When does a nonresident alien need to file a 1040NR, U.S. Nonresident Alien Income Tax Return? When might a nonresident alien want to elect to be taxed as a resident alien and file a Form 1040 instead? This week we’ll look into these questions regarding nonresident aliens and their filing requirements.
Nonresident aliens must file a return if any of the following apply:
- They were engaged in a trade or business in the United States during the year, even if:
- There was no income from the trade or business conducted in the United States,
- They have no U.S. sourced income, or
- Their income is exempt from U.S. tax under a tax treaty or a section of the Internal Revenue Code.
- They received income from U.S. sources that must be reported on Schedule NEC, Tax on Income Not Effectively Connected with a U.S. Trade or Business (page 4 of the 1040NR), and all of the U.S. tax due on that income was not withheld.
- They owe any special taxes. Some of these would include:
- Alternative minimum tax (AMT).
- Additional tax on a qualified plan—if this is the only reason for filing, Form 5329 may be filed by itself.
- Household employment taxes—if this is the only reason for filing, Schedule H may be filed by itself.
- Social security and Medicare tax on tips not reported to an employer or if the employer did not withhold these taxes.
- They received HSA, Archer MSA, or Medicare Advantage MSA distributions.
- They had net income from self-employment of at least $400 and are a resident of a country with whom the United States has an international social security agreement.
- If any advance payments of the premium tax credit were made for them, their spouse, or their dependents enrolled in coverage through the Marketplace.
- If they’re the representative for a deceased person or an estate or trust that would have had to file Form 1040NR.
These are the general filing requirements, but there are three main exceptions:
- The only U.S. trade or business was the performance of personal services, wages were less than $4,050, and there is no other need to file a return. This amount is indexed for inflation each year.
- A nonresident alien teacher, student, or trainee who was temporarily present in the United States and has no income that is subject to tax under Section 871 (i.e., otherwise reportable on the form 1040NR). This relates to the exempt individual exclusion mentioned in our opening series post.
- A partner in a U.S. partnership that was not engaged in a trade or business in the United States during the year and all income reported on Schedule K-1 would be listed on Schedule NEC.
Nonresidents can elect to be taxed as a resident for the whole year if they’re married, their spouse was a U.S. citizen or resident alien on the last day of the year, and they file a joint return for the year. If this election is made, a nonresident alien will be taxed on his or her worldwide income in the same manner as citizens and resident aliens.
Why would a nonresident want to make this election and be taxed on his or her worldwide income? Generally it would be for the ability to claim the more favorable benefits U.S. residents receive when they file a joint return vs. a married filing separate return. There are also credits and deductions available to residents that are not available to nonresidents.
Several factors determine the best filing status for each party, and they should be considered before making a decision as to how to file.