Nonresident aliens generally are subject to U.S. income taxation only if they have U.S. source income or taxable income that is effectively connected with conduct of trade or business within United States. Election may be made to treat nonresident alien as U.S. resident so that alien may file joint return with spouse who is citizen or resident of United States. Beyond income taxes, non-resident aliens will have to contend with special estate tax rules in regards to their U.S. situs property.
Who is a Non-Resident Alien for Tax Purposes?
Individuals who are born or naturalized in the United States and subject to its jurisdiction are U.S. citizens. Individuals who are not U.S. citizens are aliens. An alien individual is a resident of the United States for purposes of the income tax laws if the individual has either been granted status as a permanent resident under the immigration laws or is physically present in the United States for more than 30 days during the calendar year and for more than 182 days during the current calendar year and the two preceding calendar years. An individual who is neither a citizen nor a resident of the United States is a nonresident alien.
Nonresident Aliens and Paying U.S. Tax
A nonresident alien is normally subject to U.S. income tax, including the alternative minimum tax (AMT), only on income from sources within the United States and taxable income that is effectively connected with the conduct of a trade or business within the United States. A resident alien, on the other hand, is subject to U.S. income tax in the same manner as a U.S. citizen, on taxable income regardless of its geographical source. A nonresident alien who is a bona fide resident of Guam, American Samoa, the Northern Mariana Islands or Puerto Rico is subject to taxation on income in the same manner as a resident alien, except to the extent that the income is from sources within the possession of residence.
Filing a Joint Return with Non-Resident Alien
A husband and wife generally cannot file a joint return if either spouse is a nonresident alien at any time during the tax year. However, if one spouse is a citizen or resident of the United States, both spouses may file an election to treat the nonresident alien spouse as if he or she were a resident of the United States for the entire tax year, thereby permitting them to file a joint return. Electing spouses are taxed on their worldwide income, regardless of its source, and cannot claim the benefits of any tax treaty.
Spouses Making Election to File Joint Return
The spouses make the election by attaching a statement to their joint return. The spouses must file joint returns in the year they make the election, but they may file separate returns in subsequent years. The election is in effect for the tax year in which it is made, and for subsequent tax years until it is terminated.
Electing to Treat Nonresident Spouse as U.S. Taxpayer
The election is suspended during in any tax year in which both spouses are not citizens or residents of the U.S. Either spouse may terminate the election by revoking it. The election is also terminated by the death of either spouse or the legal separation of the spouses under a decree of divorce or separate maintenance. There could be very powerful tax planning strategies with this technique.
IRS Terminating Election to Treat Nonresident Spouse as U.S. Taxpayer
The IRS may terminate the election if either spouse fails to keep and make available books, records and other information sufficient to allow the IRS to ascertain the spouses’ tax liability. If the IRS terminates the election, the couple may not make the election in subsequent tax years. Both taxpayers will be treated as filing U.S. taxes.