1040-NR vs 1040
1040NR vs 1040: Nonresident Aliens (NRA) — including expatriates who relinquish their Green Card or renounce their U.S. citizenship and are no longer a U.S. person for tax purposes — will (usually) not have to file a form 1040 or have a form 1040 filing requirement. They are also no longer required to file the FBAR (FinCEN Form 114), FATCA Form 8938, and countless other intrusive international information reporting forms. This is a big relief for most NRAs. But, the nonresident alien may not be completely out of the woods yet. If the NRA still has U.S. source income, such as FDAP Income or ECI they may have certain US tax requirements to consider. The failure to file may result in significant tax consequences.
A form 1040 is used by U.S. persons to report worldwide income. A U.S. Person will generally include:
- U.S. Citizen
- Legal Permanent Resident
- Foreign National who meets the substantial presence test
A Form 1040NR is file by nonresident aliens (NRA) who are not U.S. persons, but still have certain U.S. sourced income to report — this includes expatriates as well.
Who is a Nonresident?
As provided in the instructions is a general definition as follows:
- “Generally, you are considered a nonresident alien for the year if you are not a U.S. resident under either of these tests. However, see Dual-Resident Taxpayer, later, if you are a resident of the United States under these tests but are eligible to claim benefits as a resident of a foreign country under a U.S. income tax treaty.”
1040NR Table A: Who Must File Form 1040-NR
There are several categories of filers who may have to file an annual Form 1040-NR.
As provided by the IRS:
You must file Form 1040-NR if any of the following conditions apply to you.
- You were a nonresident alien engaged in a trade or business in the United States during 2019. You must file even if:
- You have no income from a trade or business conducted in the United States,
- You have no U.S. source income, or
- Your income is exempt from U.S. tax under a tax treaty or any section of the Internal Revenue Code.
- You were a nonresident alien not engaged in a trade or business in the United States during 2019 and:
- You received income from U.S. sources that is reportable on Schedule NEC, lines 1 through 12; and
- all of the U.S. tax that you owe was withheld from that income.
- You owe any special taxes, including any of the following.
- Alternative minimum tax.
- Additional tax on a qualified plan, including an individual retirement arrangement (IRA), or other tax-favored account. (If you are filing a return only because you owe this tax, you can file Form 5329 by itself.)
- Household employment taxes. (If you are filing a return only because you owe these taxes, you can file Schedule H (Form 1040 or 1040-SR) by itself.)
- Social security and Medicare tax on tips you did not report to your employer or on wages you received from an employer who did not withhold these taxes.
- Recapture of first-time homebuyer credit. See the instructions for line 59b.
- Write-in taxes or recapture taxes, including uncollected social security and Medicare or RRTA tax on tips you reported to your employer or on group-term life insurance and additional taxes on health savings accounts. See the instructions for line 60.
- You received HSA, Archer MSA, or Medicare Advantage MSA distributions.
- You had net earnings from self-employment of at least $400 and you are a resident of a country with whom the United States has an international social security agreement. See the instructions for line 55.
- Advance payments of the premium tax credit were made for you, your spouse, or a dependent who enrolled in coverage through the Marketplace. You or whoever enrolled you should have received Form(s) 1095-A showing the amount of the advance payments.
- Advance payments of the health coverage tax credit were made for you, your spouse, or a dependent. You or whoever enrolled you should have received Form(s) 1099-H showing the amount of the advance payments.
- You are the personal representative for a deceased person who would have had to file Form 1040-NR. A personal representative can be an executor, administrator, or anyone who is in charge of the deceased person’s property.
- You represent an estate or trust that has to file Form 1040-NR. Change the form to reflect the provisions of subchapter J, chapter 1, of the Internal Revenue Code.
- You held a qualified investment in a qualified opportunity fund (QOF) at any time during the year. You must file your return with Form 8997 attached. See the Instructions for Form 8997 for additional reporting requirements.
- Gross income means all income you received in the form of money, goods, property, and services that is not exempt from tax. In most cases, it includes only income from U.S. sources. Gross income includes gains, but not losses, from asset transactions.
What is the 1040-NR Due Date?
The due date for 1040-NR varies based on whether it is an individual or not.
- Individual: April 15th
- Estate and Trusts: Varies
- Extension: Varies
Closer Connection to Foreign Country
Even if a person meets the requirements to have to file a Form 1040, they may qualify for file a 1040-NR instead – this benefits the taxpayer, because it means they are being taxed on their U.S. sourced income only and not their worldwide income.
As provided by the IRS:
“Even though you otherwise would meet the substantial presence test, you can be treated as a nonresident alien if you:
- Were present in the United States for fewer than 183 days during 2019
- Establish that during 2019 you had a tax home in a foreign country, and
- Establish that during 2019 you had a closer connection to one foreign country in which you had a tax home than to the United States unless you had a closer connection to two foreign countries.
You are not eligible for the closer connection exception if you have an application pending for adjustment of status to that of a lawful permanent resident or if you have applied, or have taken steps to apply, for lawful permanent residence. Each spouse must file a separate Form 8840 to claim the closer connection exception.
Timing is crucial. If you are seeking to become a Legal Permanent Resident AND still want to claim closer connection test, you should be aware of when you actually apply for LPR status.
In conclusion, when a person is a US person versus nonresident, the tax rules are different. Generally, a US person is taxed on their worldwide income and they have significant reporting requirements for their foreign assets, accounts, and investments. Conversely, when a person is a non-resident, the United States is limited as to how it can tax the taxpayer, and what income the taxpayer must report.
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