Non-Resident Alien Tax Planning in New York City
Making the distinction between resident and non-resident aliens is very important because resident aliens, like U.S. citizens, are taxed on worldwide income, whereas non-resident aliens are only taxed on U.S. income. Our New York City non-resident alien CPAa must verify your status as the first step of our tax planning process. This procedure can be complicated on account of the many compliance issues regarding residency.
Sometimes, residency is determined under an applicable tax treaty; however, if no treaty exists, you are treated as a resident as long as one of the following conditions is met:
- You are a “lawful permanent resident” of the U.S. at any time during the calendar year (i.e. you have a green card)
- You meet the substantial presence test or
- You elect to be treated as a resident alien
If none of the preceding conditions is met, then you are a non-resident alien. Of course, there are exceptions to these rules. For example, a person who meets the “substantial presence test” may still be considered a non-resident alien if a “closer connection” is established with a tax home outside of the U.S. You may also qualify for dual status residency. If this occurs, your tax year is divided into two separate tax periods. You will then be taxed a resident during one period and a non-resident during the other.
There are specific rules for establishing and terminating residency, abandoning residency, and expatriating. In addition, all departing aliens (resident or non-resident) must obtain a certificate from the IRS, stating that they have complied with the U.S. income tax laws. This is known as a sailing or departure permit.
Once our New York City CPAs have established your non-resident alien status, the sourcing rules are used to determine whether your income is from the U.S. or from foreign sources. This is important because U.S. income that is “effectively connected” with a trade or business in the U.S. is taxed at regular U.S. rates, and the usual deductions are allowed. Income that is “not effectively connected” and not covered by a tax treaty is taxed at a flat 30 percent rate. However, if there is any income included in this category that is covered by a tax treaty, it will be taxed at the treaty rate, which can be less, but not more than the 30 percent rate.
You must be engaged in a trade or business in the U.S. to have “effectively connected income” (ECI). Items of income that are fixed or determinable, annual or periodical (FDAP), as well as capital gain income, are ECI only if they meet the “business activities test” or the “asset-use test.” Some examples of FDAP income are interest, dividends, rents, royalties and compensation. In addition, for payments made on or after September 14, 2010, “dividend equivalent payments” received by foreign persons are treated as U.S. source dividends and are subject to U.S. taxation.
As a non-resident alien, you are allowed only one personal exemption, unless you are a resident of Mexico or Canada. However, your country may have a tax treaty with the U.S. that allows for more than one personal exemption. Generally, a non-resident alien cannot claim a standard deduction, but there is an exemption for certain students from India. A non-resident is also allowed to take deductions for certain expenses related to ECI, and may claim certain itemized deductions and credits. If these benefits are applicable to you, they would reduce your tax liability. Besides income tax, you may be affected by alternative minimum tax, withholding tax, and estate tax issues.
Your individual situation is unique, and therefore, an analysis of your residency status, your income types and sources, as well as any treaty benefits you may be eligible for, is an important part of your tax planning process. If you would like to discuss the potential benefits associated with your tax status, or have any questions about non-resident alien tax planning in New York City, please contact our office at your earliest convenience.