Taxation of Nonresident Aliens – International Tax Gap Series


International Tax Gap Series

Each year, thousands of nonresident aliens are gainfully employed in the United States. 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 nonresident aliens.

First step: Determining Alien Tax Status

If you are an alien (not a U.S. citizen), you are considered a nonresident alien unless you meet one of two tests: the Green Card Test or the Substantial Presence Test for the calendar year (January 1–December 31). If you do not meet either the Green Card Test or the Substantial Presence Test, then you are a nonresident alien. See Determining Alien Tax Status for more details including information on elections to override either test.

If you meet either test, you are considered a U.S. resident alien and are generally taxed in the same way as U.S. citizens. This means that your worldwide income is subject to U.S. tax and must be reported on your U.S. tax return (Form 1040, U.S. Individual Income Tax Return, or Form 1040-SR, U.S. Income Tax Return for Seniors).

Filing Requirements for Nonresident Aliens

Nonresident aliens are generally subject to U.S. income tax only on their U.S. source income. They are subject to two different tax rates, one for effectively connected income, and one 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). It is taxed for a nonresident at the same graduated rates as for a U.S. person.

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.

Nonresident aliens must file and pay any tax due using Form 1040-NR, U.S. Nonresident Alien Income Tax Return.

Tax Treaties

The United States has income tax treaties with several foreign countries. For nonresident aliens, 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.

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