Demystifying the 1040-NR Form (Nonresident Alien Income Tax Form): A Comprehensive Guide

Many non-US residents often find the task of navigating the US tax system to be daunting, at the very least. The multitude of forms that you have to file all by yourself, as well as the intricacies of the system itself (which is different than those in most other countries), often leave non-US citizens thinking that the US tax system is not worth the hassle.

On the other hand, the US real estate market alone has attracted over $53.3 billion in investments from foreign citizens. Therefore, it’s clear that plenty of people see the benefit of investing or doing business in the US as a non-citizen. 

But, if you’re still hesitant, don’t worry. We’re here to tell you that the US market and its convoluted tax system are not only worth it but also easy to find your way around — if someone shows you how.

That’s why today, we’re going over everything that a non-US citizen needs to know about one of the most important US tax forms — the 1040-NR form. So, buckle up; you will learn what is form 1040-NR and all you need to know about it.

What Is Form 1040-NR: Explaining the 1040-NR Meaning

So, what is form 1040-NR? Form 1040-NR, officially called the 1040 Nonresident Alien Income Tax Return by the IRS, is designed for individual tax purposes. It is used and filled by people who are not US citizens or Green Card holders and do not meet the substantial presence test for residency. 

This form is specifically tailored to report income earned in the United States by non-residents. 

So, if you’re a non-US citizen who has earned any type of income in the US during the year, you’ll need to file the 1040-NR form around April 15th (which is the designated deadline). 

As the US takes taxes quite seriously – just like most other countries in the world – you’ll have to file this form no matter what. Even representatives or descendants of a deceased person need to file it instead of the deceased person, for the year the person in question earned any type of income in the US.

So, what is form 1040-NR? Clearly, the 1040-NR tax form is a necessity for many non-US citizens. 

That isn’t that surprising, considering that US citizens have their own version of the same form – the 1040 form.

On the other hand, people who are actual US residents take physical presence tests.

What Is Form 1040-NR vs 1040? — The Main Differences

1040 form is filed every year by US citizens and resident aliens in the US (mostly Green Card holders). 

It is an individual tax return form that full-year residents, as well as resident aliens, file in order to declare their taxes. 

The main difference between the 1040 and the 1040-NR is that on the 1040 form, citizens are obliged to report worldwide income tax, while the 1040-NR only requires nonresident aliens to report US-based income. 

Substantial Presence Test

So, if you’re a resident or a citizen, you file the 1040 form, while nonresidents file the 1040-NR form. But how do you know whether you’re a resident or a nonresident?

Easy — the Substantial Presence Test. 

This test is a calculation that determines your presence in the US on a yearly basis. You are considered a resident if you spend: 

• 31 days in the US during the current year, while also spending
• 183 days over a 3-year period (including the current year and the 31 days previously mentioned).

However, the total number of days you spent in the US includes all of the 31 days from the first point, ⅓ of the days from the year before the current one, and, finally, ⅙ of the days from the second year before the current one.  

If this sounds complicated, that’s because it is. But here’s an example that will clear things up. 

Let’s say you spent all 31 days of January in the US in 2023. When doing your calculations, you need to count all those days into your total. 

And, let’s also say that you spent 90 days in the US in 2022. Since you only count ⅓ of those for your SPT, your total for 2022 is 30 days (since 90 divided by 3 is 30). So you’re up to 61 days so far (31 from 2023 and 30 from 2022). 

Finally, you need to check the number of days for 2021. Let’s say that was 120 days. When we divide that by 6 (since we’re only counting ⅙ th of those days), you get a total of 40 days for 2021. 

Therefore, the final calculation for your SPT is: 31+30+40, which comes up to 101 days. 

That’s fewer than 183 days, which means you’re a nonresident for US tax purposes, and you have to file 1040NR for your US-based income only! 

Who Needs to File 1040-NR Tax Forms?

Now that we all know what form 1040-NR is let’s move forward to filling it. The question of “Who files the 1040-NR?” has a simple answer — but it’s not “all nonresidents”. The 1040-NR is a vital form for every nonresident who earns any form of US-based income during any given tax year. That includes:

1. Nonresident aliens (who don’t have a Green Card or a US citizenship) who have traded or otherwise been engaged in a business in the US;
2. Nonresident aliens who haven’t engaged in either trade or business in the US, but have generated income from US sources that were not withheld and, therefore, has to be taxed;
3. People who owe special taxes (for example, household employment taxes, or the AMT tax);
4. Representatives of a person who needed to file a 1040-NR or representatives of a trust or an estate of a person who needed to file a 1040-NR;
5. Self-employed people whose earnings went over the minimum of $400, and who live in countries that have a Social Security treaty with the US;
6. People who received any distributions from MSA (Medicare Advantage or Archer Medical Savings) or HSA (Health Savings Account).

Here’s an example — let’s say you’re a foreign investor with a US-based real estate business. You’ve bought a property in Florida, and you’re renting it out to good tenants who always pay their rent on time. Every month, you get $1,000 in rent from them. 

That’s your income. Since the property you own is in the US, your income is US-based. Therefore, you have to pay taxes for it, even if you don’t live in the US (or even visit the US all that often). 

So, all income that you receive from US businesses or otherwise acquired in the US is US-sourced income, and you can’t escape paying taxes for it even if you die. Got it?

Great, let’s move on then.

What Constitutes as US-Sourced Income?

Now, if you’re a non-US citizen, your next question is something along the lines of, “What is a US-source income anyway?”

Worry not; we have you covered. In terms of nonresidents, a US-sourced income can come from:

• Owning any type of business in the US — be it brick and mortar or online,
• Salaries, wages, or any other financial compensation for services provided in the US,
• Business income for personal services or from the sale of inventory (no matter whether that inventory was originally purchased or self-produced),
• Receiving royalties for natural resources or patents, copyrights, etc.,
• Receiving interests (depending on the payers’ residence),
• Receiving ordinary and qualified dividends (both from a US or a foreign company),
• Sale of real property, personal property, or natural resources,
• Pensions (if earned in the US), 
• Capital gains,
• Real estate and farm income, and
• Scholarships and fellowships. 

So, if, during a tax year, you’ve received any income stated above, you’ll have to file a 1040NR form.

What Is Form 1040-NR And How It Looks Like?

The 1040-NR is similar to the 1040 form. It consists of a segment where you fill in your personal information and declare dependants and a segment where you fill in information that has to do with your profits and losses for the tax year.

The latter segment is, of course, problematic for many nonresidents. There are around 38 questions inquiring about your income effectively connected with US trade or business, such as:

• The amount from your W-2 forms,
• Any wages not reported on the W-2 forms,
• Tax-exempt interests,
• Dividends,
• Capital gains or losses,
• Adjustments to income, 
• Itemized deductions, etc. 

In the end, the IRS combines your income, deducts the expenses, and what you’re left with is the amount you have to pay in taxes.

If you want to take a closer look, the 1040-NR tax form is available on the IRS website in PDF form, and you’ll also find the necessary 1040-NR instructions there as well.  

How to File 1040-NR Forms

There are two different ways to file your 1040NR form:

• Fax it directly to the IRS or
• File it online.

Although it may seem daunting, filing the 1040-NR isn’t that difficult. However, mistakes happen quite often, and, in those cases, the IRS returns the form to you and you have to start over. 

That’s why it’s smart to have some professional help when filing the 1040NR. 

Here at NRI, we specialize in working with nonresidents and offer a whole array of services to them. Our CPA specializes in working with nonresidents, so don’t go through this alone — let us lend a helping hand. 

Now that you know what is form 1040-NR, book the service now!

The price of form 1040-NR is only 300$.

What Is Form 1040-NR Due Date 2023?

All taxes in the US are filed every year at the end of the tax year, which falls in April. As mentioned at the beginning of the article, for 2023, you need to file the form 1040-NR by April 15th, 2024. 

There are only two exceptions to this — taxpayers from Massachusetts and Maine have 2 extra days, which means they must file their taxes by April 17th, 2024. 

Keep in mind that missing this deadline comes with financial consequences, as the IRS will fine you for it. 

Why Do I Need to File a 1040NR?

Aside from being compliant with the US tax law, as a nonresident, you need to file the 1040-NR form in order to avoid the devastating 30% FDAP tax — especially if you’re a nonresident investor. 

ECI vs FDAP 

If we take a broader look at income, we can see that the IRS divides all income into two categories:

1. Effectively Connected Income (ECI), which is usually active income, and
2. Fixed, Determinable, Annual, and Periodic (FDAP), which is usually passive income.

The difference between these two is that with ECI income, there are no withholdings. As a nonresident with ECI income, you claim deductions that come with your business and file a 1040-NR to report all your income. 

With FDAP, you are obligated to pay 30% of your entire income to the IRS. As a natural person, the IRS doesn’t see you as a business — therefore, you aren’t eligible for business deductions. 

So, let’s go back to the example where you own a property in Florida. Let’s say that a couple of years ago, you were a Canadian looking to move to Florida. You’ve bought a house to spend your retirement in, but you have a few years left before you can start spending your days fishing along the Floridian coast, so you decided to rent the house out while you wait. 

We’ve already determined that you’re renting the house out for $1,000. So, every month, you’d have to set aside $300 out of those $1,000 for when the IRS comes collecting at the end of the tax year. And, with the various costs of property maintenance, your income comes up to practically nothing. 

So does that mean everyone should avoid buying property in the US due to the high taxes?

Of course not.

Avoiding the FDAP Tax

In the example we gave above, instead of buying a property in your name and then declaring the earnings from it on your personal 1040NR form, you would have been better off by opening a real estate business — more specifically, a US LLC. 

So, let’s imagine you did that. That way, you’d get an EIN to declare your taxes with, and you’d be able to modify your income from FDAP to ECI, and deduct your business expenses, such as:

• Amortization,
• Property maintenance,
• Property management,
• Depreciation of property, 
• Mortgage costs, etc.

Why You Should Aim to Avoid the FDAP Tax

So, as evident in the example we gave above, when you plan out your taxes and file them according to the best strategy, it’s easy to end the tax year by owing only a fraction of the original tax amount to the State or even having the State be indebted to you. 

If you’re a nonresident investor or want to become one, this fact opens up multiple avenues for you. 

For example, your passive income that’s taxed only a small amount (or not at all)  allows you to grow your business. With the entirety of your income at your disposal, it will be easier to invest that money further down the line or maybe even move to the US at some point. 

Either way, having an essentially tax-free business (and income) is definitely a massive benefit, that you can further exploit by ensuring you invest the profits properly. If your goal is to increase your real estate portfolio, for example, then owning real estate in the US and paying peanuts for taxes for them is the best way to do it.