A is for Aliens - resident and nonresident aliens that is. Aliens are a real thing in the tax code. It’s used to describe people who are in the United States, but are not citizens or green card holders. Everyone starts as a nonresident alien when they move to the US without having citizenship. Although it sounds like these nonresident aliens and resident aliens must be breaking the law or something, it’s just not true. It’s just a description of how an individual files a tax return, similar to how “married filing separately” and “head of household” are filing statuses that describe how an individual files a tax return.
A nonresident alien files a Form 1040NR instead of the regular Form 1040. A 1040NR is actually quite different than the normal Form 1040. Although they have similarities, some tax practitioners are not familiar with both types of income tax returns. It is important that you understand the differences and opportunities that come with filing a Form 1040NR.
Commonly, nonresident aliens can benefit from tax treaties with their home country. Many tax treaties exempt small amounts of earned income from taxation in the US. Other treaties speak to the rate that interest and dividends are taxed at. Some treaties have clauses allowing nonresident aliens to claim exemptions for spouses or children that would otherwise not be allowed.
The rules for determining when you are a nonresident alien and when you switch over to a resident alien can be very complex. It involves calculating your days present in the US for the past three years. There are also exemptions for students or teachers on specific types of visas. Also, in the year when you switch over from a nonresident to resident alien, you might be able to file a dual status return. Those can be complicated, but dual status can be a huge benefit for that one year.
A resident alien does file a normal Form 1040, but there can still be treaty benefits that might apply. Keep in mind that any resident aliens that still have financial accounts back in their home country might also need to file an FBAR or Form 8938 depending on the situation.
Taxes A to Z – still randomly meandering through tax topics, but at least for 26 posts in an alphabetical order.