Nonresident Alien

What Is a Nonresident Alien?

In United States tax law, "alien" simply means a person who is not a U.S. citizen or national. A nonresident alien is an alien who does not meet either of the IRS residency tests, the green card test or the substantial presence test, and so is not treated as a resident alien for tax purposes. The label describes tax status, not immigration status. A person can hold a valid visa and still be a nonresident alien for tax purposes.

How It Is Taxed

Nonresident aliens are generally taxed differently from U.S. residents. Instead of being taxed on worldwide income, they are usually taxed only on income from U.S. sources and on certain income connected with a U.S. trade or business, known as effectively connected income. Investment income such as dividends, interest, and royalties paid from U.S. sources is often subject to withholding tax at a flat statutory rate of 30 percent, unless a tax treaty reduces that rate. Gains from selling U.S. stocks are generally not taxed for nonresident aliens, although exceptions exist, such as for individuals who are physically present in the United States for 183 days or more during the tax year.

Why It Matters to Investors

An investor who is a nonresident alien usually has tax withheld at the source on U.S. dividends and interest. Brokers and payers often ask these investors to complete Form W-8BEN, which certifies foreign status and allows the correct treaty rate to be applied. Because treaty rules differ by country and by type of income, the final tax result depends on individual circumstances. Nonresident aliens who have U.S.-source income and must file a return generally use Form 1040-NR, which covers only income that is subject to U.S. tax rather than the full worldwide return used by residents.