IRS Form 1040-NR (US Nonresident Alien Income Tax Return) is used by nonresident alien individuals to report their income and calculate their tax liability in the United States.
Who Must File
- Nonresident Aliens. Individuals who are not U.S. persons and receive U.S. source income subject to tax. A U.S. person includes U.S. citizens, U.S. green card holders, and individuals physically present in the U.S. and meet the substantial presence test. All other persons are nonresidents for federal tax purposes.
- Income Subject to Tax. Nonresidents are subject to federal taxes on U.S. source FDAP income and on effectively connected income (ECI) with a U.S. trade or business.
What is U.S. Source FDAP Income?
- Definition. FDAP income means fixed, determinable, annual, or periodical income. FDAP income includes items like U.S. source interest, dividends, rents, royalties, commissions, and other grants, prizes, and awards.
- Withholding Tax. In general, U.S. source FDAP income paid to a nonresident is subject to a 30% withholding tax at source. If the correct amount of withholding tax is applied at source, then the nonresident does not have to file a Form 1040-NR.
- Form 1040-NR Required. The nonresident must file Form 1040-NR if they received U.S. source FDAP income and there was not the correct amount of withholding tax at source.
- Form 1040-NR Treaty Benefits. The nonresident may file Form 1040-NR if they are eligible to claim a lower tax rate under an applicable double tax treaty. For example, the standard withholding rate is 30% on FDAP income. If a resident of a treaty country can claim a reduced 15% tax rate, they can file Form 1040-NR for the refund claim.
What is Effectively Connected Income?
- Definition. When a foreign person is engaged in a U.S. trade or business, either directly or through a partnership investment, all income from sources within the U.S. connected with the trade or business will be effectively connected income (ECI).
- Withholding Tax. In general, a U.S. partnership must withhold tax on ECI allocated to nonresident partners. The withholding tax is reported on Forms 8805 and 8804.
- Form 1040-NR Required. The nonresident must file Form 1040-NR to report their gross income and deductions connected with the U.S. trade or business. A nonresident partner in a U.S. partnership with ECI will receive a Schedule K-1 (Form 1065), which reports their allocable share of ECI. A nonresident engaged in a U.S. trade or business through a disregarded LLC or a branch would also have a Form 1040-NR filing requirement.
Filing Requirements
- Annual Filing. The Form 1040-NR must be filed annually for each year the nonresident has U.S. source income and owes federal income taxes.
- Filing Deadlines. The Form 1040-NR is due on or before April 15th of each tax year. An extension can be requested using IRS Form 4868 (Extension of Time to File U.S. Tax Return).
Example Form 1040-NR Reporting
For example, John Doe is a citizen and resident of France. John is a nonresident alien for U.S. federal tax purposes. John invests $50,000 into a restaurant business located in Orlando, Florida. The restaurant is structured as a partnership, filing an annual Form 1065 (US Return of Partnership Income). Each partner receives a Schedule K-1 (Form 1065) showing their allocation of income. The restaurant is engaged in a U.S. trade or business and generates effectively connected income (ECI). John must file an annual Form 1040-NR to report his allocation of income and pay U.S. income taxes on those net profits.
Video Tutorials
Please visit our channel for some video tutorials on Form 1040-NR reporting requirements and example tax returns:
- How to File Form 1040-NR for the 2023 Tax Year
- How to File Form 1040-NR with Treaty Benefits
- Do I Need to File Form 1040-NR
Additional Information
Nonresidents can find more information in Form 1040-NR Instructions and IRS Publication 519 (U.S. Tax Guide for Aliens).