U.S. Nonresident Alien Income Tax Return - Form 1040NR
A nonresident alien has to report his income derived from U.S. sources by filing annually a U.S. tax return - Form 1040NR. ​Generally, you are considered a nonresident alien if you are neither a citizen of the United States nor a resident of the United States. You are considered U.S. resident if you meet either the green card test or the substantial presence in the U.S. test.
As a foreign investor who has to pay, potentially, taxes in the U.S. on income derived from U.S. sources (such as U.S. real estate), the IRS had to come up with an idea of how to combat tax evasion and to ensure that a foreign investor will file his annual tax return. This is achieved by tax withholding. A tax withholding is a payment to the government (IRS) by the payer of the income rather than by the recipient of the income (foreign investor), as an advance.
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Unlike Israel, passive income in the U.S. is subject to progressive tax rates - ranging between 10% and 37% (See table below). Therefore, the IRS requires payors to foreign investors to withhold tax, which can be as high as 37%. At the end of the year, when we calculate your actual taxable income and tax liability, any amount withheld above your actual tax liability will be refunded to you. For certain types of income, a reduced withholding tax rate might apply.
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This way, the IRS creates an economic stimulus to file the tax return. Most foreign investors might be eligible for tax refunds because:
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Their actual tax rate is much lower than the withholding tax rate.
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They can usually offset losing investments with profitable investments, which will decrease their overall taxable income.
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They can use their carry forward losses from prior years.
A nonresident alien had to obtain an Individual Taxpayer Identification Number (ITIN) to file the tax return. As a Certified Acceptance Agent, we can ease this process for you together with your tax return.
Elimination of Personal Exemption
Under the tax reform bill that passed into law at the end of 2017, the personal exemption was eliminated. Before this bill, an annual taxable income of $4,000 per individual was exempt from taxes.
Income Tax Brackets for 2019 (in 2020 amounts changed by ~1%)
Favorable Taxation of Certain Capital Gains
Long-term capital gains result from selling capital assets owned for more than one year. Long-term capital gains are subject to unique tax brackets that are generally more favorable than the regular income tax brackets. Long-term capital gains are taxed at a tax rate of 0% (if total income is up to $39,375), 15% (if total income is up to $434,550) and 20% (if income is over $434,550). Deducted depreciation will be taxed at a tax rate of 25%.
When To File
If you did not receive wages as an employee subject to U.S. income tax withholding, file Form 1040-NR by the 15th day of the 6th month after your tax year ends. A return for the 2019 calendar year is due by June 15, 2020. If you cannot file your return by the due date, ask us to file for you a 6-month extension.
Our suggestion is to send us your documents as soon as you receive all your K-1 (if you a member of a partnership) or when you receive the annual statement from the company managing your asset (if you a single-owner LLC, or directly own the asset).
In addition to submitting a federal tax return, you might be required to file also a state return and sometimes even a local/city return, depending on the type and location of your asset.
We have built an excellent reputation taking care of a wide variety of tax and accounting needs for our valued clients. Whether you need assistance with tax filings or something more complex, check out our list of specialties and get in touch to find out why so many businesses and individuals rely on us to manage their finances.
Contact us today for more specific consultation based on your personal information.