International tax gap series Each year, thousands of nonresident aliens (NRAs) are gainfully employed in the United States (U.S.). Thousands more own rental property or earn interest and/or dividends from U.S. investments. This International Tax Gap Series article discusses the tax filing requirements for NRAs. First step: determining alien tax status An alien (not a U.S. citizen), is considered an NRA unless the alien meets one of two tests: the Green Card Test or the Substantial Presence Test for the calendar year (January 1–December 31). If an alien does not meet either the Green Card Test or the Substantial Presence Test, then the alien is an NRA. See Determining Alien Tax Status for more details including information on elections to override either test. If an alien meets either test, the alien is considered a U.S. resident alien and is generally taxed in the same way as U.S. citizens. This means that an alien’s worldwide income is subject to U.S. tax and must be reported on the alien’s U.S. tax return (Form 1040, U.S. Individual Income Tax Return, or Form 1040-SR, U.S. Income Tax Return for Seniors). General U.S. tax rules for NRAs NRAs are generally subject to U.S. income tax only on their U.S. source income. NRAs are subject to two different tax rates, normal marginal rates for effectively connected income, and a statutory rate for fixed or determinable, annual, or periodic (FDAP) income that is non-effectively connected income. Effectively connected income (ECI) is earned in the U.S. from the operation of a business in the U.S., as well as personal service income earned in the U.S. (such as wages or self-employment income). NRAs are taxed at graduated rates, similar to U.S. persons. FDAP income is passive income such as interest, dividends, rents or royalties. FDAP income that is non-effectively connected income is taxed at a flat 30% rate on the gross income unless a tax treaty specifies a lower rate. Filing requirements for NRAs Generally, NRAs who are engaged or considered to be engaged in a U.S. trade or business during the year must file Form 1040-NR, U.S. Nonresident Alien Income Tax Return. NRAs who are not engaged in a U.S. trade or business but have U.S. source income on which the tax liability was not satisfied by the withholding of tax at the source must also file Form 1040-NR. See Publication 519, U.S. Tax Guide for Aliens for additional details. Tax treaties The U.S. has income tax treaties with several foreign countries. For NRAs, 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. Refer to the nonresident aliens page for more details on extensions of time to file, where to file, etc. References and links: Taxation of nonresident aliens Publication 515, Withholding of Tax on Nonresidents and Foreign Entities Publication 519, U.S. Tax Guide for Aliens Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return Return to: The international tax gap series
