The tax code is complex for American citizens, but the regulations get even more confusing for non-resident aliens.
A resident alien is one who has a green card or who satisfies the residency requirements as outlined in Publication 519. Namely they were present in the United States for 31 days during 2012, and 183 days during the three-year period that includes 2012, 2011 and 2010. A resident alien files Form 1040 whereas a nonresident alien files Form 1040NR, which looks similar to the 1040, but the rules are different and more tricky.
Essentially, according to the IRS, a nonresident alien does not need to file Form 1040NR or Form 1040NR-EZ if he meets either of the following conditions:
- Your only U.S. trade or business was the performance of personal services, and
- Your wages were less than $3,800, and
- You have no other need to file a return to claim a refund of overwithheld taxes, to satisfy additional withholding at source, or to claim income exempt or partly exempt by treaty.
- You were a nonresident alien student, teacher, or trainee who was temporarily present in the United States under an “F,” “J,”“M,” or “Q” visa and you have no income that is subject to tax, such as wages, tips, scholarship and fellowship grants, dividends, etc.
Scott Cripps, chief fiduciary officer and head of trust services at Bank of the West, works with nonresident aliens on a regular basis, and says they need to be aware of planning opportunities. Aside from residency tests, there’s an entire section devoted to what can and can’t be excluded from taxable income.
“It’s not just the income tax issue. A nonresident alien should be aware that he can subject himself to the U.S. estate tax,” he says.
Estate tax is levied based on a property’s location. “If a nonresident alien wants to buy property here in the United States he may get drawn into the estate tax,” explains Cripps. Some nonresident aliens purchase property in the states and then end up moving here. If they live here when they pass away, they will be subject to the estate tax.
According to Cripps, the estate tax provides only a $60,000 exclusion amount for non-citizens. Under current legislation, the applicable exclusion amount for estates, gifts and generation-skipping transfers is $5,120,000 for 2012 for American citizens.
This is quite a difference, but careful planning can prevent troublesome situations. “Even if they aren’t domiciled here, the asset is subject to the U.S. estate tax.” Cripps explains that one method of overcoming an estate tax liability is to set up a trust to hold the property so they aren’t subject to estate tax. Publication 519 spells out the terms of these actions as well as other considerations.
Another consideration is tax treaties that the resident country might have with the United States which may contain some tax benefits. Publication 519 contains a complete listing of the tax treaty countries.