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If you’re a non-US national who lives or works in the US part-time, or if you have US-source income, you may very well need to file a US nonresident alien (“NRA”) income tax return. Filing this return correctly and on time is essential — otherwise, you may face significant fines and penalties.
The US tax system can be intimidating — and truth be told, it is complex. Especially rules around US nonresident alien income tax returns. But, the more you learn about it, though, the better equipped you are to handle it.
Below, we’ll define what a nonresident alien is, their tax obligations, how to file a return, and more.
What is a nonresident alien?
The term “nonresident alien” (often shortened to NRA) refers to non-US citizens and permanent residents who do not meet either of the following two tests:
- Green Card Test: Must be a lawful permanent resident of the US and, therefore, hold a permanent residence card (aka green card)
- Substantial Presence Test: Must be physically present in the US for at least:
- 31 days of the current year, AND
- 183 days of the current year + previous two years, taking into account:
- All the days you were present in the current year
- ⅓ of the days you were present in the year before the current year
- ⅙ of the days you were present in the second year before the current year
Pro tip:
You may be able to exclude certain days from counting toward the Substantial Presence Test, such as a <24 hour layover in the US, inability to leave due to a medical condition, or a commute from Canada or Mexico. In that case, you may need to file Form 8833 to claim a treaty position.
The calculation can sound pretty confusing, so let’s break it down.
Let’s say Sasha is trying to calculate whether he was a nonresident alien for the 2023 tax year. Here are the records of his time in the US from 2023 and the two previous years:
- 2023: 90 days in the US
- 2022: 90 days in the US
- 2021: 60 days in the US
Because he spent more than 31 days in the US in 2023, we know he already meets Part A of the substantial requirement test. But to find out whether he meets Part B, we’ll have to calculate his days as follows:
All of the days he spent in the US in 2023: 90, plus
⅓ of the days he spent in the US in 2022: 30 (90 * ⅓), plus
⅙ of the days he spent in the US in 2021: 10 (60 * ⅙)
Added up together, that equals 130 days — 53 days short of the 183-day limit. As such, Sasha is a nonresident alien.
Tax residency & resident aliens
We’ve talked about how those who meet neither the Green Card Test nor the Substantial Presence Test are nonresident aliens — but what if you pass one of these tests?
In that case, the US generally considers you to be a tax resident. As such, you are subject to US income tax on your worldwide income and would be required to file a US tax return (Form 1040). Nonresident aliens, on the other hand, are subject only to taxation on their US-sourced income. You may still be required to file a non-resident tax return (Form 1040NR).
Adding to the confusion, there are some circumstances in which you can be considered both a nonresident alien and a tax resident for the same tax year. Typically, this occurs in years in which someone departs from or arrives in the US. The tax return to file in these situations is called a “Dual Status tax return.”
Other times, someone who would ordinarily be taxed as a nonresident alien vs. tax resident (or vice versa) can elect to be treated differently. This can happen in cases when:
- You are married to a US citizen or permanent resident
- You just arrived in the US that year
- You claim a “closer connection” to a foreign country than the US
- You are an exempt individual, such as a student, researcher, or teacher
It’s critical to understand whether you’re a nonresident alien or a tax resident, as the way they’re taxed and the way they file are distinct. Not only can incorrect filing lead to fines and penalties — it can result in you having to pay significantly more in taxes than you would otherwise.
Note:
Given how complex it can be to distinguish nonresident aliens from resident aliens, it’s best to clarify your standing with a US tax professional.
Taxable income for nonresident aliens
As mentioned earlier, nonresident aliens (“NRAs”) are taxed on their US-sourced income. Exactly how that income is taxed depends on where it comes from:
Effectively Connected Income (ECI)
ECI is income derived directly from trade or business in the US. This typically includes earned income acquired by performing services in the US for an employer (e.g. a bi-weekly paycheck) or US-based rental property if an election is made. For nonresident aliens, this income is taxed at ordinary US tax rates ranging from 10% to 37%, depending on the overall amount earned after applicable deductions.
Fixed Determinable Annual or Periodical (FDAP) Income
FDAP income refers mainly to passive income, such as:
- Dividends
- Interest
- Pensions
- Annuities
- Alimony
- Royalties
However, it can also refer to sales commissions or performance-based payments (like an annual bonus in some cases).
FDAP income that doesn’t qualify as ECI has a flat tax rate of 30% — and usually does not qualify for tax credits/deductions.
Capital gains
“Capital gains” refers to US-sourced income derived from the sale of certain assets, such as real estate, stock, or items with a significant value (e.g. cars, art collection). And note that this only applies if they are not effectively connected with a trade or business in the US.
Like FDAP income, the capital gains of nonresident aliens are generally taxed at a flat rate of 30% and do not qualify for tax credits/deductions. However, you may be exempt from US capital gains taxation if:
- You are an exempt individual (e.g. student, researcher, teacher), OR
- The asset sold was not property, AND
- You were present in the US for less than 183 days the year the gains were realized
B!T note: The 183-day test for capital gains is different than the 183 days mentioned in the Substantial Presence Test. Unlike that one, this is a straightforward calculation of how many days you were physically present in the US in the calendar year in question.
Understanding tax return filing requirements
Generally, nonresident aliens who earn US-sourced income are required to file a tax return. The main form they use is Form 1040-NR, aka the US Nonresident Alien Income Tax Return.
On it, you’ll select your filing status, declare dependents, report your ECI, claim tax credits, and calculate your tax bill or refund.
Other forms you may have to file include:
- Schedule NEC: For reporting any non-ECI income, such as FDAP income or capital gains.
- Schedule OI: For documenting your country of residence, the dates you were physically present in the US, and whether you’ll be claiming the benefits of a tax treaty.
- Schedule A: For itemizing deductions to reduce your taxable ECI.
- Form 8833: Treaty position disclosure
- Form 8843: A statement for exempt individuals such as a student, researcher, or teacher
Note that this is not an exhaustive list of all required tax forms, however. Depending on your circumstances, you may need to file other schedules — check with a US tax professional to make sure.
The tax deadline for nonresident aliens is the same as the general deadline: April 15th. However, you can file Form 4868 to request an extension until October 15th — that said, any taxes you owe must still be paid by April 15th.
Income tax treaties & benefits for nonresident aliens
The US has signed tax treaties with dozens of different countries, including the UK, most EU countries, Mexico, Canada, China, and many more. These treaties often contain provisions that prevent nationals of one country living in the other from being taxed by both governments on the same income (aka double taxation).
Some benefits of the US-UK tax treaty, for example, include:
- Capping the tax rates that the US can levy on UK-sourced dividends, interest, and royalties at 10%
- Exempting lump-sum withdrawals from UK-based pensions from US taxation
- Requiring each country to offer tax credits for income taxes paid in the other on all other types of income unless otherwise specified
Pro tip:
Treaties like these often contain a savings clause that gives the US the right to tax Americans as if the treaty didn’t exist. Keep in mind, that this is usually only applicable to US citizens and permanent residents. Eligible nonresident aliens should be able to benefit from a treaty as long as their home country has not inserted a similar clause.
Claiming the benefits of these treaties can often help you avoid double taxation entirely. Whether or not you’re eligible for these benefits, though, depends on factors like your visa type, income classification, job, and how much time you spend in the US. Again, it’s best to consult a US tax professional to see if you qualify.
To claim the benefits of a treaty, you should complete the relevant portions of the aforementioned Form 1040-NR and Schedule OI as well as Form 8833.
Common tax deductions & credits for nonresident aliens
Nonresident aliens may also be able to reduce their US tax liability by claiming tax breaks that lower their taxable ECI. (Remember — you can’t use credits or deductions against FDAP or capital gains income.) And the lower your ECI, the less you have to pay taxes on it.
A few of the most common tax breaks that nonresident aliens qualify for include:
- State & local income taxes
- Charitable contributions to US-qualified non-profits
- Casualty & theft losses
To claim these benefits, you’ll need to file the aforementioned Schedule A (Form 1040NR) along with your 1040-NR.
Compliance & reporting obligations
Nonresident aliens usually don’t have the same compliance and reporting obligations that resident aliens and US citizens/permanent residents do.
Remember, though, that there are a couple of situations in which a nonresident alien may choose to be taxed as a resident alien — such as if they arrived in the US within the year or are married to a US citizen/permanent resident. (A specific tax election would have to be made if you make this choice.)
In this case, they would be subject to additional compliance and reporting obligations. A couple of common reports folks in this situation may have to file include the:
- Foreign Bank Account Report (FBAR): Required of those who have a total of $10,000 or more across foreign financial accounts.
- Statement of Specified Foreign Assets (Form 8938): Required of those whose foreign assets exceed $50,000 on the last day of the tax year or $75,000 at any time during the tax year.
A note from our experts:
The penalties for failing to file these reports can be steep. Non-willful (aka unintentional) FBAR penalties are typically $10,000 for each year the report should have been filed but wasn’t. Failing to file Form 8938 when required can also incur a $10,000 penalty, or more if you fail to file even after being notified.
Again, this list of additional reporting obligations is not comprehensive — when in doubt, check with a tax specialist.
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