Foreign Nationals
Expert CPA Guidance for Foreign Nationals – Navigate U.S. Tax Laws with Confidence.
Who is Considered a Foreign National?
A foreign national is an individual other than a U.S. citizen or permanent resident. A foreign national is taxed as a U.S. resident on worldwide income if meeting the substantial presence test. Otherwise, the foreign national is taxed as a non-resident on his/her U.S.-source income.
What is the substantial presence test?
The substantial presence test is a criterion used by the IRS to determine if a foreign national should be classified as a U.S. tax resident based on the number of days they are physically present in the United States
To meet the substantial presence test, the foreign national must be physically present in the U.S. on at least:
- 31 days during the current year, and
- 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting
- All the days of being present in the current year
- 1/3 of the days of being present in the first year before the current year
- 1/6 of the days of being present in the second year before the current year
Note
- Days you are an exempt individual do not count.
- Closer connection exception to the substantial presence test is possible.
- Some foreign nationals may qualify for tax treaty exemptions, which override the Substantial Presence Test and grant nonresident status for tax purposes.
- Regular commuters from Canada or Mexico who work in the U.S. but return home daily are generally not subject to the Substantial Presence Test.
When is a foreign national required to file a U.S. personal income tax return (Form 1040)?
When meeting the substantial presence test, Form 1040 should be filed if
- Your gross income was at least the standard deduction (indexed annually for inflation)
- You owe any special taxes (eg. alternative minimum tax, additional tax on a qualified plan, household employment taxes)
- You received health savings account, Archer MSA, or Medicare Advantage MSA distributions
- You had net income from self-employment of at least $400
- Other scenarios can apply as well
Why Your Tax Status Matters
Which tax forms you file (1040 vs. 1040NR)
Whether you qualify for standard deductions or tax treaty benefits
How your foreign income is taxed in the U.S.
Whether you must report foreign bank accounts (FBAR) and assets (FATCA).
When is a foreign national required to file a U.S. nonresident alien income tax return (Form 1040-NR)?
When not meeting the substantial presence test, Form 1040-NR should be filed if:
- You are engaged in a trade or business in the U.S.
- You received FDAP (fixed or determinable, annual, or periodic) income from U.S. sources and not all of the tax owed is withheld from that income
- You owe any special taxes (eg. alternative minimum tax, additional tax on a qualified plan, household employment taxes)
- You received health savings account, Archer MSA, or Medicare Advantage MSA distributions
- You are the personal representative for a deceased individual who would have had to file Form 1040-NR
- Foreign investors and Real Estate owners
- Other scenarios can apply as well
General U.S. tax rules for non-resident aliens (NRAs)
NRAs are generally taxed only on their U.S. source income.
Effectively connected income (ECI)
- Income from operation of a business in the U.S.
- Income from personal services rendered in the U.S. (wages, self-employment income)
- Gains and losses from the sale or exchange of U.S. real property interests
- Taxed at graduated rates, similar to U.S. residents
Fixed or determinable, annual, or periodic (FDAP) income
- Passive income such as interest, dividends, rents or royalties
- Taxed at a flat 30% rate on the gross income (lower treaty rate can apply)
Effectively connected income (ECI)
- Income from operation of a business in the U.S.
- Income from personal services rendered in the U.S. (wages, self-employment income)
- Gains and losses from the sale or exchange of U.S. real property interests
- Taxed at graduated rates, similar to U.S. residents
Fixed or determinable, annual
or periodic (FDAP) income
- Passive income such as interest, dividends, rents or royalties
- Taxed at a flat 30% rate on the gross income (lower treaty rate can apply)
Services TMP can assist you with
Form 1040 for foreign nationals who are US tax residents
State personal income tax returns
Dual status returns
Foreign asset forms (Form 8938 and FBAR)
Form 1040-NR for non-resident aliens
Form 1116 foreign tax credit
ITIN Application Assistance
Schedule NEC for FDAP income
Analysis of tax treaty benefits
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Frequently Asked Questions (FAQs)
Find answers to common questions about Democracy
Yes, you must either have an SSN or an ITIN. You need to apply for an SSN if you are eligible to work in the U.S. You need to apply for an ITIN if you are not eligible for an SSN but need to file a tax return.
Yes, you can still be classified as a U.S. tax resident under the substantial presence test for the calendar year, if you are physically present in the U.S. for at least 31 days during the current year and 183 days during the current year plus two preceding years. 1/3 of the days in the first preceding year and 1/6 of the days in the second preceding year are counted.
Yes, a non-resident’s income subject to U.S. income tax is typically divided to 2 categories: 1) ECI income – income that is effectively connected with a trade or business in the U.S. or 2) FDAP income – US source income that is fixed, determinable, annual, or periodic. Generally, you are engaged in a trade/business in the U.S. when you perform personal services there. You should report ECI (such as wages, business income) on page one of Form 1040-NR. FDAP income should be reported on Schedule NEC of Form 1040-NR, which covers dividends, interest, rent and pensions.
If you only earned U.S.-source interest or dividends and the payer withheld taxes at the proper rate, you may not need to file. If the payer withheld excess taxes and you wish to claim a refund, then you must file Form 1040-NR.
Yes, you are allowed to claim deductions when figuring your effectively connected income. For example, you can claim business expenses against business revenues from U.S. trade/business. Your effectively connected income is taxed at graduated rates (the same rates applicable to U.S. citizens and residents). On the other hand, deductions are not allowed against FDAP income. The IRS levies a flat 30% tax on FDAP income, though it can be reduced by a tax treaty; and this tax is typically fulfilled by withholding at source by the payer.
The return due date for Form 1040-NR is April 15 following the tax year.
Yes, foreigners may need to file U.S. taxes depending on their residency status and income.
- Resident Aliens: Foreign nationals who meet the substantial presence test or have a green card must file taxes on their worldwide income using Form 1040.
- Non-Resident Aliens: Foreign nationals who do not meet the substantial presence test must file Form 1040-NR if they have U.S.-source income that meets filing thresholds.
- Resident Aliens: Pay taxes on worldwide income, similar to U.S. citizens.
- Non-Resident Aliens: Pay taxes only on income effectively connected with a U.S. trade or business (ECI) or fixed or determinable, annual, or periodic income (FDAP).
- ECI: Taxed at graduated rates.
- FDAP: Taxed at a flat 30% rate, unless reduced by a tax treaty.
TMP pricing for personal tax
Basic Package
Number of income slips:
1-3 slips
Foreign financial accounts:
1-2 accounts
Other schedules:
no or minimal other schedules required
State return:
up to 1 state return
Expert Package
Number of income slips:
1-5 slips
Foreign financial accounts:
1-5 accounts
Other schedules:
up to 2 other schedules required such as Schedule C (business income), Schedule E (rental income), Schedule D (capital gains) foreign tax credit, foreign earned income exclusion
State return:
up to 1 state return
Premium Package
Number of income slips:
1-10 slips
Foreign financial accounts:
1 to 10 accounts
Other schedules:
up to 4 other schedules required such as Schedule C (business income), Schedule E (rental income), Schedule D (capital gains) foreign tax credit, foreign earned income exclusion
State return:
up to 2 state return(s)
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