A Comprehensive Tax Return Guide for Non-Residents in the U.S.

Business Globalizer helps you to understand your U.S. tax resident status if you're running a business in the USA as Non-Resident.
Tax Return Guide for Non-resident In The U.S

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Are you a foreign national who has invested capital in the U.S. and wants to file your tax returns? Do you find the U.S. tax system confusing and overwhelming? You aren’t alone! A large number of people stranded in the U.S. as well as foreigners and investment companies abroad have to file their tax returns. 

Whether you’re invested in the U.S. real estate business, software business, or any other business from your country, this tax return guide for non-residents will help you navigate the complicated parts of tax returns. 

This blog will provide you with clear and concise information to make filing your taxes a stress-free experience. We understand that tax laws can be complex and overwhelming, but we’re here to help simplify the process for you.

Let’s dive in!

Taxation of Nonresident Aliens (NRA) Income

Any nonresident 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.

Non-residents are required to maintain meticulous business records and accurately report all US-based income to the IRS. Proper documentation is essential to ensure that the IRS can determine which portion of your income is exempt from taxes.

It’s important to understand that nonresidents may be subject to different tax rates and deductions depending on the type of US-based income they earn. Income that is not effectively connected with a US trade or business, such as investment income, may be taxed differently than income that is effectively connected, such as business or 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 that 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

Income earned by nonresident aliens who are not connected to a US trade or business is subject to a flat tax rate of 30% on the gross income. No deductions are allowed in this case, although tax treaties may provide for a lower tax rate.

This type of income includes interest, dividends, royalties, rents, and other types of income that are fixed, determinable, annual, or periodic in nature. However, certain exceptions apply, such as portfolio income from registered bonds and bank accounts, which are not taxed unless they are effectively connected with a US trade or business.

It’s important to note that understanding how US tax laws apply to nonresident aliens can be complex. Seeking professional advice can help you navigate the regulations and minimize your tax liability.

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:

  • 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.
  • Pension from former foreign employers.
  • Compensation and pension received by teachers living in the US.
  • 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

If you’re a nonresident earning income from assets used in a US trade or business, you’ll be taxed at a graduated rate. This tax applies to both US citizens and resident aliens as well.

However, it’s important to note that there’s no clear definition of what “trade or business” means when it comes to determining the effective income of nonresident alien individuals. The type of activities you’re involved in and your economic interest in the US will ultimately determine whether your income is considered to arise from trade or business. 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 the sale 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 a person engaged in business, even if you are working as an employee for a company.

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

1. NRA individuals connected with US trade or business must file tax returns.

2. NRAs without a US trade or business but with US income and unsatisfied tax liabilities must file tax returns.

3. A representative or fiduciary of an NRA in the above categories must also file tax returns.

4. Residents responsible for an NRA’s property may need to file taxes on their behalf.

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). 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 are typically due on April 15th for calendar-year taxpayers.

  • If you can’t file your taxes by the deadline, you can request an automatic extension until October 15th by filing Form 4868.

  • An extension does not give you extra time to pay any taxes owed, and interest will continue to accrue until the amount is paid in full.

  • If the tax deadline falls on a weekend or national holiday, it is deferred to the next business day.

  • If you mail your tax return, it must be postmarked by the deadline. If you use an IRS-authorized or private delivery service, it is considered filed on the date it was mailed. If using a non-authorized private mailing service, it must be received by the IRS by the deadline.

  • Each state has its own filing requirements and deadlines, which may differ from the federal government’s.

  • If you’re self-employed or have income from rental property, you may need to make estimated tax payments quarterly.

  • E-filing your tax return can speed up the refund process and reduce the risk of errors.

What Happens If You Do Not File?

Failure to file taxes can result in penalties and interest charges, even if you don’t owe any taxes. Non-resident alien individuals who are required to file US taxes should seek guidance from a qualified tax professional to ensure they are filing correctly. Surprisingly, many foreign nationals overpay taxes instead of underpaying.

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.

Are 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

  • Filing a US tax return is necessary if you have income from real estate or owned properties that you choose to exhibit as connected income.

  • Timely and accurate filing can help you claim deductions against your income and reduce your tax liability.

  • Filing a tax return allows you to claim a refund in case of overpaid taxes or being over withheld.

  • Filing a tax return is important for non-resident aliens seeking permanent residency or citizenship in the US.

  • Proper tax filing can help you avoid penalties and interest charges.

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 it to the IRS on time. Our team of legal experts has 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

To sum it up, filing US tax returns as a non-resident alien can be a daunting task, but it is necessary to comply with US tax laws and avoid penalties. With the right guidance and resources, you can navigate the complexities of the US tax system and file your tax returns accurately. Remember, timely and accurate tax filing can save you from unwanted IRS investigations and penalties. We hope that this comprehensive tax return guide has provided you with useful insights and information to make the process easier.

Business Globalizer provides comprehensive US tax return services to ensure that you comply with all the necessary US tax laws and regulations. Our team of experts is committed to helping you navigate the complex US tax system and ensure that you file your taxes on time.

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