U.S. citizens and resident aliens use Form 1040 (or a shorter variation of this form) to report their worldwide income for tax purposes. Nonresident aliens, however, use Form 1040NR to report U.S. source income and calculate any taxes due to the United States. There are different guidelines for determining whether or not certain income is considered U.S. sourced. Here is a brief description of the determining factors and the types of income the factor relates to:
- Where services are performed – wages, salaries, other compensation, personal services business income, and pensions
- Where sold – sale of purchased inventory
- Where produced – sale of produced inventory (allocation might be needed)
- Location of property – rents, royalties for natural resources, and sale of real property
- Residence of payer – interest income and scholarships or fellowships
- Dividends determined by the type of corporation – a U.S. or foreign corporation
To illustrate how this works, here is an example of someone who owns an apartment in New York City. Elle, who is originally from another country, purchased an apartment to live in while she attended school and decided to stay while she started her career. A few years later, she received a job offer in her home country.
Since at this point the market was lower than she would like for selling the apartment, Elle decides to rent out the apartment when she moves back to her home country. Because the rented apartment is located in the United States, it is considered U.S. sourced income. If the proper elections are claimed, she will be allowed to claim direct rental expenses against her rental income on Schedule E (just like a U.S. citizen or resident alien would with a 1040) instead of being subject to U.S. withholding on gross rents with no right to claim deductions for expenses.
Unlike citizens and resident aliens, nonresident aliens are not entitled to a standard deduction—they are only allowed to claim certain itemized deductions and only against certain types of income (generally wages and other business income, or rental income for which the election discussed above has been made). The net taxable income from this U.S. trade or business-type income is then taxed using the standard tax table or tax computation worksheet.
Now that we have a general idea of how to determine if you need to file and how the return flows, when is the return due? Nonresident aliens who earned wages subject to U.S. income tax must file by the 15th day of the fourth month after their year-end (April 15 for a calendar year taxpayer). Those who did not receive wages subject to U.S. income tax must file by the 15th day of the sixth month after their year-end (June 15 for a calendar year taxpayer). An extension of time to file is available by filing Form 4868 to request a six-month extension. This is only an extension of time to file—all taxes due still must be paid by the original due date.
Join us next week when we look into different rules, exemptions, elections, and tests relating to Forms 1040 and 1040NR.