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Question: Who must file Form 1040-NR, and how is a nonresident alien's income taxed?

Form 1040-NR: What Nonresident Aliens Must Know Before Filing

Nonresident aliens with U.S. source income must file Form 1040-NR rather than the standard Form 1040. Here is how the IRS defines nonresident alien status, what income triggers the return, and how effectively connected income and FDAP income are taxed differently.

Individuals4 min read

Quick answer

A nonresident alien who earns income effectively connected with a U.S. trade or business, or who receives U.S. source income subject to withholding, must file Form 1040-NR. Income falls into two categories: effectively connected income, taxed at graduated rates with deductions, and FDAP income, taxed at a flat 30 percent with no deductions. Nonresident filers generally cannot claim the standard deduction.

Key points

  • A nonresident alien is anyone who fails both the green card test and the substantial presence test
  • Form 1040-NR is required when a nonresident alien is engaged in a U.S. trade or business or receives U.S. source income subject to withholding
  • FDAP income, including dividends and royalties, is taxed at a flat 30 percent unless a tax treaty provides a lower rate
  • Nonresident aliens cannot claim the standard deduction and cannot use married filing jointly status if either spouse was a nonresident during the year
  • Credits available to nonresident filers include the foreign tax credit, child tax credit, and credit for other dependents

What is a nonresident alien?

Under U.S. tax law, a person who lacks both U.S. citizenship and U.S. national status is classified as an alien. Residency for tax purposes then turns on two separate tests. The green card test looks at whether the person held lawful permanent resident status at any point in the year. The substantial presence test tallies physical days in the country across three years using a weighted formula. A person who fails both tests is a nonresident alien for that tax year.[1]

Nonresident aliens pay U.S. tax only on income that has a U.S. source, not on worldwide income. This is one of the most significant differences from the tax treatment of resident aliens and U.S. citizens.

For many South Florida clients, especially those who recently arrived or who split time between countries, nonresident alien status is not obvious. An Enrolled Agent can review your situation and determine which return applies. If you do not yet have an Individual Taxpayer Identification Number, that is a prerequisite for filing; see our ITIN application help service. For a full walkthrough of the ITIN process, see How do I apply for an ITIN in Miami?.

Who must file Form 1040-NR?

  • The filer was a nonresident alien carrying on a trade or business within the United States.[4]
  • The filer served as personal representative of a decedent who would have been required to file Form 1040-NR.[5]
  • The filer acted as fiduciary for an estate or trust with a Form 1040-NR filing obligation.[5]
  • The filer received U.S. source income not effectively connected with a trade or business, and that income was subject to federal withholding.

The IRS requires nonresident aliens to use Form 1040-NR rather than the standard Form 1040.[2] The filing obligation applies even if the full tax was withheld at the source. Non-resident owners of U.S. pass-through entities, foreign investors in U.S. real property, and foreign professionals who provide services here on a temporary basis frequently encounter this requirement.

For help preparing a nonresident return, see our individual tax return preparation page.

How income is taxed: ECI versus FDAP

Nonresident alien income subject to U.S. tax falls into two distinct categories, and the tax treatment differs substantially between them.

Effectively connected income (ECI) is income directly linked to a trade or business carried on in the United States. ECI is taxed at the same graduated rates that apply to U.S. residents, and the filer may claim applicable deductions against it. Wages, self-employment income from U.S. activities, and business profits generally fall here.

FDAP income, which stands for fixed, determinable, annual, or periodical income, covers passive sources such as dividends, interest, rents, and royalties that are not effectively connected with a U.S. trade or business. The IRS taxes FDAP income at a flat 30 percent, and no deductions are allowed against such income.[3] Many tax treaties between the United States and Latin American countries reduce the FDAP rate on specific income types; Form 1040-NR provides a dedicated section for declaring treaty positions taken on the return.

For foreign-owned U.S. businesses where ECI and FDAP income streams both arise, the entity-level and owner-level filing obligations interact in ways that require careful coordination. Our foreign-owned U.S. entity tax services team handles both layers.

Deductions, credits, and filing status

  • Nonresident aliens cannot claim the standard deduction; only itemized deductions against effectively connected income are permitted.
  • Married filing jointly status is generally unavailable when either spouse was a nonresident of the United States at any point during the tax year.
  • Head of household filing status is generally not available to nonresident alien filers.
  • Credits that nonresident aliens may claim include the foreign tax credit, child and dependent care credit, child tax credit, credit for other dependents, and adoption credit.
  • The Earned Income Tax Credit is not available to nonresident alien filers.

Frequently asked questions

What is a nonresident alien for U.S. tax purposes?

Under IRS rules, a nonresident alien is any person who is not a U.S. citizen or U.S. national and who has not passed the green card test or the substantial presence test. The green card test is met if you held lawful permanent resident status at any point during the calendar year. The substantial presence test uses a weighted day-count applied across the current and two prior years. Failing both tests means you are a nonresident alien and taxed only on U.S. source income.

Who is required to file Form 1040-NR?

Nonresident aliens who must file a U.S. income tax return are required to use Form 1040-NR. You generally must file if you were engaged in a trade or business in the United States, or if you received U.S. source income that was subject to federal withholding and is not effectively connected with a trade or business.

How is FDAP income taxed for nonresident aliens?

FDAP income, which covers passive U.S. source income such as dividends, interest, rents, and royalties, is taxed at a flat 30 percent rate and no deductions are allowed against it. A tax treaty between the United States and your country of residence may reduce that rate for specific income types. Treaty positions are documented directly on Form 1040-NR.

Can a nonresident alien file a joint return with a U.S. citizen spouse?

Generally, no. The IRS does not allow married filing jointly status when either spouse was a nonresident of the United States at any time during the tax year. There is a special election that allows a nonresident alien spouse to be treated as a resident and join a joint return, but it is irrevocable and brings worldwide income into the return, which requires careful evaluation before electing.

What tax credits can a nonresident alien claim?

Nonresident alien filers may claim several credits, including the foreign tax credit, child and dependent care credit, child tax credit, credit for other dependents, and adoption credit. The Earned Income Tax Credit is not available to nonresident alien filers.

Sources

  1. Taxation of Nonresident Aliens · Internal Revenue Service
  2. Taxation of Nonresident Aliens · Internal Revenue Service
  3. Taxation of Nonresident Aliens · Internal Revenue Service
  4. About Form 1040-NR, U.S. Nonresident Alien Income Tax Return · Internal Revenue Service
  5. About Form 1040-NR, U.S. Nonresident Alien Income Tax Return · Internal Revenue Service