Filing a nonresident federal income tax return
Unlike U.S. citizens and green card holders, nonresident aliens (“NRAs”) are not subject to U.S. tax on their worldwide income. They can be subject to U.S. tax, however, on certain U.S. source “passive” income (e.g., dividends from a U.S. corporation) and income generated from a U.S. trade or business or from the sale of U.S. real estate. In such case, a nonresident alien may be required to file a nonresident federal income tax return (IRS Form 1040NR or 1040NR-EZ).
Who is a nonresident alien?
A nonresident alien for tax purposes is a person who is not a citizen of the United States or a green card holder and is not considered “resident” in the United States for tax purposes.
The basic test for determining tax residency is the substantial presence test. Under this test, an individual will be considered a U.S. resident for tax purposes if he or she is physically present in the United States on at least: (a) 31 days during the current calendar year; and (b) A total of 183 days during the current year and the 2 preceding years, counting all the days of physical presence in the current year, but only one-third the number of days of presence in the first preceding year, and only one-sixth the number of days in the second preceding year.
You are treated as present in the United States for purposes of the substantial presence test on any day you are physically present in the country, at any time during the day. However, there are exceptions to this rule. Examples of days of presence that are not counted for the substantial presence test include:
- days you are in the United States for less than 24 hours, when you are in transit between two places outside the United States; and
- days you are an exempt individual (which includes certain teachers, students, and professional athletes)
Additional exceptions to the substantial presence test include:
The closer connection test – Under U.S. tax law, even if you fail the substantial presence test, you can still be treated as a nonresident alien if you maintain a “tax home” in a foreign country during the year and have a “closer connection” during the year to one foreign country in which you have a tax home than to the United States.
Treaty relief – Under an applicable U.S. tax treaty, an individual may be subject to a less onerous test than the substantial presence test.
When are nonresident aliens taxed in the U.S.?
While the U.S. government taxes its citizens and tax residents on worldwide income and subjects them to certain anti-deferral regimes, it taxes foreign persons, including nonresident aliens, in a more limited manner.
First, foreign persons are generally subject to tax on U.S.-source “FDAP” (fixed, determinable, annual, or periodic) income, which includes passive-type items, such as interest, rent, royalties, and dividends. This income is taxed on a gross basis (i.e., with no offsetting deductions) at the rate of 30% by way of withholding at source by the U.S. payer, who has primary responsibility as the “withholding agent” to collect, deposit, and report the tax to the IRS. Failure to do so can expose the U.S. payer and foreign person to significant penalties and interest.
Second, foreign persons who are considered to earn income “effectively connected” with a trade or business in the U.S. (in contrast to the passive-natured FDAP income) are subject to tax at graduated rates on a net basis (i.e., reduced by available deductions). U.S. payers generally do not need to withhold tax on such effectively connected income (“ECI”).
Nonresident aliens are generally required to file their returns by June 15th of the following year. However, if you were an employee and received wages subject to U.S. income tax withholding, Form 1040NR must be filed by April 15th day of the following year. If you cannot file your return by the due date, you can file Form 4868 to get an automatic 6-month extension.