YourFiling Status – What Difference Does It Make?
Choosing the proper filing status is important because it is used to determine what tax rate schedule you will use for youreffectively connectedincome. An explanation of filing status is in Chapter Five of IRSPublication 519. It is also discussed in theInstructions to Form 1040NR.
If you are single on the last day of the tax year, check box 1 or 2 on Form 1040NR (or box 1 on Form 1040NR-EZ) in the space under “Filing Status.” Some married persons who are residents of Canada, Mexico, South Korea, or a US national, who have dependent children and who did not live with their spouse for at least the last six months of the tax year may file as single. (A US national is an individual who, although not a US citizen, owes his or her allegiance to the United States.)
The single rates are lower than married filing separate rates. If you are in this category, see the additional requirements in theInstructions to Form 1040NR.
If you are married on the last day of the tax year, and your spouse is a nonresident alien, you do not have the option to file Form 1040NR jointly with your spouse. Married filing jointly is not an option on Form 1040NR. If you file Form 1040NR or Form 1040NR-EZ you must file as married filing separately.
Options To File A Joint Resident Return
IRC Sec. 6013(g).If you are a nonresident alien at the end of the year and are married to a citizen or resident of the U.S., you can make a special election to file a joint resident return (Form 1040) with your spouse and you will be treated as a US resident for the entire year.
IRC Sec. 6013(h).An election is available to file a joint resident return (Form 1040) with your spouse and be treated as a US resident for the entire year in the year you become a resident (are a resident at the end of the year) if your spouse is also a resident at the end of the year. This election is available if either you or your spouse, or both of you, are dual status aliens.
Under either of theseelections, you can claim the standard deduction, spousal and dependency exemptions (for years prior to 2018),and other tax benefits available to US citizens and residents, but you are subject to tax on your worldwide income for the entire calendar year. In order to reduce or eliminate double taxation, the foreign tax credit is generally available to claim against foreign taxes paid on foreign source income.
Determining What Income Is Taxable And How To Report It
If you are a nonresident alien, you are subject to US income tax only on certain income from sources within the United States and on certain income connected with the conduct of a trade or business in the United States. Generally, you do not report income from sources outside the United States on your US tax return. Your US source income is divided into two general categories – income that iseffectively connectedwith a US trade or business and income that isnot effectively connectedwith a US trade or business.
Effectively Connected Income
Income that is effectively connected with a US trade or business is reported on the first page of Form 1040NR or Form 1040NR-EZ. It is subject to tax at the same graduated rates that apply to residents, and can be offset by allowable deductions and exemptions. Effectively connected income can also be partially or fully excluded from your income by treaty provisions between the United States and your home country. See “Where to Find Treaty Information” underTax Treatiesbelow.
If you are in the United States as an F, J, M, orQ visa holder, you are considered engaged in business in the United States.That means anyUS source income that is taxable to you in connection with your scholarly activities, such as wagesor scholarshipand fellowship grants, is included in this category. Also, any other income from personal services performed in the United States is generally considered effectively connected income.
Form 1040NR Graduated Tax Rates on Effectively Connected Ordinary Income for 2019:
- 10% on your taxable income from 0 to $9,700 (You pay 10% of taxable income)
- 12% on your taxable income from $9,700 to $39,475
- 22% on your taxable income from $39,475 to $84,200
- 24% on your taxable income from $84,200 to $160,725
- 32% on your taxable income from $160,725 to $204,100
- 35% on your taxable income from $204,100 to $510,300
- 37% on your taxable income over $510,300
Rates For Effectively Connected Capital Gains For 2019:
For gains from capital assets owned by you for one year or less, called short-term capital gains, you pay the same rates as effectively connected ordinary income, shown above. The tax rate on net long-term gains (on capital assets held for more than one year), is 0% for most taxpayers, but the rate increases with your income to a maximum of 20%.
We have left out a lot more to talk about here, relating to the computation of capital gains and losses and how they are taxed. If you would like to read more, tryIRS Publication 544,Sales and Other Dispositions of Assets, andIRS Publication 550,Investment Income and Expenses.
Not Effectively Connected Income
If your US source income is not effectively connected with a US trade or business, it is reported onSchedule NECon page four of Form 1040NR, (you cannot use Form 1040NR-EZ if you have this type of income). It is generally taxed at a flat 30% rate and cannot be reduced by deductions and exemptions.
Treaty provisions between your home country and the United States might provide for a lower rate of tax. See “Where to Find Treaty Information” underTax Treatiesbelow. Income that is typical of this categoryincludes corporate interest, dividends, capital gains in excess of capital losses, prizes, awards and certain gambling winnings.
If you are a nonresident alien, capital gains on stocks, securities and other personal property are taxable to you only if you are present in theUnited States for at least 183 days duringthe tax year. A nonresident alien can be present in the US more than 183 days if they are an “exempt individual.” (See the discussion underResidency Status, above.)
Generally, you cannot offsetgambling winnings with gambling losses.However, if you happen to be a resident of Canada, you can claimgambling losses to the extent of gambling winnings under theU.S/Canada tax treaty.Bank interest received by nonresident aliens is statutorily excluded from taxation.
Wages
Nonresident aliens are generally subject to tax on wages for services performed in the United States as effectively connected income. The general rules on personal service income are in Chapter Two of IRSPublication 519.
There are exceptions to this general rule, however. First, note in Chapter Three of Publication 519 that nonresident visitors with F, J, M and Q visas can exclude pay received from a foreign employer, other than a foreign government. Second, any wages you receive might be exempt from US tax under a treaty between your country of residence and the United States. See IRSPublication 901andTax Treaties, below, to learn about treaty benefits.
If you received taxable wages during the year, you should receive a Form W-2 from your employer within 30 days after the end of the year. If any of your wages are exempt from income tax under a tax treaty, you should receive a Form 1042-S rather than a W-2 form. Record your taxable wages on page oneof Form 1040NRor Form 1040NR-EZ on the line for wages.
Do not include any amount that is exempt by treaty on these lines.Any wages exempt by treaty are reported on line 22 of Form 1040NR and on page 5, Item L. On Form 1040NR-EZ they are reported on line 6 and on page 2, Item J. Attach one copy of any Form W-2 or Form 1042-S you received from your employer to the front of the return.
Scholarships And Fellowships
Any scholarship or fellowship grant that is taxable to you is considered effectively connected income and is subject to graduated rates. It is reported on line 12 of Form 1040NR and on line 5 of Form 1040NR-EZ. There are three ways, described below, in which part or all or your scholarship or fellowship grant can be excluded from income.
Foreign Source.If you receive a grant from a foreign payer, it is considered foreign source income and is not taxable. Generally, the source of a scholarship or fellowship grant is the source of the payer, regardless of who actually disburses the funds. Foreign source payments should not be reported on your tax return.
Qualified Scholarship.If you are a candidate for a degree, you can exclude amounts received as a scholarship or fellowship grant that you use for 1) tuition and other fees you pay to the university to attend class, and 2) fees, books, supplies and equipment that are purchased because of course requirements. The amounts you used for expenses other than tuition and course-related expenses (such as room, board and travel) are generally taxable.
Also, any part of a scholarship or grant that is compensation for services cannot be excluded as a qualified scholarship. Report the amounts excluded on lines 12 and31 on Form 1040NR, and on lines 5 and 8 on Form 1040NR-EZ. Attach one copy of any Form W-2 or Form 1042-S you received from the payor to the front of the return.
Schools are no longer required to report qualified scholarships you receive in the form of tuition benefits, so Form 1042-S will no longer show these amounts and they need not be reported on your return. You are supposed to attach a statement to your return if you exclude qualified scholarship payments that are reported on a Form 1042-S. (See the instructions to Form 1040NR or Form 1040NR-EZ.) The statement should show 1) the amount of the grant, 2) the dates it covers, 3) the grantor’s name, 4) expenses the grant covers and conditions of the grant, and 5) the amount that is taxable and tax exempt.
Fill-In Scholarship Statement:Here is a fill-inscholarship statementform in PDF format that you can fill in on the screen and print out for this purpose.ScholarshipStatement
Treaty Exempt Scholarships.If there is a tax treaty between the United States and your home country, it might contain a provision to exclude scholarship payments. See IRSPublication 901andTax Treaties, below, to learn about treaty benefits. On Form 1040NR, put the excluded amount on line 22 (not on line 12) and complete ItemL on page 5. On Form 1040NR-EZ, put the excluded amount on line 6 (not on line 5) and complete Item J on page 2. Attach one copy of any Form W-2 or Form 1042-S you received to the front of the return.
Investment Income
Reporting interest, dividend and capital gain income is a little confusing. There are spaces provided to show it on page 1 of Form 1040NR, and in Schedule NEC on page 4 as income not effectively connected with a US trade or business. Reporting it on page 1 means it is effectively connected to a US trade or business.
To be effectively connected, the investment income must have a direct economic relationship to your United States trade or business. For example, investment income reported on a K-1 of a partnership you have an interest in could be classified as effectively connected income. If you are a student or scholar with investment income, your trade or business in the United States is studying, teaching, or doing research. Therefore, it is very unlikely you have effectively connected investment income.
The tax rate on income that is not effectively connected with a US trade or business is a flat 30 percent, unless a treaty provision between the United States and your home country reduces the rate. (We talk about tax treaties below). Show the income on page 4 and any US tax withheld on the income, and compute the tax. The computed tax and related withholding is shown on page 2 of Form 1040nr.
Exempt Interest.Interest paid on deposits with banks, on accounts or deposits with certain financial institutions, or on certain amounts held by insurance companies, are exempt from US tax even though they are US source income. If you file Form 1040NR, do not report this interestanywhere on the return.
Capital Gains.You do not pay tax oncapital gains from the sale of stock or securities if you are a nonresident who has not been present in the United States for 183 days or more during the tax year, unless it is effectively connected income. In that case, tax applies at the lower capital gains rates for effectively connected income. However, if you are an “exempt individual” who resides in the United States longer than 183 days, you do pay tax on capital gains at the 30 percent rate, unless a lower tax treaty rate applies to you. (See below about tax treaties.)
Income From Rental Real Estate
You are given a choice regarding income from real property in the US. This income is generally considered income that is not effectively connected with a US trade or business, and is taxed at a flat rate of 30 percent of gross income. A nonresident individual is not required to file a US return if tax of 30 percent is withheld by the payor (usually the property manager).
Alternatively, you can file a tax return and include an election (under IRC Section 871(d)) to have the net income (after expenses) taxed as income effectively connected with a trade or business in the US. This is generally a much better way to go for nonresident aliens. Any net income is taxed at graduated rates beginning at 10 percent. Under Section 897 of the Code, gain on the disposition of real property by a nonresident alien is always treated as income effectively connected with a US trade or business, and is therefore taxable, but at the generous capital gains rates.
Allowable Deductions And Credits
Deductions and credits are generally less available for nonresident aliens than for residents. First, deductions and credits can only offset effectively connected income; income that is not effectively connected to a US trade or business cannot be reduced by deductions and credits.
Second, while residents can claim the standard deduction in lieu of itemized deductions, nonresidents (other than students and business apprentices from India) are not allowed to claim the standard deduction. Third, while most nonresidents must itemize their deductions, the deductions available to itemize are limited. Following are brief descriptions of some of the more common deductions and credits that might be available to you. For more information see IRSPublication 519.
Moving Expenses
If you moved to the United States, or from one city to another during the year, you can deduct moving expenses if you work full-time for at least 39 weeks during the 12 months right after you moved. You will need Form 3903, which you can download from the IRSForms, Instructions & Publicationspage. If you want more information on moving expenses, you can also download Publication 521,Moving Expenses. If you claim moving expenses you must file Form 1040NR; you are not eligible to file the shorter Form 1040NR-EZ.
The deduction for moving expenses is shown on line 26 of Form 1040NR for years prior to 2018. This deduction has been disallowed for the years 2018 through 2025.
Itemized Deductions
Itemized deductions are a special category of deductions listed on Schedule A (page 3) of Form 1040NR. Nonresidents from India can elect to claim the greater of their itemized deductions or the standard deduction (described below).
If you are a nonresident from a country other than India, you cannot claim the standard deduction; you are only allowed to claim itemized deductions for costs that were paid during the year. Look through the types of allowable itemized deductions on Schedule A. Also see descriptions of the individual deductionsin IRSPublication 519. The deductions are totaled on Schedule A, then reported on line 38 of Form 1040NR.
State Income Taxes.If you had state and/or local income tax withheld from your wages during the year, you can claim the amount withheld on line 1 of Schedule A (the amount is shown on your W-2). This is typically the only itemized deduction nonresident aliens. If this is the only itemized deduction you have, you can file Form 1040NR-EZ if you otherwise qualify. The amount goes on line 11. If you have additional itemized deductions, you must file Form 1040NR. Beginning in 2018, the deduction for the combined total of state and local taxes is limited to $10,000 per return.
The Standard Deduction
The standard deduction is a statutory allowance available to all residents. It is generally not allowed on the nonresident and dual status return, other than to nonresident students and business apprentices from India under Article 21(2) of the United States/India tax treaty.
Those taxpayers from India who claim the standard deduction cannot also claim itemized deductions. Also, if you are married filing separately, and your spouse itemizes deductions, you cannot claim the standard deduction. The standard deduction for single taxpayers and married taxpayers filing separately for2017 is $6,350. Beginning in 2018, it is increased to $12,000, partly to account for the disallowance of personal exemptions. Of course, this will not benefit the vast majority of nonresident aliens.
Personal And Dependency Exemptions For Years Prior To 2018
For years prior to 2018, personal and dependency exemptions were statutory deductions representing the taxpayer, the spouse of the taxpayer and any allowable dependents of the taxpayer. The exemption amount was adjusted for inflation each year. For 2017 the amount was $4,050. That means eligible taxpayers could deduct $4,050 on their 2017 tax returnfor each allowable exemption. A discussion of exemptions is in Chapter Five of IRSPublication 519. There is also guidance in the Form 1040NR instructions.
Generally, whether you were married or single, you could not deduct dependency exemptions as a nonresident, even if you were supporting family members. That means only one exemption (your personal exemption) was typically allowed on Form 1040NR. However, residents of Mexico and Canada and nationals of the United States were allowed to deduct the spousal and dependency exemptions under the same rules as US residents. (This rule is in IRC Section 873(b)(3).) Also, residents of South Korea and students and business apprentices from India were eligible, under theircountries’ treaties, to claim spousal anddependency exemptions under certain circ*mstances.You could not file Form 1040NR-EZ if you claimed dependency exemptions.
The2017Tax Cuts and Jobs Act(P.L. 115-97) (the “Act”) repealed exemptions for years 2018 through 2025.
New Child Tax Credit And Other Dependents Credit For Years After 2017
Child Tax Credit.Asa partial replacement for dependency exemptions after 2017,the Actexpanded the Child Tax Credit (IRC Section 24) from $1,000 to $2,000 for those previously qualifying for the credit.However, it further narrowed allowance of this credit for the small category of nonresident aliens who could previously claimit (those from Canada, Mexico, and South Korea, US nationals and students and business apprentices from India) by requiring the dependent to have a Social Security number prior to the due date for filing the tax return.
A dependent was previously required to qualify as a resident of the US for tax purposes, but could have an ITIN. Alien dependents qualifying as residents under the substantial presence test are generally not eligible for a Social Security number.However, if a nonresident in one of the above categories has a resident dependentwith a Social Security number (because of US citizenship or permanent residence), the credit is available. All of the following must apply:
- The child must be aUS citizen, national, or resident alien who resides with the taxpayer,
- The child must be a son, daughter, adopted child, grandchild, stepchild, or foster child,
- The child must be under 17 at the end of the year,
- The child must qualify as a dependent, and
- The child must have a valid Social Security number by the return due date.
Other Dependents Credit.An additional $500 credit was added by the Act for dependents who do not qualify for the $2,000 credit, and some nonresident alien taxpayers will qualify for this.This credit is also limited to nonresidents claiming dependentswho are residents of the U.S,but the dependent can be issued an ITIN (as long as it’s before the return due date).
Example V.
Ken is a resident of Canada, entering the United Statesin 2018 as a J-1visa holder working for an American university. Ken is a nonresident for 2018. Ken’s spouse, Angela, is a US permanent resident who has no income and does not file a tax return. They have a child, Kenny, who is under 17, a permanent resident and has a Social Security number. Ken provides more than half of Kenny’s support, and Kenny lives with Ken. Ken will file a nonresident return using Form 1040NR for 2018. Ken can claimthe $2,000 Child Tax Credit for Kenny on his nonresident return.
Example VI.
The same facts as Example 1,except Angela is present in the United States as an H-1bvisa holder and Kenny is present as an H-4visa holder. Both Angela and Kenny have passed the substantial presence test, and Kenny has been issued an ITIN.Angela will file a US resident tax return andKenwill file a nonresident tax return. Ken and Angela together provideover half of Kenny’s support, and Kenny lives with Ken and Angela. Ken’s adjusted gross income is higher than Angela’s adjusted gross income in 2018,so Kenis eligible to claim the Other DependentsCreditof $500 on his nonresident tax return. (See IRC Section 152(c)(4).) Ken is not eligible to claim the $2,000 Child Tax Credit because Kenny does not have a socialsecurity number.
Example VII.
The same facts as Example 1, except Angela and Kenny are present in the United States with J-2family member visas. Angela has no income and will not file a tax return. Ken is not eligible to claim a Child Tax Credit or Other Dependents Credit for Kenny on his nonresident return, because Kenny is considered a non-resident alien in 2018, the same as Ken.
For those nonresidents formerly eligible to claim dependency exemptions through the tax treaty with India, the treaty appears to allow the Other Dependents Credit if they have dependents who pass the substantial presence test, otherwise qualify, and have been issued an ITIN. If a dependent has been issued a Social Security number and otherwise qualifies, the $2,000 Child Tax Credit could be claimed. It is not clear that the US tax treaty with South Korea (Article 4(7)) will allow the Child Tax Credit or Other Dependents Credit.
Any taxpayer claiming either the regular Child Tax Creditor the Other Dependents Credit mustbe issueda taxpayer identification number by the due date of the tax return.
Earned Income Credit
If you are a nonresident alien for any part of the year, the earned income credit is not available.
Education Credits
If you are a nonresident alienfor any part of the year, educational credits such as the American Opportunity Credit and Lifetime Learning Credit are not available.
Credit For Child And Dependent Care Expenses
Although this credit has a line on Form 1040NR, it is very unlikely you will qualify for it. If you are married, you must file a joint return with your spouse to claim the credit. But as you see underFiling Statusabove, you are not allowed to file a joint return as a nonresident alien. If you are single, you must have a dependent who is a “qualifying individual” to get the credit. A qualifying individual is a dependent under the age of 13 or a disabled dependent. As you will find underPersonal and DependencyExemptions for Years Prior to 2018, dependency exemptions are typically not allowed to nonresident aliens. For more information on this credit, see Chapter Five of IRSPublication 519.
The Foreign Tax Credit
If you receive foreign source income that you also pay US tax on, you can claim a foreign tax credit. However, since you generally do not pay US tax on foreign source income, this credit is typically not available on the nonresident return. Also, you cannot take any credit for taxes imposed by a foreign country on your US source income if those taxes were imposed because you are a citizen or resident of the foreign country.
