Filing Requirements for Nonresident Aliens
Nonresident aliens are generally subject to U.S. income tax only on their U.S. source income. They are subject to two different tax rate methods, one for effectively connected income, and one for fixed or determinable, annual, or periodic (FDAP) income. Effectively connected income (ECI) is earned in the U.S. from the operation of a business in the U.S. or is personal service income earned in the U.S. (such as wages or self-employment income). Effectively connected income of a nonresident is taxed at the same graduated rates as for a U.S. person. FDAP income is passive income such as interest, dividends, rents or royalties. This income is taxed at a flat 30% rate, unless a tax treaty specifies a lower rate.
Nonresident aliens must file and pay any tax due using Form 1040NR, U.S. Nonresident Alien Income Tax Return or Form 1040NR-EZ, U.S. Income Tax Return for Certain Nonresident Aliens with No Dependents.
There may be a range of tax treatment options available in a part-year residency situation. Residency could be triggered early in the tax year due to a U.S. vacation or U.S. business trip in excess of 10 days, in a case where a subsequent actual assignment did not begin until mid-year. (Many times a tax treaty could limit U.S. taxability prior to the date of assignment, however.)(Taxpayers should seek professional advice for any such analysis.)
Where residency applies to only a portion of the year, the taxpayer is a “Dual Status” taxpayer. As such, the taxpayer only reports income (or loss) for the residency period (and any U. S.source income for the nonresident period). However, the taxpayer must itemize (i.e., no standard deduction) even if there are no itemized deductions of any consequence.
Married Dual Status taxpayers are not only required to itemize, but must use the higher “married filing separate” tax rates. Married taxpayers can, however, elect to file on a full year basis, as full year residents reporting all income and loss for the entire year, where such an election would be advantageous. IRC Sec. 6013. For example, if the spouse did not work or there had been a rental loss during the non-residency period, the loss could (potentially) be claimed, and the lower married joint rates and standard deduction could be used. Even where the spouse had worked in the foreign country, the election still might be advantageous, due to foreign tax credit or, in some cases, the foreign earned income exclusion.