Thursday, March 20, 2008

U.S. Tax Filing Requirements for Non-Residents

You are a nonresident if you are an exempt individual or you did not complete Substantial Presence Test for number of days in the U.S. and you did not choose under "First-year Choice" to be treated as dual-status or resident for the year.

Exempt Individual
The term "exempt individual" refers to anyone in the following categories.
* An individual temporarily present in the United States as a foreign government-related individual.
* A teacher or trainee temporarily present in the United States under a “J” or “Q” visa, who substantially complies with the requirements of the visa, is normally exempt for 2-years.
* A student temporarily present in the United States under an “F,” “J,” “M,” or “Q” visa, who substantially complies with the requirements of the visa, is normally exempt for 5-years.
* A professional athlete temporarily in the United States to compete in a charitable sports event.
Note: As an "Exempt Individual" you are not exempt for state residency purpose. That is you are part year resident or full year resident of the state in which you live.

A nonresident must file the 2009 and 2010 tax return:
1. If the income in the U.S. and from the U.S. sources is $3,650 or more, or
2. The self employed income is $400 or more.
Even if your income is below $3,650, you should file tax return to get refund of all the income taxes withheld from your paycheck.

Normally a non-resident exempt individual's income is not subject to Social Security and Medicare taxes. Read More.

Bank Interest on Checking or Saving Account
Bank interest and interest on CDs are not considered taxable income for non-resident aliens, and are not reported on the tax returns. But if you file taxes as a resident alien, bank interest is a taxable income.

Hope Credit or Education Credit
Non-resident aliens can't claim tuition fee deduction or Hope credit or education credit. Non-residents are not eligible for Earned Income Credit. However, they can get Student Loan deduction just as resident aliens. Student loan deduction is shown on Form 1040NR-EZ line 9 and Form 1040NR line 32.

Filing Form 1040NR or 1040NR-EZ
For the federal tax return, a nonresident must file Form 1040NR or 1040NR-EZ and Form 8843. On the nonresident return, you will only get your personal exemption, itemized deductions and other deductions as per tax treaty. Most common itemized deduction is state income tax withheld from your paycheck. (Note: For some countries, the tax treaties allow them to claim exemption deduction for spouse (if spouse did not have any income in the year) and for children. One such example is India.)

File the Form 1040NR or 1040NR-EZ with check for tax due or without any check is filed with: Department of Treasury, Internal Revenue Service Center, Austin, TX 73301-0215 USA. If you are enclosing check for the tax due payment, make sure to attach Payment Voucher 1040-V. Also on the check, write Form 1040NR (or Form 1040NR-EZ) and your SSN.

A nonresident tax return can not be e-filed, and most of the available software do not do nonresident tax returns.

Form 8843
If you are an exempt individual, and you are not required to file the tax return, you must file Form 8843 alone. Normally you attach Form 8843 to your 2008 income tax return. If you do not have to file a return, send Form 8843 to the Internal Revenue Service Center, Austin TX 73301-0215, by the due date for filing Form 1040NR or Form 1040NR-EZ.

If you do not timely file Form 8843, you cannot exclude the days you were present in the United States as a student. This does not apply if you can show by clear and convincing evidence that you took reasonable actions to become aware of the filing requirements and significant steps to comply with those requirements.

Students from India. Students from India can claim benefits of US India Tax Treaty Article 21(2). You can claim standard deduction instead of itemized deductions. You can also claim exemption for your spouse if your spouse did not have any gross income in 2010 and can not be claimed dependent on another US taxpayer's 2010 tax return. You can claim exemption for each of your dependents if they meet the requirements.

Filed Resident Tax Return Instead of Non-Resident Tax Return
Many "Exempt Individuals" file residents return by mistake. A large number of tax preparer have limited knowledge about non-resident tax returns and they also make this mistake. Residents pay FICA taxes on their earned income while nonresidents do not pay FICA taxes. By filing resident tax return you claimed standard deduction and deductions allowed only to the residents but your employer did not withhold FICA taxes.

You may file amended tax return Form 1040X along with properly done non-resident tax return Form 1040NR or 1040NR-EZ and Form 8843. Pay the tax due. Attach a letter for Waiver of Penalty giving your reasons why this happened.

Your Visa Type
If you are on work visa, for example H1-B or L1, and you are filing a non-resident tax return, you will only get personal exemption and itemized deductions. Even if you are married and your are filing a nonresident tax return, you won't get exemption for your spouse or child. A L1 or H1-B visa holder may be eligible to file resident tax return after he/she meets the Substantial Presence Test and other requirements. Read more...

If you have F1/OPT, you will get personal exemption, itemized deductions and deduction as per tax treaty. And, if you are nonresident and have F1/OPT as well as H1-B income in the same year, you will get personal exemption, itemized deductions, and treaty deduction for OPT income only.

More Articles on Tax for Aliens
1. U.S. Tax Filing Requirements for Non-Residents
2. Substantial Presence Test
3. Social Security and Medicare (FICA) Taxes for Non-resident Exempt Individual
4. U.S. Tax Treaties for Professors, Teachers and Researchers
5. U.S. Tax Treaties for Students and Apprentices
6. Mandatory Reporting of Foreign Bank and Financial
7. The U.S. Visas
More... List of Articles

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