(UUNITED STATES) — Citizenship does not decide how the United States taxes you; your IRS classification as a U.S. tax resident or a nonresident alien does.
That single label changes what income gets taxed, what forms you file, and what deductions or treaty benefits you may claim. It can also spill into immigration life, because USCIS can review tax filing patterns when you seek benefits.
What “tax resident” means (and why H-1B holders often switch categories)
IRS rules treat many non-citizens exactly like citizens once they become U.S. tax residents. The dividing line is tax residency, not a passport.
Two IRS tests control this:
1) Green Card Test
A person is a U.S. tax resident if they are a lawful permanent resident (a Green Card holder) at any time during the calendar year.
2) Substantial Presence Test
A person is a U.S. tax resident if they are physically present in the United States for:
– at least 31 days in the current year, and
– at least 183 days over a 3-year lookback formula (counting 100% of current-year days, plus fractions of the prior two years).
Many long-term workers, including H-1B holders, “age into” tax residency after spending enough time in the United States. That shift can happen even if their immigration status (H-1B) stays the same. Tax status and immigration status are related, but they are not identical.
⚠️ Important: Tax residency status determines obligations; misclassifying as nonresident may trigger penalties or loss of benefits.
Residency status and what changes on U.S. taxes
| Status | Taxation of Worldwide Income | Tax Filing Form | Key Deductions/Credits | Notable Restrictions |
|---|---|---|---|---|
| U.S. citizen | Yes | Form 1040 | Standard deduction; broad access to credits (subject to normal rules) | Treaty benefits often limited once fully resident |
| U.S. tax resident (including many Green Card holders and many long-term H-1B holders) | Yes | Form 1040 | Generally similar to citizens; worldwide reporting may apply | Extra foreign-asset reporting may apply (FBAR, FATCA Form 8938) |
| Nonresident alien | No (generally U.S.-source only) | Form 1040-NR | Often limited deductions; fewer credits | Withholding can be higher; structural limits such as no S-Corporation ownership |
Salary income: when citizenship barely matters
Salary is the easiest example. For U.S. citizens and U.S. tax residents, wages are generally taxed the same way:
- Taxed on worldwide income
- Same federal tax brackets
- Same payroll taxes, including Social Security and Medicare
- Similar deductions and credits (with some exceptions depending on facts)
By contrast, a nonresident alien is generally taxed only on U.S.-source wage income. Withholding rules can also feel stricter, and some deductions and credits are limited. The result can be a higher effective tax rate in many cases.
Picture two people doing the same job in the same office. If both are U.S. tax residents, the IRS generally treats their wages similarly, even if only one has U.S. citizenship.
Business income: where residency status can reshape your options
Business income often creates sharper differences.
U.S. citizens and U.S. tax residents usually have broad flexibility to operate through structures like sole proprietorships, LLCs, S-Corporations, or C-Corporations. Their worldwide business income is generally within the U.S. tax net.
Nonresident aliens are different. U.S. tax can apply to business income only when it is U.S.-sourced, but the rules can be demanding. Two concepts show up often:
- Effectively Connected Income (ECI): business income connected to a U.S. trade or business
- Withholding: tax collected upfront in certain situations
Do not misstate your tax residency. Misclassification can trigger penalties and may affect immigration benefits; USCIS may examine filing patterns when evaluating Green Card or visa applications.
A concrete limitation also matters for entrepreneurs: nonresident aliens cannot be shareholders in S-Corporations. That restriction can remove a common small-business structure from the menu.
Investment income: withholding, exemptions, and foreign-asset reporting
Investments are where nonresident alien status can sometimes reduce U.S. tax, depending on the income type and treaty position.
For U.S. citizens and U.S. tax residents:
– Global investment income is generally taxable in the United States
– Capital gains rules apply
– Foreign accounts and assets may trigger reporting, including FBAR and FATCA (Form 8938)
For nonresident aliens:
– Many types of passive U.S.-source income may face 30% flat withholding, including dividends, royalties, and similar passive payments
– Some capital gains are often exempt unless tied to U.S. real estate or a U.S. business connection
– Tax treaties may reduce withholding rates
Think of it like two nets. Residents cast a wide net over worldwide income, plus extra reporting. Nonresident aliens cast a narrower net, but the net can be tighter on certain U.S. passive income through withholding.
Tax treaties: a real divider for nonresident aliens
U.S. tax treaties can:
– reduce withholding tax rates,
– exempt specific income categories, and
– lower double-tax risk.
Those treaty benefits often matter most to nonresident aliens receiving U.S.-source passive income. Once someone becomes a U.S. tax resident, treaty positions can narrow in practice, depending on the treaty and the taxpayer’s facts.
Treaties are not automatic. Eligibility and paperwork can matter, so professional review is common.
Exit tax: a risk that appears after long-term residence
A lesser-known difference shows up when someone leaves the U.S. tax system.
The exit tax concept can apply to:
– certain U.S. citizens who renounce citizenship, and
– certain long-term Green Card holders who give up permanent residence.
Nonresident aliens who never become long-term residents generally avoid this specific risk. Facts control, and the rules can be technical. Still, long-run planning is part of the story for immigrants who may later depart.
Policy updates callout: what changed around January 1, 2026
A separate issue from basic IRS definitions is how tax compliance can affect immigration processing and cost.
USCIS and DHS have increased attention to tax compliance as part of benefit eligibility reviews. In a DHS Press Office item dated April 11, 2025, Secretary Kristi Noem said: “The Trump administration will enforce all our immigration laws—we will not pick and choose which laws we will enforce. We must know who is in our country for the safety and security of our homeland.”
USCIS has also pointed to tax filing positions as a factor during some reviews, including situations where a Green Card holder claims “nonresident” treatment on a return. That can be viewed as evidence tied to permanent residence intent.
Table: 2026 policy notes affecting non-citizens
| Policy/Rule | Effective Date | Impact on Non-Citizens | Official Source |
|---|---|---|---|
| Remittance tax (cash or similar physical instruments) | January 1, 2026 | Adds a 1% remittance tax on certain outbound transfers to recipients in foreign countries | U.S. government materials cited through official channels; see https://home.treasury.gov/ |
| USCIS inflation-based fee increases (examples) | January 1, 2026 | Raises costs for common applications, including Form I-765 to $560 and Form I-821 to $510 | USCIS alert dated November 20, 2025: USCIS announces FY 2026 inflation increase for certain immigration-related fees |
| H-1B supplemental fee for certain filings | In effect for covered cases as of early 2026 | A $100,000 supplemental fee may be triggered for certain H-1B petitions when the beneficiary is outside the U.S. or needs consular notification | USCIS updates and related DHS materials: https://www.uscis.gov/ |
Practical way to think about the rules
Ask two questions in order:
- Am I a U.S. tax resident under the Green Card Test or the Substantial Presence Test?
- If I’m a nonresident alien, what counts as U.S.-source income, and do treaties reduce withholding?
That sequence usually prevents the most common mistake: deciding taxes based on citizenship rather than residency.
If you’re an H-1B approaching residency, track your U.S. days and run a 1040 vs 1040-NR analysis with a tax pro before year-end to confirm the most beneficial status and treaty options.
✅ Action: If you are an H-1B holder approaching or transitioning to tax residency, consult a tax professional about 1040 vs 1040-NR implications and treaty benefits.
This article discusses tax and immigration policy that can affect your status. For personal decisions and compliance, consult a qualified tax advisor or immigration attorney.
Policies cited (e.g., enforcement approaches, new fees) may be subject to change; verify with official sources (IRS, USCIS, DHS).
This guide clarifies that U.S. tax liability depends on residency status, not citizenship. By passing the Substantial Presence Test, many visa holders like those on H-1B status become tax residents, taxing their global income. The article also highlights critical 2026 updates, including a 1% remittance tax on foreign transfers and increased scrutiny from USCIS regarding tax compliance for immigration benefits.
