Taxation of Nonresident Aliens Is Required to File 1040-NR. This article discusses the tax filing requirements for nonresident aliens earning money in the US.

International Tax Gap Series

Each year, thousands of nonresident aliens are gainfully employed in the United States. Thousands more own rental property or earn interest or dividends from U.S. investments. Some want to earn money from online business with a U.S. corporation or LLC and not file taxes here with the misconception they are not residents or citizens. Some just want to flat-out cheat their home countries and keep earnings outside their countries. Whatever the reason, the IRS wants its cut for income earned in the U.S.

An alien is an individual who is not a U.S. citizen or U.S. national. A nonresident alien is an alien who has not passed the green card test or the substantial presence test.

If you are a nonresident alien at the end of the tax year, and your spouse is a resident alien, your spouse can choose to treat you as a U.S. resident alien for tax purposes and file Form 1040 using the filing status “Married Filing Jointly.”

First step: Determining Alien Tax Status

If you are an alien (not a U.S. citizen), you are considered a nonresident alien unless you meet one of two tests: the green card test or the substantial presence test for the calendar year (January 1 – December 31). If you do not meet either the Green Card Test or the Substantial Presence Test, then you are a nonresident alien. See Determining Alien Tax Status for more details.

If you meet either test, you are considered a U.S. resident alien and are generally taxed in the same way as U.S. citizens. This means that your worldwide income is subject to U.S. tax and must be reported on your U.S. tax return (Form 1040, U.S. Individual Income Tax Return, or Form 1040-SR, U.S. Income Tax Return for Seniors).

Filing Requirements for Nonresident Aliens

Nonresident aliens are generally subject to U.S. income tax only on their U.S. source income. They are subject to two different tax rates, one for effectively connected income, and one for fixed or determinable, annual, or periodic (FDAP) income.

Effectively connected income (ECI) is earned in the U.S. from the operation of a business in the U.S. or is personal service income earned in the U.S. (such as wages or self-employment income). It is taxed for a nonresident at the same graduated rates as for a U.S. person.

FDAP income is passive income such as interest, dividends, rents, or royalties. This income is taxed at a flat 30% rate unless a tax treaty specifies a lower rate.

Nonresident aliens must file and pay any tax due using Form 1040NR, U.S. Nonresident Alien Income Tax Return, or Form 1040NR-EZ, U.S. Income Tax Return for Certain Nonresident Aliens with No Dependents.

Tax Treaties

The United States has income tax treaties with a number of foreign countries. For nonresident aliens, these treaties can often reduce or eliminate U.S. tax on various types of personal services and other income, such as pensions, interest, dividends, royalties, and capital gains. Each individual treaty must be reviewed to determine whether specific types of income are exempt from U.S. tax or taxed at a reduced rate. More details can be found in Publication 901, U.S. Tax Treaties.

Who Must File

 You must file a return if you are a nonresident alien engaged or considered to be engaged in a trade or business in the United States during the year.

Even if you are not engaged in a trade or business in the United States, you must file a return if you have U.S. income on which the tax liability was not satisfied by the withholding of tax at the source.

You also must file an income tax return if you want to claim a refund of excess withholding or want to claim the benefit of any deductions or credits (for example, if you have income from a rental property that you choose to treat as income connected to a trade or business).

Tax Treatment of Nonresident Alien

If you are a nonresident alien engaged in a trade or business in the United States, you must pay U.S. tax on the amount of your effectively connected income, after allowable deductions, at the same rates that apply to U.S. citizens and residents.  If you are not engaged in a trade or business, the payment of U.S. source income that is fixed, determinable, annual, or periodical is taxed at a flat 30 percent (or lower treaty rate) and no deductions are allowed against such income. You may earn both effectively connected income and fixed determinable, annual, or periodical income in the same year and they will be taxed accordingly.