Taxation of Non-resident Aliens
A nonresident alien is any individual who is not a US citizen and not a US resident. To be considered a US resident, a person needs to have a valid green card or pass the substantial presence test.
A nonresident alien is any individual who is not a US citizen and not a US resident.
To be considered a US resident, a person needs to have a valid green card or pass the substantial presence test. The substantial presence test is met when a person is present in the United States for more than 31 days during the current year and for at least 183 days over a three-year period, including the current year. Under various circumstances, individuals may be exempt from the substantial presence test. These individuals will be taxed as non-residents even though they meet the substantial presence test.
Typical examples of nonresident aliens include visiting professors, people seeking medical treatment, students, and non US citizens living outside the United States, with income from US sources.
Generally speaking, the US has first rights to tax income from United States sources. Thus, nonresident aliens must report and pay taxes on their US sourced income.
Nonresident aliens use form 1040NR to file taxes, and can file using an individual taxpayer identification number (ITIN) instead of a Social Security Number if they do not qualify for a Social Security Number.
Effectively connected income (ECI) is earned from the operation of a trade or business in the United States. Deductions are allowed against ECI, and it is taxed at the same graduated tax rates as used for a US person. An income tax treaty provision may eliminate U.S. tax on personal service and other effectively connected income in specific situations.
Whether you are engaged in a trade or business in the United States depends on the nature of your activities. The following are examples of situations whereupon a nonresident alien would be considered to be connected with a trade or business in the United States:
Generally, if a nonresident alien’s only U.S. business activity is trading in stocks, securities or commodities (including hedging transactions) through a U.S. resident broker or other agent, he is NOT engaged in a trade or business in the United States.
If it is determined that an NRA is engaged in a trade or business in the United States, he must file even if he has no income, no US sourced income or has income that is exempt from US tax under a tax treaty provision.
A nonresident alien reporting ECI may claim the following deductions/credits:
FDAP income is passive income such as interest, dividends, rents or royalties from US sources. Income is fixed when it is paid in amounts known ahead of time. Income is determinable whenever there is a basis for figuring the amount to be paid. Income can be periodic if it is paid from time to time.
Unlike Effectively Connected Income, FDAP income is taxed at a flat 30% rate, unless a tax treaty provision specifies a lower rate. These income amounts are reported on Schedule NEC (Non Effectively Connected Income with a U.S. Trade or Business). No deductions are allowed to offset such income.
It is important to note that if taxes were properly withheld at source, there is no need to file a US income tax return to report the FDAP income. If the withholding agent withheld at an incorrect rate, Form 1040NR may be filed as per simplified procedures.
Foreign trusts or estates use form 1040NR to report their US sourced income. It is important to note that US trust tax rates apply, not individual tax rates.
For those who earned US wages subject to withholding tax, the filing deadline is April 15th following the tax year-end. For all other individuals, the deadline is June 15th following the tax year-end.
A 1040NR filed for an estate or trust that holds an office in the US must be filed by April 15th following the tax year-end. A 1040NR filed for an estate or trust that does not hold an office in the US must be filed by June 15th following the tax year-end.
Form 4868 filed by the original due date, affords an NRA with an additional six months to file Form 1040NR. Taxes must be paid by the original due date of the return in order to avoid late payment penalties.
Filing late may result in a penalty of up to 25% of the tax due, assuming the failure to file was non-fraudulent. The late filing penalty could be up to 75% of the tax due if failure to file was fraudulent. Penalties for paying taxes late also apply. Late payments penalties can be up to 25% of the taxes due. The late filing and payment penalties are in addition to interest charges.
An LLC or other domestic disregarded entity (DE) that is wholly owned by a foreign person is treated as a domestic corporation separate from its owner (the foreign person) for the limited purposes of the reporting requirements under section 6038A. Under section 6038A the foreign-owned domestic DE must file a pro-forma Form 1120 with Form 5472 attached by the due date (including extensions) of the return. Form 5472 is an informational return on which certain transactions between the foreign person and the entity are reported. The penalty for late filing of Form 5472 is $20,000.
In some cases, aliens are allowed to make elections which override the green card and the substantial presence test as described below:
Dual status refers to an individual who is both a nonresident and a resident in the same year. This usually occurs in the year of arrival in and departure from the United States. Depending on the residency status on the last day of the year either a 1040 or a 1040NR is required with a support statement detailing the income and tax computations for the other part of the year. Various elections are available to be treated as a resident/nonresident for the full year. Generally speaking, US citizens who renounce their citizenship will be considered dual status taxpayers in the year of expatriation.
Before leaving the United States, all aliens (with certain exceptions) must obtain a certificate of compliance. This document, also popularly known as the sailing permit or departure permit, must be secured from the IRS before leaving the U.S. You will receive a sailing or departure permit after filing a Form 1040-C, U.S. Departing Alien Income Tax Return, or Form 2063, U.S. Departing Alien Income Tax Statement. Both forms have a “certificate of compliance” section. When the certificate of compliance is signed by an agent of the Field Assistance Area Director, it certifies that your U.S. tax obligations have been satisfied according to available information. Your Form 1040-C copy of the signed certificate, or the one detached from Form 2063, is your sailing or departure permit. Form 1040-C is not an annual U.S. income tax return. If an income tax return is required by law, that return must be filed even though a Form 1040-C has already been filed.
US Tax Returns for individuals/ single member LLC’s
| Non-Resident Federal Tax return Form 1040 NR including up to two K-1s | $385 |
| Each additional K-1 | $30 |
| Schedule E (Rental Property) | $55 |
| Form 4797 (Sale of business or property) | $155 |
| Form 5472 for disregarded entities | $300 |
| State Tax Return | $140 |
| Each additional State Tax Return | $55 |
US Tax Returns for Partnership (Multi Member LLC’s)
| Form 1065- Federal Tax return of Partnership income | $715-1650 |
| State Tax Return of Partnership income | $140 |
| Form 8805 and 8804 | $55 per member |
| Form 8813 (Late penalties will be assessed if proper tax withholding was omitted) | $220 |
| Form 1040NR Non-Resident Federal Tax return (includes Form 1040 and 2 K-1’s) | $385 |
| Each additional 1040NR | $190 |
| Each additional K-1 | $30 |
| Schedule E (Rental Property) | $55 |
| State tax return | $220 |
| Each additional State return | $55 |
Additional Forms
| Form W7 ITIN Application | $165 |
| Form W7 ITIN Application when the tax return itself is not being prepared by us | $275 |
| Dual Status Tax Return | starting from $470 |
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