Wealth & Risk Management Blog

William Byrnes (Texas A&M) tax & compliance articles

Filing Requirement for NRA with US Source Income?

Posted by William Byrnes on June 10, 2014


Nonresident Aliens with US Source Income?

Nonresident aliens (“NRA”) who received income from U.S. sources in 2013 also must determine whether they have a U.S. tax obligation. The filing deadline for nonresident aliens can be April 15 or June 16 depending on sources of income. See Taxation of Nonresident Aliens.

Who is a Nonresident Alien for US tax Purposes?

An alien is any individual who is not a U.S. citizen or U.S. national.

A resident alien is an alien who has passed either the green card test or the substantial presence test.  A nonresident alien is everyone other alien.

Who Must File a US tax Return?

If an alien is covered under either of the following 2 categories , then the alien must file a US tax return:

  1. A nonresident alien individual engaged or considered to be engaged in a trade or business in the United States during the year.
  2. A nonresident alien individual who is not engaged in a trade or business in the United States and has U.S. income on which the tax liability was not satisfied by the withholding of tax at the source.

Which Income to Report?

A nonresident alien’s income that is subject to U.S. income tax must generally be divided into 2 categories:

Effectively Connected Income, after allowable deductions, is taxed at graduated rates. These are the same rates that apply to U.S. citizens and residents. Effectively Connected Income should be reported on page one of Form 1040NR, U.S. Nonresident Alien Income Tax Return.

FDAP income generally consists of passive investment income; however, in theory, it could consist of almost any sort of income. FDAP income is taxed at a flat 30% (or lower treaty rate) and no deductions are allowed against such income. FDAP income should be reported on page four of Form 1040NR.

Which Form to File?

Nonresident aliens who are required to file an income tax return must use:

What is US Source Income Subject to US tax?

A nonresident alien (NRA) usually is subject to U.S. income tax only on U.S. source income. The general rules for determining U.S. source income that apply to most nonresident aliens are shown below:

Summary of Source Rules for Income of Nonresident Aliens
Item of Income Factor Determining Source

Salaries, wages, other compensation

Where services performed

Business income: Personal services Where services performed
Business income: Sale of inventory -purchased Where sold

Business income: Sale of inventory -produced

Where produced (Allocation may be necessary)

Interest

Residence of payer

Dividends

Whether a U.S. or foreign corporation*

Rents

Location of property

Royalties: Natural resources Location of property

Royalties: Patents, copyrights, etc.

Where property is used

Sale of real property

Location of property

Sale of personal property

Seller’s tax home (but see Personal Property, in Chapter 2 of Publication 519, for exceptions)

Pensions

Where services were performed that earned the pension

Scholarships – Fellowships Generally, the residence of the payer

Sale of natural resources

Allocation based on fair market value of product at export terminal. For more information, see IRC section 1.863–1(b) of the regulations.

*Exceptions include: a) Dividends paid by a U.S. corporation are foreign source if the corporation elects the Puerto Rico economic activity credit or possessions tax credit. b) Part of a dividend paid by a foreign corporation is U.S. source if at least 25% of the corporation’s gross income is effectively connected with a U.S. trade or business for the 3 tax years before the year in which the dividends are declared.

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  If you are interested in discussing the Master or Doctoral degree in the areas of financial services or international taxation, please contact me: profbyrnes@gmail.com to Google Hangout or Skype that I may take you on an “online tour”

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