The Income Tax Return

Your Filing Status

Choosing the proper filing status is important because it is used to determine what tax rate will be used for your effectively connected income.

If you are single on the last day of the tax year, box 1 or 2 on Form 1040NR (or box 1 on Form 1040NR-EZ) applies under “Filing Status.”

Some married persons who have dependent children and who did not live with their spouse for at least the last six months of the tax year may file as single. If you are in this category, and are a resident of Canada, Mexico, Korea, or a U.S. national, there are additional requirements in the instructions to Form 1040NR on page 5.

If you are married on the last day of the tax year, and your spouse is a nonresident alien, you do not have the option to file a return jointly with your spouse if you are also a nonresident alien. If you file Form 1040NR or Form 1040NR-EZ you must file as married filing separately.

Options to File as a Joint Resident Return 

IRC Sec. 6013(g). If you are a nonresident alien at the end of the year and are married to a citizen or resident of the U.S., you can make a special election to file a joint resident return with your spouse and you will be treated as a U.S. resident for the entire year.

IRC Sec. 6013(h). An election is available to file a joint resident return with your spouse and be treated as a U.S. resident for the entire year in the year you become a resident (are a resident at the end of the year) if your spouse is also a resident at the end of the year. This election is available if either you or your spouse, or both of you, are dual status aliens.

Under either of these elections, you can claim the standard deduction, spousal and dependency exemptions, and other tax benefits available to U.S. citizens and residents, but you are subject to tax on your worldwide income for the entire calendar year. In order to eliminate double taxation, the foreign tax credit is generally available to claim against foreign taxes paid on foreign source income.

Personal and Dependency Exemptions

An exemption is a statutory allowance that represents a taxpayer, the spouse of the taxpayer and any allowable dependents of the taxpayer. The exemption amount is adjusted for inflation each year. For 2014 the amount is $3,950. That means you can deduct $3,950 on your tax return for each exemption you are allowed, so in other words, if there are 4 exemptions, you are allowed a total of $15,800 ($3,950 x 4). Yes, you are allowed to claim a personal exemption for yourself, unless another taxpayer who supports you can claim a dependency exemption for you. You can claim dependency exemptions for qualifying individuals.

Generally, whether you are married or single, you cannot deduct dependency exemptions as a nonresident, even if you are supporting family members. That means only one exemption (your personal exemption) is typically allowed on Form 1040NR. However, residents of Mexico, Canada and nationals of the United States are allowed to deduct exemptions under the same rules as U.S. residents. Also, residents of South Korea, students and business apprentices from India are eligible under their countries’ treaties to claim spousal and dependency exemptions under certain circumstances.

What Income is Taxable and How to Report It 

A nonresident alien is subject to U.S. income tax only on certain income from sources within the United States, and on certain income connected with the conduct of a trade or business in the United States. Generally, income from sources outside the United States is not reported on the U.S. tax return of a nonresident.

U. S. source income is divided into two general categories – income that is effectively connected with a U.S. trade or business and income that is not effectively connected with a U.S. trade or business.

Effectively Connected Income

Income that is effectively connected with a U.S. trade or business is reported on the first page of Form 1040NR or Form 1040NR-EZ. It is subject to tax at the same graduated rates that apply to residents, and can be offset by allowable deductions and exemptions. It can also be partially or fully excluded from your income by treaty provisions between the United States and another country. See “Where to Find Treaty Information” under Tax Treaties. If you are in the United States on an F, J, M, or Q visa, you are considered engaged in business in the United States. That means any U.S. source income that is taxable to you in connection with your scholarly activities, such as wages or scholarship and fellowship grants, is included in this category.  Also, any other income from personal services performed in the United States is generally considered effectively connected income.

Not Effectively Connected Income 

If you have US source income that is not effectively connected with a U.S. trade or business, it  is reported on page 4 (Schedule NEC) of Form 1040NR (you cannot use Form 1040NR-EZ not if you have this type of income).  It is generally taxed at a flat 30% rate and cannot be reduced by deductions and exemptions.  Treaty provisions between another country and the United States might provide for a lower rate of tax.  See ” Where to Find Treaty Information” under Tax Treaties.  Income that is typical of this category includes dividends, capital gains in excess of capital losses, prizes, awards and certain gambling winnings.  If you are a nonresident alien, capital gains on stocks, securities and other personal property are taxable to you only if you are present in the United States for at least 183 days during the tax year. Generally, you cannot offset gambling winnings with gambling losses. However, if you happen to be a resident of Canada, you can claim gambling losses to the extent of gambling winnings under the U.S/Canada tax treaty. Bank interest received by nonresident aliens is statutorily excluded from taxation.

Wages

Nonresident aliens are generally subject to tax on wages for services performed in the United States as effectively connected income.

There are exceptions to this general rule, however. First, note in Chapter Three of Publication 519 that nonresident visitors of F, J, M and Q visas can exclude pay received from a foreign employer, other than a foreign government. Second, any wages you receive might be exempt from U.S. tax under a treaty between your country of residence and the United States.

If you received taxable wages during the year, you should receive a Form W-2 from your employer with an 30 days after the end of the year.  If any of your wages are exempt from income tax under a tax treaty, you should receive a Form 1042-S rather than a W-2.

Scholarships and Fellowships

Any scholarship or fellowship grant that is taxable to you is considered effectively connected income and is subject to graduated rates. It is reported on line 12 of Form 1040NR and on line 5 of Form 1040NR-EZ. There are three ways, described below, in which part or all or your scholarship or fellowship grant can be excluded from income.

Foreign Source. If you receive a grant from a foreign payer, it is considered foreign source income and is not taxable. Generally, the source of a scholarship or fellowship grant is the source of the payer, regardless of who actually disburses the funds. Foreign source payments should not be reported on your tax return.

Qualified Scholarship. If you are a candidate for a degree, you can exclude amounts received as a scholarship or fellowship grant that you use for: 1) tuition and other fees you pay to the university to attend class, and 2) fees, books, supplies and equipment that are purchased because of course requirements. The amounts you used for expenses other than tuition and course-related expenses (such as room, board and travel) are generally taxable. Also, any part of a scholarship or grant that is compensation for services cannot be excluded as a qualified scholarship. Report the amounts excluded on lines 12 and 31 on Form 1040NR, and on lines 5 and 8 on Form 1040NR-EZ. Attach one copy of any Form W-2 or Form 1042-S you received from the payor to the front of the return.

Schools are no longer required to report qualified scholarships you receive in the form of tuition benefits, so Form 1042-S will no longer show these amounts and they need not be reported on your return. You are supposed to attach a statement to your return if you exclude qualified scholarship payments that are reported on a Form 1042-S The statement should show 1) the amount of the grant, 2) the dates it covers, 3) the grantor’s name, 4) expenses the grant covers and conditions of the grant, and 5) the amount that is taxable and tax exempt. Here is a fill-in scholarship statement form in PDF format that you can fill in on the screen and print out for this purpose.

Treaty Exempt Scholarships. If there is a tax treaty between the United States and your home country, it might contain a provision excluding scholarship payments.

Investment Income

Reporting interest, dividend and capital gain income is a little confusing. There are spaces provided to show it on page 1 of Form 1040NR, and on page 4 as income not effectively connected with a U.S. trade or business. Reporting it on page 1 means it is effectively connected to a U.S. trade or business. To be effectively connected, the investment income must have a direct economic relationship to your United States trade or business. As a student or scholar, your trade or business in the United States is studying, teaching, or doing research. Therefore, it is very unlikely you have effectively connected investment income.

Report your investment income on page 4 of Form 1040NR (you cannot use Form 1040NR-EZ if you have this type of income). The tax rate is a flat 30% unless a treaty provision between the United States and your home country reduces the rate.

Exempt Interest. Interest paid on deposits with banks, on accounts or deposits with certain financial institutions, or on certain amounts held by insurance companies, are exempt from U.S. tax even though they are U.S. source income. If you file Form 1040NR, do not report this interest anywhere on the return.

Allowable Deductions and Credits

There are generally less deductions and credits available for nonresident aliens than for residents. Deductions and credits can only offset effectively connected income; income that is not effectively connected to a U.S. trade or business cannot be reduced by deductions and credits. While residents can claim the standard deduction in lieu of itemized deductions, nonresidents (other than students and business apprentices from India) are not allowed to claim the standard deduction. Most nonresidents must itemize their deductions, the deductions available to itemize are very limited. Following are brief descriptions of some of the more common deductions and credits that might be available to you.

Moving Expenses

If you moved to the United States, or from one city to another during the year, you can deduct moving expenses assuming you work full-time for at least 39 weeks during the 12 months right after you moved.

Itemized Deductions

Itemized deductions are a special category of deductions listed on Schedule A of Form 1040NR. Nonresidents from India can elect to claim the greater of their itemized deductions or the standard deduction (described below). If you are a nonresident from a country other than India, you cannot claim the standard deduction; you are only allowed to claim itemized deductions that you paid during the year.

State Income Taxes. If you had state and/or local income tax withheld from your wages during the year, you can claim the amount withheld as an itemized deduction. This is typically the only itemized deduction nonresident alien students have.

The Standard Deduction

The standard deduction is a statutory allowance available to all residents. It is also available to nonresident students and business apprentices from India under Article 21(2) of the United States – India tax treaty. Those taxpayers who claim the standard deduction cannot also claim itemized deductions. Also, if you are married filing separately, and your spouse itemizes deductions, you cannot claim the standard deduction.

Credit for Child and Dependent Care Expenses

Although this credit has a line on Form 1040NR, it is very unlikely you will qualify for it. If you are married, you must file a joint return with your spouse to claim the credit. However, you are not allowed to file a joint return as a nonresident alien. If you are single, you must be able to claim a dependency exemption for a “qualifying individual” to get the credit. A qualifying individual is a dependent under the age of 13 or a disabled dependent. Dependency exemptions are typically not allowed to nonresident aliens.

The Foreign Tax Credit

If you receive foreign source income that you also pay U.S. tax on, you can claim a foreign tax credit. However, since you generally do not pay U.S. tax on foreign source income, the credit is typically not available to you on foreign source income. Also, you cannot take any credit for taxes imposed by a foreign country on your U.S. source income if those taxes were imposed because you are a citizen or resident of the foreign country.