1040 vs 1040NR: Main Differences and Which Form to File

Every year, the IRS deals with more than 165 million individual tax returns. And this year doesn’t seem like it will be different. 

The 2023 US tax season, just like any other before it, brings a lot of stress to many people worldwide. 

With so many different forms, exemptions, deductions, and credits you can file, figuring out exactly which of those are for you can pose many issues. To save you some trouble and make this tax season less “taxing” than the previous ones, we’ve decided to look at the two most common individual taxpayer forms — 1040 vs 1040NR.

In this article, we’ll talk about what those forms are and share the difference between these two – 1040 vs 1040NR. We’ll also tell you about a couple of methods you can use to file your returns this tax season and some common mistakes when filing 1040 or 1040NR forms that you should try to avoid.

Let’s begin.

Which Tax Form Should You File: 1040 vs 1040NR

Before we tell you the main differences between these two, 1040 vs 1040NR forms, let’s first review some basic information about each tax form.

What Is The 1040 Form?

The 1040 is the standard individual income tax form that US citizens and Green Card holders must file each year with the Internal Revenue Service (IRS). This form is the most common tax return form for filing personal income taxes in the US. Both US citizens and Green Card holders are viewed as residents (for tax purposes) and have to pay taxes on their worldwide income, report all their foreign bank accounts, and use the 1040 tax form to file their taxes.

What Is The 1040NR Form?

Similar to the 1040, the 1040NR is a form used for filing individual income taxes, the main difference being that it is for nonresidents with US-based income. No matter where in the world they live or which citizenship they hold, if they have a US-based income, they need to pay US taxes. Some of the most common types of US-sourced income include:

• Rental income — A type of income generated by a residential or commercial rental property located in the US. 
• Wages and salaries — Any monetary compensation for work performed in the US
• Interest and dividends — A type of income generated from interest on US bank accounts, bonds, or dividends paid by US-based corporations.
• Royalty income — Any income generated from using copyrighted, patented, or trademarked property on US soil.

Nonresident aliens (for tax purposes) are usually not US citizens or Green card holders. They also do not meet the requirements set by the Substantial Presence Test (a test that determines whether or not an individual will be viewed as a US resident or nonresident by the IRS and strictly for tax purposes). Nonresidents only have to pay taxes on their US-based income (their income earned outside of the US is not taxed by the IRS) and don’t have to report any of their foreign assets or bank accounts to the US government.

Technically, you can be a nonresident (who lives outside of the US and doesn’t have US citizenship) but is viewed as a resident by the IRS. And that’s where filing taxes can get a bit complicated. If you need help, don’t hesitate to book a free call and see what NRI can do for you.

What Is the Main Difference – 1040 vs 1040NR?

Filing taxes in the US can be a strenuous process that, if not done right, can cost you a lot of money and time. To avoid that, it’s important to understand the difference between 1040 vs 1040NR tax forms. They are meant for completely different categories of US taxpayers and have specific rules and requirements.  

1040 vs 1040NR: Residency Status 

The first major difference between the 1040 and 1040NR is in the residency status of taxpayers. The 1040 form is for US citizens, Green Card Holders, and residents (for tax purposes). The 1040NR form is for nonresident aliens (i.e., people who don’t have legal permission to live in the US on a permanent basis and have failed the SPT test).

Determining US residency status for tax purposes is done via the Substantial Presence Test (SPT). To pass this test and get the status of US resident for tax purposes, you need to have at least 183 days of presence in the US during a 3-year period. To see how many days you’ve spent in the US, you can check your travel history via the I-94 form.

1040 vs 1040NR: Deductions and Credits

Another important difference between 1040 and 1040NR is in the type and number of deductions and credits these two forms offer to taxpayers. The 1040 (meant for US residents) has a lot more categories for deductions than the 1040NR. Types of deductions that the 1040 tax form offers include:

• Mortgage interest deductions
• Various state and local taxes
• Healthcare costs
• Casualty and theft losses
• Charitable contributions 
• Investment interest expenses

On the other hand, the 1040NR form offers a lot less in terms of deductions and credits.

1040 vs 1040NR: Income Sources

One more key difference between 1040 and 1040NR is in the way these two tax forms treat income sources. The 1040NR is there to make sure nonresidents accurately report their income within the US (i.e., US-based income). The 1040 tax form is for residents (for tax purposes) and is used to report their worldwide income (any financial gains made anywhere in the world, including the US). 

Treaty Benefits and Tax Retention

Nonresident aliens that file 1040NR forms could be eligible for certain tax treaties (if such exist between their home country and the US). For example, UK citizens can claim certain tax exemptions on their US-based income in order to prevent double taxation. 

Main Methods To File 1040 and 1040NR Tax Forms

There are three main ways you can use to file 1040 and 1040NR tax forms. Which one you have to file will depend on your residency status, and you can do it via the following methods:

• Electronic Filing or E-File — The Internal Revenue Service (IRS) offers tax preparation software (e-filing software) that you can use to file either 1040 or 1040NR forms. This is by far the easiest and quickest way to file taxes. Another good option is to hire a certified public accountant who specializes in e-filing. 
• Mail filing — Opposite to e-filing is filing taxes via paper mail. You can print out either of the two forms (1040 or 1040NR), fill it out (by yourself or with professional help), and simply mail it to the IRS. Check out this official IRS page to see the exact addresses where you should mail your form (based on your residency type, state, and more).
• Authorized private delivery service or PDS — The IRS gave permission to certain private delivery services to act as couriers and deliver your tax return forms. To see the full list of authorized companies, check out this official IRS page.

1040 vs 1040NR: Filing Examples 

To make the differences between these two forms easy to understand, we’ll share with you a couple examples of filing 1040 or 1040NR forms. 

1040 vs 1040NR: Filing Example 1

Jim is a US citizen, born and raised in the state of Iowa. He works as an engineer at John Deere and has an annual salary of $130k. Because he lives and works in the US and is a US citizen, the IRS will view him as a resident, and he will have to file 1040 from each tax year.

1040 vs 1040NR: Filing Example 2

Lucas is a Canadian citizen who bought a rental property in Florida. Apart from this rental property that generates a steady income and makes him a foreign real estate investor in US property, Lucas also has a steady job in Canada; he works as a purchasing specialist for a company based out of Toronto. 

Because he has a US-based income (from his rental property), he needs to pay taxes to the US government (or, more specifically, the IRS). Lucas first needs to do a Substantial Presence Test to figure out which form he needs to file. If he passes, he’ll need to pay taxes on his worldwide income, and if he fails, he’ll only need to pay taxes for his US-based income (his rental property). 

After doing the SPT test, Lucas got a score of 130 days of presence in a 3-year period. The IRS will view him as a nonresident because his score is less than 183 days. This means that he needs to file the 1040NR form and will only have to pay taxes on his US-based income. 

1040 vs 1040NR: Filing Example 3 

Mary is a US citizen who lives and works in France. Because all US citizens are taxed on their worldwide income, Mary has to file taxes with the IRS, even though she doesn’t live there anymore. But, before she does that, she needs to do the Physical Presence Test to check if she’s eligible for certain tax exemptions available to US expats.   

After taking the PPT test, Mary got a score of 20 days of presence in the US, which means that she qualifies for foreign-earned income tax exclusion. However, because she is a US citizen, she is still viewed as a resident by the IRS and needs to file the 1040 form. But, because she meets the foreign earned income tax exclusion requirements, she can also file form 2555 and get certain exemptions.  

Most Common Mistakes When Filing 1040 or 1040NR Forms

Here are some of the most common mistakes people make when filing individual tax forms:

• Filing late or early — While filing late can lead to penalties and fees, filing early can lead to processing delays, which can make the entire tax filing operation last way longer than it should.
• Misspelling names — Many taxpayers who file 1040NR or 1040 forms accidentally end up misspelling their names. This can cause many different issues, so make sure to triple-check and ensure you’ve spelled your name correctly.
• Inputting wrong bank account numbers — Taxpayers eligible for a refund should make sure they use the correct routing and bank account numbers on their tax forms.
• Forgetting to put a signature — Any tax form (1040 or 1040NR) needs to be signed by the person who is filing it (with certain exemptions for people in the military and people who have power of attorney ). Unsigned tax forms will be considered invalid by the IRS. 
• Inputting incorrect information — Any information entered into a tax form (1040 or 1040NR) should be accurate. The information can include wages, interest, various other types of income, and calculations for credits and deductions.  
• Filing the wrong form — There are a lot of people who mistakenly file the wrong form. The reasons for this vary, from people doing it themselves to poor or inadequate counseling. Whatever the case, if that happens, the thing to do is file an amended return.
• Not filing taxes at all — Because it seems too complicated because they forget or think they can get away with not filing taxes, there are some people who choose to ignore their obligation to file taxes with the IRS. For every month of unpaid taxes, the IRS will charge an interest between 5-25% of owed taxes. 

Need help to file US taxes? Book a free call with NRI and see what we can do for you!

FAQ

1040NR and 1040NR-EZ difference?

The 1040NR-EZ tax form was a simplified version of the 1040NR form discontinued by the IRS in 2020. You can still use the 1040NR-EZ to file taxes before 2020, but for this tax year and any year after 2020, you should file the 1040NR form if you are a nonresident. 

What should I do if I filed 1040 instead of 1040NR? 

If you filed the wrong form (1040 instead of 1040NR), you need to file the form 1040-X with the IRS and amend your tax returns. Try to do it as soon as you realize your mistake to avoid the penalties and fees that the IRS charges for this type of infringement.