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A Comprehensive Tax Return Guide for Non-resident In The U.S

A tax return guide is a well-explained document explaining all the tax laws you need to comply with in the U.S. if you have set up a business. As a foreign national, if you are invested in establishing a company in the U.S., then you need to ascertain what parts of your income are subject to taxation. And so you need to determine your US tax resident status. 

Whether you are invested in the US real estate business, software business, or any other business from your country, this tax return guide for non-residents will help you understand the complicated parts of tax returns. Even more, we are going to talk about what part of your income is taxable, tax exemption, tax filing options, etc.

To most people working in and outside the US, filing for tax is confusing to do without assistance. Furthermore, it seems more daunting for a foreign visitor. And so, regardless of your visa status, we are going to explain everything there is to know about tax returns that can make your tax filing much easier. 

Let’s get started.

Taxation of Nonresident Aliens (NRA) Income

Any nonresident alien becomes subject to US income tax if they have earned or done business in the US. In simpler terms, an NRA must pay income taxes on money earned in the US or from a US source.

To clarify further, here is an example - a Singaporean citizen who owns one business in Singapore and another one in the US will only be taxed for their US-based business. They will not be taxed for their income outside the US.

In addition, nonresident aliens must remain very cautious about their business records and needs to show all valid sources of their income in and from the US. The valid sources are crucial to ensure that the Internal Revenue Service (IRS) can determine which part of your income should be exempted from taxes and also sign the documents.

However, nonresident aliens are taxed separately on income from US sources that are not effectively connected with a US trade or business (for example - investment income) and on income that is effectively connected with a US trade or business (for example - business and compensation income). Here is a table that exhibits the type of tax for each type of income:

Taxation of Nonresident Aliens

Type of Tax

Type of Income

Tax at graduated rates

Income effectively connected with a US trade or business

Tax at 30% or at a lower treaty rate

US source income that is not effectively connected with a US trade or business and is a fixed or determinable annual or periodic income

No tax

Foreign-source income of a nonresident alien not engaged in a US trade or business

Which Income Should Be Filed for Taxes?

Generally, an NRA’s income is subject to US taxes when it falls under any of these two categories:

  1. Income which is effectively connected with a trade or business in the United States

  2. A US source of income that is fixed, determinable, annual, or periodical (FDAP)

Income Not Effectively Connected with a US Trade or Business

An NRA’s income that is not effectively connected with a US trade or business is subject to tax at a 30% flat rate i.e., 30% of the gross income. No tax deductions are allowed in this case. However, tax treaties may reduce this flat rate.

Income taxes that are subject to 30% tax includes - interest, dividends, royalties, rents, and other fixed, determinable, annual, or periodic income. But, certain exceptions are provided for portfolio income from registered bonds and bank accounts. And this interest is not taxed unless it is effectively connected with a US trade or business.

What Are Tax Treaties?

Tax treaties are ways to eliminate or reduce the withholding requirements on US income like - dividends, interests, and royalties received by the NRA. And in this case, the treaty should be reviewed if the flat 30% tax rate can be reduced for a specific kind of income.

Here are examples of some income types that may exempt NRAs from US taxation:

  1. The compensation received from a foreign employer who is not engaged in a business or trade if the employee had stayed in the US for less than 183 days.

  2. Pension from former foreign employers.

  3. Compensation and pension received by teachers living in the US

  4. Foreign income is received by students and trainees who are living in the US for the purpose of training, education, maintenance, etc.

Effectively Connected Income

A nonresident alien is taxed separately based on the income arising from the assets used in US trade or business.This income is taxed at a graduate rate and it applies to all US citizens and resident aliens.

While determining the effective income of NRA individuals, the definitive meaning of ‘trade or business’ had not been clearly mentioned. And so, whether the income arises from trade or business depends on the type of activities and on the economic interest in the US. However, business income generally includes the following types:

  1. The compensation received by an NRA individual for personal services from an employer in the US.

  2. Income and profits obtained from maintaining a business in the US.

  3. Income from the sale of a US business or selling of a US property

  4. Income from real property operated as a business

  5. Income from the partnership that is associated with trade or business.

Who Needs to File A US Tax Return?

If you are a nonresident alien (NRA) coming from a country outside the US, then you will be subject to US taxation. You will also be considered as a person engaged with business even if you are working as an employee in a company.

For example - if you are a student or a scholar who is residing in the US on F-1, J-1, M-1, Q-1 or Q-2 visas, then you will be classified as an NRA engaged in business or trade. And so, you need to file a Federal income tax return every year because of your earnings in the US.

Filing a tax return is mandatory if you fall into any of the following categories of NRAs:

  1. An NRA individual connected with a trade or business in the US in the current year.

  2. An NRA individual who is not connected with a trade or business in the US has US income on which the tax liability was not satisfied by the withholding of the tax at the source.

  3. A person representing an NRA mentioned in (1) and (2) who is responsible for filing the tax returns

  4. A fiduciary of the NRA

  5. A resident charged with taking care of the property belonging to the NRA may be required to file an income tax for the NRA and clear the taxes.

Which Form Should I Choose To File For Taxes?

Any income that is effectively connected to an NRA is normally taxed at graduated rates (after allowable deductions). In fact, these rates also apply to US citizens and residents. 

All effectively connected income should be reported on the first page of Form 1040-NR, otherwise called the US Nonresident Alien Income Tax Return.

Again, if your income is subject to taxation and if you are an NRA with no dependence, then you need to file your taxes under Form 1040NR-EZ, US Income Tax Return for Certain Nonresident Aliens With No Dependents.

In the case of exempt individuals, you are required to file your taxes under Form 8843, also known as the Statement for Exempt Individuals and Individuals with Medical Condition. Form 8843 is not for exempting your taxes, rather it exempts you from the ‘substantial presence test’ for determining the residency status.

When To File For Taxes?

Tax returns for taxpayers are due on the fifteenth day of the fourth month after the ending of the tax year i.e., the 15th of April for calendar-year taxpayers. If you fail to meet this deadline, there is an automatic extension up to October 15 that can be availed through filing Form 4868, Application for Automatic Extension of Time to File US Individual Income Tax Return. 

However, the extension date does not apply to paying any tax owed. On top of that, the interest will continue to build upon any amount until that tax liability is cleared.

If the due date for filing tax (including the automatic extension date) falls on a Saturday, Sunday, or on a national holiday, then it is immediately deferred to the next working day.

There are certain obligations to filing the tax returns on time. If you send your tax returns via post, then it must have an official postmark (US or others are accepted) dated on or before the last day of submission.

Similarly, if the tax returns are sent via an IRS-authorized or private delivery service, then it is also considered filed on the date it had been mailed. Alternately, if your private mailing service is not IRS designated, then the authorities at IRS will consider the date at which it was received. In such cases, you need to ensure that the mail is received on time.

What Happens If You Do Not File?

From previous data, it has been observed that most NRA individuals who are required to file US taxes, either do not file a tax return or files it incorrectly. However, astonishingly it has been seen that there is a massive overpayment of taxes by foreign nationals instead of underpayments.

Also, if your income is not subject to tax liability, then there is no need for you to file for taxes and in which case, the IRS will not impose any penalties where tax is not due. However, if you wish to become a permanent resident, then you need to file your income tax return as one of the mandatory terms of your visa which states that you are required to comply with all the laws of the US.

Is there Interest and Penalties on Balance Due or Filing Late?

A properly filed extension for tax payment relieves the taxpayer from a late filing penalty on net tax due (4.5% per month for late filing, and additionally, 0.5% per month for the late payment until the payment is completed). However, the combined penalty of late filing and late payment does not exceed 25%. Also, it does not eliminate the liability for interest that is charged on any unpaid tax from the original due date (without extension).

Benefits of Filing US Tax Return

If you have no business in the US but have income from real estate or from owned properties that you choose to exhibit as connected income, then you must timely and accurately file your tax return to take any amount of deduction against your income.

Also, you can claim a refund in case of overpaid taxes or in the case of being over withheld.

Finding It Hard To File Tax Returns? We Are Here To Help

Complying with the taxation rules in the US is a difficult job whether you are a resident or a nonresident alien. As concerned citizens, we help people file income tax returns appropriately so that they do not overpay or underpay accidentally.

At Business Globalizer, we ensure with maximum responsibility that your tax return form is well organized and completed before submitting to the IRS on time. Our team of legal experts have a proven track record of handling tax records for more than 15 years. Still not convinced? Head over to Business Globalizer and send us a mail to get a quotation of our competitive price range.

In Conclusion

The bottom line of this US tax guide is to ensure that you know how to get started with filing your income tax return. On top of that, it is important to know in detail about your tax returns as a business owner living outside the US in order to comply with all the US tax laws. And after all, failing to file your taxes on time will not only subject you to penalties but also make you a subject for investigation by the IRS.