Doing business in the United States as a non-citizen can be complicated, especially regarding taxes.
One form that you may need to fill out is IRS Form 1040-NR, the Nonresident Alien Income Tax Return, which is used by individuals who are not US citizens or tax residents but have certain incomes or other reportable activities.
Continue reading to discover if the IRS classifies you as a nonresident alien and how to file the corresponding tax form properly.
What you need to know about Form 1040-NR
Generally, the IRS requires non-residents to use Form 1040-NR to file annual income tax returns if they have income from US sources.
Form 1040-NR has two pages. But it also comes with three schedules as follows:
- Schedule A: These are itemized deductions such as state and local taxes you paid and gifts made to US charities.
- Schedule NEC: NEC is an abbreviation for Not-Effectively Connected Income. Not-Effectively Connected Income is not connected with a US trade or business and usually includes things like dividends, interest, or royalties.
- Schedule OI: Here, you’ll document your country of residence, dates of travel to the US, and if you’re claiming income that is exempt from US taxation due to a tax treaty.
Who does the IRS define as a nonresident alien?
Anyone not a US citizen or resident for tax purposes is a nonresident alien.
Generally, you’re a US citizen if you have a US passport, US birth certificate, or a Certificate of Citizenship (if you were naturalized).
But how do you know if you’re a US resident for tax purposes?
The IRS will consider you a non-resident for tax purposes if you:
- Don’t have a Green Card, or
- Fail the Substantial Presence Test.
You’ll pass the Substantial Presence Test in one of two ways:1
- You were physically present in the US for at least 31 days during a tax year, or
- You were physically present in the US for 183 days in a consecutive three-year period, counting all the days they were present in the third year, 1/3 of the days that they were present in the second year, and 1/6 of the days that they were present in the first year.
But there are exceptions to the Substantial Presence Test. And all days are not treated equally.
Excluding days from the Substantial Presence Test
Any day you are physically present in the US will count towards the Substantial Presence Test. Even if you’re only in the US for a few minutes or a few hours, the entire day counts.
But there are some notable exceptions, including:
- Days you cannot leave the US because of a medical condition that develops while you are in the US
- Days you are in the US as a crew member of a foreign vessel
- Days you are in the US for less than 24 hours when you are in transit between two places outside the US
- Days you commute to work in the US from a residence in Canada or Mexico if this is your regular commute
- Days you are an exempt individual (those in the US on certain visas)
Closer Connection Exception to the Substantial Presence Test
Thanks to the “Closer Connection Exception,” you may still be treated as a nonresident alien even if you meet the Substantial Presence Test.
To be eligible for the Closer Connection Exception, you
- Must have been present in the US for less than 183 days in the current year
- Maintained a tax home in a foreign country for the entire year
- Had a closer connection throughout the year to at least one foreign country that is your tax home
- Didn’t take steps toward receiving or have a Green Card application pending
According to the IRS, certain tax benefits (such as the Child Tax Credit, the Credit for Other Dependents, and the Additional Child Tax Credit; and the Premium Tax Credit for Dependents) are only available in full to residents of Canada and Mexico and, to a limited extent, to residents of India and South Korea. These tax benefits cannot be claimed by other nonresident aliens.
When is Form 1040-NR due in 2023?
Form 1040-NR was due April 18, 2023. If you missed the filing deadline, you can file Form 4868 to request an extension until October 16, 2023.2
The average time to complete Form 1040-NR is significant
According to the IRS, taxpayers spend an average of 13 hours to file Form 1040-NR.
What happens if you don’t file Form 1040-NR?
If you don’t file Form 1040-NR, you may be subjected to penalties and interest. Penalties start at 5% of the amount due for each month you’re late, up to 25%.3