If you’re a nonresident alien (NRA) earning income from U.S. sources, it’s essential to understand when and how you’re taxed by the IRS.
Who Is a Nonresident Alien[NRA]?
You are considered a nonresident alien[NRA] if you’re not a U.S. citizen and don’t pass the green card test or substantial presence test. For more information, please refer to our earlier blog.
What U.S. Income Is Taxable?
Non-resident aliens[NRA] are taxed only on U.S.-sourced income, such as:
- Wages or service income performed in the U.S.
- Rental income from U.S. real estate
- Dividends, interest, or royalties from U.S. companies
- Capital gains, in certain cases (e.g., if present in the U.S. for 183+ days)
Two Common Types of Taxable Income for Foreign Person
- Effectively Connected Income (ECI):
- Connected to a U.S. business or trade
- Taxed at graduated rates (same as U.S. residents)
- Reported on Form 1040NR
- Fixed, Determinable, Annual, or Periodical (FDAP) Income:
- Includes passive income like dividends, rent, royalties
- Typically taxed at a flat 30% (unless reduced by a tax treaty). However, if you file a tax return with a valid ITIN, you can claim back the full or excess taxes paid by filing a nonresident tax return 1040NR
When does an ITIN Requirement become Mandatory?
If you’re not eligible for a Social Security Number (SSN), you’ll need an ITIN (Individual Taxpayer Identification Number) to file your U.S. tax return. For more information on categories of ITIN please refer to our earlier blog.
Foreign Person NRA TAX Filing Obligations includes
You must file Form 1040NR if:
- You earn any U.S.-source ECI or FDAP income
- You want to claim refunds or treaty benefits
- You’re a student or researcher receiving scholarships
- For a list of other comprehensive categories of 1040NR filing requirements, please refer to this earlier blog.
What are the benefits of Tax Treaties?
Tax treaties may reduce or eliminate tax withholding on specific income types. You must disclose this properly, often using Form 8833.
Common Mistakes made by a foreign person with the USA income by not filing a Nonresident tax return
- Not filing a tax return and ITIN when you are eligible for a refund
- Overpaying due to a lack of treaty knowledge
- Missing ITIN application or renewal.
- Missing out on the loss carryforward to the future tax year to offset net profit and tax saving opportunities.
Final Thoughts
U.S. tax rules for non-resident aliens can be complex. If you’re applying for a new ITIN the expertise simplifies the process, saving you time and effort. Whether it’s filing Form 1040NR, renewing ITIN, or reclaiming taxes on Form 1042S , FORM 1099, Form 8288A, Form 8808– we’ve got your back.
We are one of the IRS Enrolled Agent with many years of experience in US 1040/1040NR personal tax compliance reporting and Fatca Compliance FBAR Reporting, We are happy to assist our clients in a timely, efficient, and cost-effective way.
