.

However, there is no one-size-fits-all formula for figuring out exactly how much a foreigner living in the United States should pay. Instead, non-citizens must start by determining their alien tax status. There are four basic categories:

  1. Resident alien: This means you either pass the green card test -- which means you are a lawful resident of the U.S. -- or you pass the substantial presence test, a somewhat complicated formula based on how many days you lived in the country during the tax year (with some exceptions),
  2. Nonresident alien: Anyone who does not meet one of the above standards.
  3. Dual status alien: Someone who has been both a U.S. resident alien and a nonresident alien in the same tax year. This status typically applies to foreigners in the year in which they enter or depart from the U.S.
  4. Foreign student or scholar: This category applies to students, trainees, scholars, teachers, researchers, exchange visitors, and cultural exchange visitors.

Like most things involving the Internal Revenue Service (IRS), it's a bit more complicated than it looks at first. Still, once you determine your status, a foreign citizen living in the U.S. then simply has to pay up.

Hands type on a calculator

Filing taxes can be especially complicated for foreign citizens living in the U.S. Image source: Getty Images.

How much do foreign citizens pay in U.S. taxes?

The majority of citizens of other countries living in the U.S. have resident alien status. Generally, they pay their taxes in the same way they would if they were U.S. citizens. The IRS lays out exactly how it works on its website.

This means that their worldwide income is subject to U.S. tax and must be reported on their U.S. tax return. Income of resident aliens is subject to the graduated tax rates that apply to U.S. citizens. Resident aliens use the Tax Table and Tax Rate Schedules which apply to U.S. citizens found in the Instructions for Forms 1040, 1040A, or 1040EZ.

Resident aliens can claim the same deductions as American citizens. In order to claim a spouse or dependent, however, each person claimed must have either a Social Security Number or an Individual Taxpayer Identification Number.

What if you are a nonresident alien?

The rules get more complicated for nonresident aliens: They don't report their global earnings to the IRS, but only the portion made in the U.S. There are two types of income that qualify, according to the IRS:

  1. Income that is Effectively Connected with a trade or business in the United States
  2. U.S. source income that is Fixed, Determinable, Annual, or Periodical (FDAP)

Effectively connected income -- meaning money made from U.S. sources that are connected with the conduct of a trade or business in this country -- is taxed after allowable deductions at graduated rates. The same rates that are used for U.S. citizens apply.

FDAP income, according to the IRS, "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% rate unless a lower rate has been agreed to in a treaty between the U.S. and the country where the nonresident alien is a citizen. No deductions can be taken against FDAP income.

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What do students and scholars pay?

In most cases, foreign students and scholars living in the U.S. do not have to file taxes, but there are exceptions. They must report the following forms of income on U.S. tax forms:

  1. A taxable scholarship or fellowship, as described in Chapter 1 of Publication 970, Tax Benefits for Education
  2. Income partially or totally exempt from tax under the terms of a tax treaty
  3. Any other income that is taxable under the Internal Revenue Code.

Students and scholars do not have to files taxes if their only income comes from foreign sources or interest income, even it it comes from a U.S. bank, credit union, or insurance company.

It's not easy

Even for Americans who have lived in the U.S. for their entire lives, the tax code can be confusing. For foreign citizens, the rules can be even more confusing. In many cases, the best course of action is to work with a tax professional who has experience in both the U.S. and your home country.