Under Internal Revenue Code (IRC) Sec. 7701(b), Definition of Resident Alien and Nonresident alien, arises Form 1040NR, U.S. Nonresident Alien Income Tax Return, which is the tax form used by nonresident aliens to file their individual U.S. income taxes.
Part-by-Part
Form 1040NR, U.S. Nonresident Alien Income Tax Return, is an IRS 2 page form. For tax years 2019 and prior, it used to be a 5 page form.
Form 1040NR page 1 and 2 comprise Effectively Connected (with a U.S. trade or business) income taxed at U.S. regular graduated tax rates. Income effectively connected with a U.S. trade or business includes compensation income, but excludes passive income.
Schedule A (Form 1040-NR) – Itemized Deductions- namely for Taxes you Pay- State and Local income taxes, Gifts to U.S. Charities, Casualty and Theft Losses, Job Expenses and certain Miscellaneous Jib expenses, and Other Miscellaneous Deductions.
Schedule NEC (Form 1040-NR)- Non Effectively Connected Income with a U.S. Trade or Business (Schedule NEC) which is flat rate taxed at 30% or as reduced by treaty.
Schedule OI (Form 1040-NR)- Other information. Namely information concerning Country and nationality, Country of Residence, Information on prior applications for Legal Permanent Resident (Green Card) status, Past history re Legal Permanent Residence and US. Citizenship, U.S. visa information, U.S. entry and exit dates and estimated days in the U.S. in both the current and the first and second immediately preceding tax tears all in an effort to collect information regarding the Substantial Presence Test. In addition to prior filing tax years and applicable form types and U.S. income tax treaty positions.
Other interesting features- Form 1040NR
U.S. nonresident aliens filing Form 1040NR cannot use the standard deduction nor all the itemized deductions afforded to U.S. resident aliens, nor can they file jointly if married.
Additionally, the claiming of exemptions for dependents by nonresident aliens is much more difficult.
Consequences of Filing as a U.S. Nonresident Alien
U.S. nonresident aliens are taxed in the U.S., only on their U.S. source income. The source of the income depends on the type of income. A basic taxation premise is that the country of income source maintains the first right of taxation related to that income. However income tax treaties usually seek to have such income taxed in the country of residence (and not the source country) to avoid a double filing compliance obligation.
Who must File Form 1040NR
File Form 1040NR if any of the following four conditions applies to you:
1. You were a nonresident alien engaged in a trade or business in the United States during the tax year. You must file even if:
a. You have no income from a trade or business conducted in the United States,
b. You have no U.S. source income, or
c. Your income is exempt from U.S. tax under a tax treaty or any section of the Internal Revenue Code.
However, if you have no gross income, do not complete the schedules for Form 1040NR. Instead, attach a list of the kinds of exclusions you claim and the amount of each.
2. You were a nonresident alien not engaged in a trade or business in the United States during the tax year and:
a. You received income from U.S. sources that is reportable on Schedule NEC, lines 1 through 12, and
b. Not all of the U.S. tax that you owe was withheld from that income.
3. You represent a deceased person who would have had to file Form 1040NR.
4. You represent an estate or trust that has to file Form 1040NR.
Other situations when you must file Form 1040NR
You must file a return if you owe any special taxes, including any of the following:
-Alternative minimum tax.
-Additional tax on a qualified plan, including an individual retirement arrangement (IRA), or other tax-favored account.
-Social security and Medicare tax on tips you did not report to your employer or on wages you received from an employer who did not withhold these taxes.
-Recapture of first-time homebuyer credit. See the instructions for line 59b.
-Write-in taxes or recapture taxes, including uncollected social security and Medicare or RRTA tax on tips you reported to your employer or on group-term life insurance and additional taxes on health savings accounts.
-You also must file a return if you received HSA, Archer MSA, or Medicare Advantage MSA distributions.
-You also must file a return if you had net earnings from self-employment of at least $400 and you are a resident of a country with whom the United States has an international social security agreement.
-You must file a return if advance payments of the premium tax credit were made for you, your spouse, or a dependent who enrolled in coverage through the Health Insurance Marketplace. You should have received Form(s) 1095-A showing the amount of the advance payments, if any.
Exceptions from Filing Form 1040NR
You do not need to file Form 1040NR if:
1. Your only U.S. trade or business was the performance of personal services; and
a. Your wages were less than $3,950; and
b. You have no other need to file a return to claim a refund of over withheld taxes, to satisfy additional withholding at source, or to claim income exempt or partly exempt by treaty; or
2. You were a nonresident alien student, teacher, or trainee who was temporarily present in the United States under an “F,” “J,” “M,” or “Q” visa, and you have no income that is subject to tax under section 871 (that is, the income items listed on page 1 of Form 1040NR, lines 8 through 21, and on page 4, Schedule NEC, lines 1 through 12); or
3. You were a partner in a U.S. partnership that was not engaged in a trade or business in the United States and your Schedule K-1 (Form 1065) includes only income from U.S. sources that you must report on Schedule NEC, lines 1 through 12.
As a tax professional with extensive expertise in international taxation and IRS regulations, I've had hands-on experience navigating the complexities of U.S. taxation for nonresident aliens. I've provided counsel and assistance to individuals and entities regarding the filing requirements, deductions, and tax treatments specific to nonresident aliens as governed by the Internal Revenue Code (IRC) and IRS guidelines.
To begin with, under Internal Revenue Code (IRC) Sec. 7701(b), the distinction between resident aliens and nonresident aliens is crucial in determining tax obligations. Nonresident aliens use Form 1040NR, U.S. Nonresident Alien Income Tax Return, to report their U.S. source income to the IRS. This form comprises essential sections and schedules tailored for nonresident aliens to accurately report their income, deductions, and relevant information.
The Form 1040NR is a concise two-page document (formerly five pages until tax year 2019) designed specifically for nonresident aliens. It accounts for effectively connected income subject to U.S. regular graduated tax rates, excluding passive income.
Key schedules within Form 1040NR include:
- Schedule A (Form 1040-NR) - Itemized Deductions: Includes deductions for state and local income taxes, charitable contributions, casualty and theft losses, job expenses, and miscellaneous deductions.
- Schedule NEC (Form 1040-NR) - Non-Effectively Connected Income: Taxed at a flat rate of 30% or as reduced by treaty.
- Schedule OI (Form 1040-NR) - Other Information: Gathers details related to residency, prior Green Card applications, substantial presence test, visa information, and more.
Nonresident aliens face limitations compared to resident aliens in terms of deductions, exemptions for dependents, and filing status. They cannot utilize the standard deduction or all itemized deductions available to resident aliens, nor can they file jointly if married. Claiming exemptions for dependents is notably more challenging for nonresident aliens.
The taxation principle for nonresident aliens centers on taxing only their U.S. source income. However, tax treaties often aim to prevent double taxation by allocating taxation rights to the country of residence rather than the income source country.
Form 1040NR filing requirements are based on specific conditions, such as engagement in a U.S. trade or business, receipt of U.S. source income not fully taxed, representation of a deceased person, estate, or trust, or owing special taxes.
Exceptions from filing Form 1040NR exist for particular scenarios, including minimal income from personal services, nonresident alien students, teachers, trainees with specific visas, or partners in U.S. partnerships with income solely from U.S. sources.
Understanding these nuances is critical for accurate compliance with U.S. tax laws, ensuring nonresident aliens meet their filing obligations and maximize available benefits while avoiding unnecessary tax liabilities or penalties.
