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.
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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.
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