It’s crucial for nonresident aliens to understand U.S. tax obligations, which come along with “U.S.-sourced income”: investments or employment in the U.S. As many nonresidents aren’t familiar with U.S. tax system, they fail to file a tax return. It may lead to a variety of consequences. But on a positive note, you could receive a refund if you file a tax return on time. What if you are a U.S. citizen or Green Card holder with U.S. investment but ready to give up your citizenship/green card? In cases you consider going this route, you need to be aware of your tax obligations changes.
Do you want to know more about U.S. taxes? Check out our free resources here.
Who should file form 1040NR and who is a Non-resident Alien?
First, let’s determine who is a nonresident alien. The IRS considers anyone who is not a U.S. citizen, Green Card holder, or met the substantial presence test but has U.S. tax filing obligation to be a nonresident alien. For example, you have income from the US but you do not meet the substantial presence test. Or you are engaged in a trade or business in the US and you are a nonresident alien. It doesn’t matter if the business activities generated any income, or if it’s exempt under tax treaty from US tax.
There is no minimum income threshold to file 1040NR Form as a non-resident alien. You should only report your U.S. sourced income on this form. However, foreigners investing in the US should first determine if their U.S. visits make them U.S. residents for tax purposes. In such cases, you must report your worldwide income.
1040NR Fact #1: Filing 1040NR Form is easier than it seems to be. While many nonresident aliens suppose they don’t owe any tax, they are robbing themselves of a possible refund. It’s very common that they withhold more from your paycheck. So you can get this money back!
Some individuals must file both Form 1040 and Form 1040NR. It usually applies to expatriates who should file a dual-status return. Following the laws, you are U.S. citizen from January 1st until the day of expatriation. For this period you will need to file Form 1040 and report your worldwide income. After your expatriation, you will need to file a non-resident alien tax return to cover your U.S. sourced income. On this return, you cover the period from the date of your expatriation to Dec 31st of the same year.
Am I a Non-resident?
You can use two different tests to determine if you are a non-resident and required to file Form 1040NR. The Green Card Test and The Substantial Presence Test. While the Green Card test is simple, meaning you either have it or not, the latter one is slightly more complicated.
The substantial presence test is more complex:
- You were physically present in the US for at least 31 days during 2018, and 183 testing days from 2016 to 2018.
- The satisfy the 183-day requirement, you need to count all of the days you were present in the US in the previous 3 years. You need to count the total number of days you spent in the US during the current year. The add it to 1/3 of the total numbers of says you spent last year and then add 1/6 of the total numbers of days spent in the United States 2 years ago.
- For the purpose of this test, The US includes all 50 States and the District of Columbia; territorial waters; The seabed and subsoil of those submarine areas that are adjacent to U.S. territorial waters and over which the United States has exclusive rights under international law to explore and exploit natural resources.
1040NR Fact #2: You may fall into a category of exempt individuals. Those are foreign-government related individuals, who are present in the US temporarily. Or you are a teacher with a J or Q visa. Elsewise, you can be a foreign student or professional athlete, These categories do not need to file a nonresident tax return. More specifically, the days spent in the U.S. under these visa categories are excluded from the computation when computing the substantial presence test.
What are some other exemptions to this Substantial Presence Test?
There are exemptions when you do not count the days of being in the US. For example, the first one is when you are in transit between two places outside the US and you are in the US for less than 24 hours. Also if you commute to work in the US from Canada or Mexico, where you reside. That should be on more than 75% of the workdays during your working period. In such a case, you don’t count the days you commute. Another exemption is when you couldn’t leave the US because of the medical condition which happened when you were in the country.
1040NR Fact #3: You are exempted if you are in the US as a crew member of a foreign vessel and you are engaged in transportation between the United States and a foreign country.
1040NR Fact #4: If you failed to meet the Substantial Presence Test, you can be treated as a nonresident alien for tax purposes. To do so, you need to satisfy 3 criteria: 1) maintain “tax home” in a foreign country; 2) have a closer connection to that country than to the US; 3) spend less than 183 days in the US during the current calendar year.
There are cases when a tax treaty between the US and foreign countries have special rules to determine residency for tax purposes. What happens if you changed your status during the year from resident to nonresident (or vice versa)? Usually, you will have a dual-status for that year. And it means you have two different periods when different tax law provisions will apply to each period. If you want to claim the above-mentioned exceptions, then you have to file different forms and attach them to a Form 1040NR. So for tax treaty relief, you’d file Form 8833. And for the closer connection test, it is Form 8840.
When nonresident aliens are taxed in the U.S.?
Filing Form 1040NR-EZ is necessary when you are a nonresident alien and have the U.S. sourced income on which tax wasn’t paid fully. U.S. source income includes: 1) wages, if you have hourly pay as a full or part-time employee; 2) salaries, you get a fixed salary each pay period; 3) tips, if you receive tips for any type of work; 4) refunds of state and local income taxes; 5) taxable scholarships and fellowships grants.
Generally speaking, U.S. taxes foreign people, including non-resident aliens, in a different manner than to U.S. citizens or resident aliens. Foreigners are subject to U.S. taxes if they have income, which includes passive-type items like interest, dividends, royalties, and rent. The U.S. payer has a primary responsibility to withhold 30% on a gross basis with no offsetting deductions and report it to the IRS.
Nonresident aliens earning effectively connected income with a trade or business in the U.S. have graduated tax rates on a net basis. It means available deductions reduce your income. A foreigner’s U.S. source net capital gains are not subject to U.S. tax. However, it will be taxed if the alien spent at least 183 days in the U.S. during the year.
Speaking of available deductions for nonresident aliens, it’s worth noting that you can deduct certain itemized deductions. It is allowed when you receive income effectively connected with your U.S. trade or business. You cannot include deductions and/or losses that relate to exempt income or income that is not connected with your U.S. business or trade.
Summary of Form 1040NR: Nonresident alien tax return
To summarise filing obligations of nonresident aliens, it’s important to remember a few things. You must file a tax return if you are a non-resident alien and you are engaged in a trade or business in the U.S. during the year. Also, you will need to file Form 1040NR if you have the U.S. sourced income and on which tax withheld wasn’t enough.
Generally, the deadline to file Form 1040NR or Form 1040NR-EZ is June 15th of the following year. In cases when you are an employee and receive wages, which you need to pay taxes on, you will need to file Form 1040NR by April 15th of the following year. To get a 6-month extension a foreign person needs to file Form 4868.
At 1040 Abroad we love helping people with U.S. taxes. Contact us to receive a free email consultation or 20-min phone call to discuss your tax situation.
Thank you for this. Do I understand this correction. a) I am now a Canadian citizen. b) I have neither US income nor any legal or family based obligations in the US. I would also say that I have in the past failed to submit US tax forms following several years of filing such forms. No one from the US then nor at any time since challenged me on this. Truthfully, I am fully committed to my Canadian citizenship and have no intention of returning to the US except in the case of a family of origin crisis. TO my way of thinking I think that this means I am not obliged to file US taxers any longer. Does this make sense?
Hi Richard,
Please, elaborate if you are the U.S. citizen, non-resident alien or have a Green Card, as different requirements apply depending on your status. Being fully committed to Canadian citizenship while still having U.S. tax return filing obligations doesn’t cancel the latter. Please, contact us at info at 1040abroad.com if you want to discuss the situation any further.
Thanks.
Hello,
Thanks for your informative article.
I am still struggling to figure out what my situation is. I am a German citizen. I was the lead plaintiff in a securities class action suit that settled in 2017 and was approved by a Delaware court.
The funds have been distributed. I received fund for what was due on my shares in the settlement and the judge also awarded me money as the lead plaintiff and for overseeing the case. Almost all of it was done from abroad except for the few times that had to fly in to appear in court.
Nothing was withheld from my distribution.
Germany has a tax treaty with the US. I definitely didn’t cross the substantial presence test. The US don’t owe me and cash that was withheld. I don’t owe Uncle Sam any taxes.
But I just got a letter from the IRS asking for a 2017 tax return.
Do I really have to file anything in the US? You can’t imagine my dread to find out I’m on the IRS’s radar… I like visiting the US and don’t want any legal troubles there.
Thank you for any insight you can share.
Hi Derek! Please don’t take this as final advice but to the extent that the damages replaced what would have been capital gains and since capital gains are sourced to Germany, the lawsuit damages would also be sourced to Germany and you wouldn’t have any tax owing to the US. I would respond to the notice with such an explanation.
I’m Saudi Citizen & my visa b1/b2. I have real estate investment in USA for medical issue I stayed 183 days in us in 2018. back years I used to file form 1040NR but my tax consultant informed me in 2018 I have to file form 1040 as resident also, to include all my incomes from overseas “Foreign income”
Hi Jo, you could have excluded the days by using form 8843 and have it signed by a doctor. But it had to be timely filed, if filing late, you can’t do that.
If you stayed less than 183 days, you could have used form 8840. The same rule applies, you had to file it on time, otherwise, you can’t use form 8840.
A treaty position on form 8833 doesn’t have to be timely filed, but there’s no tax treaty between the US and Saudi Arabia so that won’t work either. Tough luck, you have to file 1040, and report worldwide income just like a US citizen.
I am from Nepal and we don’t have tax treaty with USA. I am here in US since January 12, 2016. I lived 328, 357, 365 and 365 days respectively in year 2016, 17, 18 and 19. When can I file tax as a resident alien? I would appreciate for your insight.
Hi GP! You met the substantial presence test for each of these years, accordingly, you would file form 1040.
My wife is a J1 visa holder and ideally she is meant to use the 1040-NR form but she spent considerable time in the US since 2015 before starting a medical residency in 2018. Do the days spent in the USA on a B1/B2 visa count towards Substantial Presence Test?
Hi Stephen! In most circumstances, the days spent under a J1 status are excluded from the Substantial Presence Test, but the days spent under a B1/B2 status are not.
I am an mongolian expat never lived in USA since 2010 and i got 1099k for paypal transactions in 2019. My paypal is originated from USA and created when i was living in USA. That is why i have received 1099K on my paypal account and also i have SSN and USA bank account. Can anyone help on which form i should file? it seems like 1040-NR would be right one for me but i am not sure of myself. I initiated the filing with hrblock and they sent me an invoice of 349$ service fee cause i am an expat. I can not pay that much money these days. So i decided to file it as finding right form and send it through fax if possible, Any advises accepted,thanks guys
all these transactions through paypal is not came from USA sourced but i would say around 50% of them would be usa sourced.
Hi Batbayar! Sourcing depends on the type of income as well. Interest and dividends are sourced where the payor is while wages where the work was performed.
Hi Batbayar! Are you a US citizen or Green Card holder? Are you a freelancer? It would be best to contact us directly at info@1040abroad.com as your filing obligation is unclear to me at the moment.
Hi, I am from India. I came to US in Nov 28, 2018. I didn’t file tax return previous year. Now, I need to file tax return for 2019. I became a resident alien in Jan 2020. Should I file 1040NR or 1040?
Hi Aadil! Resident Alien files 1040.
I receive a pension from the usa railway and pay tax as we have tax treaty….I am a Canadian a not a resident of Usa what file do need to file ….
Hi Mary! Your US railroad benefits/social security will not be taxed in Canada. Article XVIII, paragraph 5 of the US-Canada tax treaty states that you would only be taxed in Canada and it is not taxable in the United States (Article XVIII survives the savings clause found in article XXIX paragraph 2 & 3, as such it can be read as is).
Hi,
I am a Canadian citizen, so I gather that I am a “nonresident alien individual.” I sell products solely through the internet on Amazon.com in the US. I am not physically in the US conducting any business. The income from Amazon goes into a RBC US bank account that is linked with my RBC CDN bank account. The US RBC bank is the withholding agent. I just received a Recipients Copy B form from the bank: “1042-S Foreign Person’s US Source Income Subject to Withholding”. My question is what tax form do I need to file?
Thanks for your time and advice,
Dan
Hi Dan! You are not “engaged in a US trade or business”, as such, you do not have to file a US tax return. With that being said, if taxes were being withheld on your 1042-S, you would file a tax return in order to claim a refund.
Hi, I went to the US for working in a summer camp in 2018 with a J1 Visa, should I file a tax form? Thanks!
Hi Paola! Yes, you should. You would most likely receive a refund of some of the taxes withheld on your form W-2.
Does nonresident alien without an SSN or ITIN without US income have to file a US tax return?
Hi Shavkat! No, you do not have to file a US tax return.
Hi,
I am Indian, lived in US from 2012 thru 2018 working for a company. I did migrate to Australia which has tax treaty with US. I have filed my 2018 tax returns thru agent.
In 2019 I sold my shares that were bought thru company share purchase plan between 2012 and 2018. I incurred long term capital gains. I have two questions.
1. Can you please suggest what is the tax rate being non-resident alien and how to file 1040R?
2. If there is a tax difference between what i paid Vs what IRS calculated, how would IRS contact me in future if they have to challenge me or to ask me pay the deviation.
Hi Syed! Capital gains are generally sources where the taxpayer is a resident, as such, you would pay tax to Australia but you wouldn’t have to report it to the US on form 1040NR.
Hi Oliver
I am a foreign resident of a nation with a tax treaty with the US.
I was in the US for 330 days last year as crew on a foreign flagged yacht.
Does that make me a non resident alien as per “fact #3 in your article?
Hi Daryl! If you are a US citizen or Green Card holder then you are not a Non-Resident Alien.
Hello
I was on TN visa from Canada as independent IT contractor. I was not in US enough days to meet the substantial presence test. Do I need to file a 1040 NR?
Thanks
Hello! Yes, you would file a tax return on form 1040NR if you didn’t meet the substantial presence test.
Hi,
I live abroad with no status in the USA (No USA citizenship or Green Card) my understanding is that makes me a Non-Resident Alien.
I have a brokerage account in the USA with some stocks which sometimes pay dividends. Tax was withheld on the dividend income. I assume should there be any capital gains from selling any stocks, that would be withheld as well.
I received a 1042-S for 2019 from the bank.
Please advise as to what my requirements are for filing tax in the USA. Am I obligated to file 1040NR? Is the 1042-S enough? Is there something else I need to do with the 1042-S after receiving it?
Thank you!
Hi James! If the FDAP tax was appropriately withheld on your from 1042-S, you wouldn’t have to file a form 1040NR.