U.S. Taxable Income for Nonresident & Dual-Status Aliens
Full-Year Nonresidents are taxable only on U.S. source income and income effectively connected with a U.S. trade or business. Full-year nonresident aliens file and pay using taxes IRS form 1040NR.
Part-Year / Dual-Status Aliens are considered a Nonresident for the time before or after they meet the residency requirements and must allocate income between residency and nonresidency periods. The resident period includes worldwide income received during the residency period and is reported on IRS form 1040. The nonresidency period includes only U.S. source income and income effectively connected with a U.S. trade or business for the nonresidency period and is reported on Form 1040NR.
U.S. Sourced includes:
- Compensation such as wages or service fees to independent contractors are generally sourced where the services were performed, except in the case of nonresident aliens temporarily present in the U.S. so if the services are performed in the U.S. the income would be U.S. sourced.
- Rental income from property located in the U.S. along with royalty income from the sale of natural resources extracted in the U.S.
- Gains on sales of real property located in the U.S.
- Dividends generally are sourced where the corporation is incorporated. However, dividends received from a foreign corporation are treated in part as from U.S.-sources if 25% or more of the corporation’s gross income was effectively connected with the conduct of a U.S. business for the 3-year period (or shorter period of its existence) ending with the close of its tax year preceding the declaration of the dividends.
- Interest generally is sourced where the debtor is located.
- Insurance income from insuring U.S. risks is U.S.-source.
- Other items as specified in Internal Revenue Service Code Sec. 861.
As you can see determination of residency status and income sourcing can be quite complex. An accurate determining of filing requirements and taxability requires a detailed understanding of the relevant IRS code along with a review of the specific treaties in place between the countries involved and the U.S.
Failure to file and pay taxes due as a nonresident, resident, or citizen can result in penalties, liens, and other adverse consequences so if you are unsure about your responsibilities consult a tax professional knowledgeable in this area.