U.S. Taxation for Non-Resident Aliens

Understanding your U.S. tax obligations as a non-resident alien is paramount for anyone earning income from U.S. sources. The United States tax system is unique in its global reach, and a specific, complex set of rules applies to foreign individuals and entities with financial ties to the U.S. As of July 25, 2025, this guide provides a detailed overview of U.S. taxation for non-resident aliens, clarifying your status, responsibilities, potential liabilities, and how to navigate the intricacies of the U.S. tax code with confidence.

Part I: Determining Your Tax Status and Filing Requirement

Before you can address your tax obligations, you must first determine your status in the eyes of the Internal Revenue Service (IRS). For tax purposes, an individual is either a U.S. resident alien or a non-resident alien.

Determining Your Tax Status

Your tax status is not determined by your immigration status but by two specific tests:

• The Green Card Test: If you are a Lawful Permanent Resident of the United States at any time during the calendar year, you are considered a U.S. resident alien for tax purposes and must file Form 1040, reporting your worldwide income.
• The Substantial Presence Test: If you do not hold a green card, you may still be considered a U.S. resident alien if you are physically present in the U.S. for a significant period. This test involves a mathematical formula:
  • You must be physically present in the U.S. for at least 31 days during the current year, and
  • The sum of the following must be 183 days or more:
    • All days of physical presence in the current year.
    • One-third of the days of physical presence in the preceding year.
    • One-sixth of the days of physical presence in the year before that.

If you do not meet either the Green Card Test or the Substantial Presence Test, you are classified as a non-resident alien (NRA) for tax purposes. Certain individuals, such as students on F or J visas, teachers, and diplomats, are considered “exempt individuals,” and their days of presence in the U.S. do not count toward the Substantial Presence Test for a limited time.

Who Must File Form 1040-NR?

As a non-resident alien, you are required to file Form 1040-NR, U.S. Nonresident Alien Income Tax Return, if you meet either of the following conditions:

• You were engaged in a trade or business in the United States during the year. This applies even if you had no income from that trade or business or if your income is exempt from U.S. tax under a tax treaty.
• You were not engaged in a U.S. trade or business but had U.S. source income on which the tax liability was not fully paid through tax withholding at the source.

You must also file if you wish to claim a refund of over-withheld or overpaid tax or to claim certain tax deductions or credits.

Part II: The Two Core Categories of Non-Resident Alien Income

The U.S. taxes non-resident aliens on two primary classifications of income, each with a distinct tax treatment. This distinction applies only to foreign persons, including non-resident individuals, foreign corporations, partnerships, estates, and trusts. U.S. persons are taxed on their worldwide income on a net basis by default.

• Effectively Connected Income (ECI): ECI is income earned from engaging in a U.S. trade or business, such as salary, wages, self-employment income, and rental income if a specific election is made. ECI is taxed at the same graduated marginal tax rates (10%-37%) that apply to U.S. citizens and is reported on the main page of Form 1040-NR. You are allowed to claim certain deductions related to this income.
• Fixed, Determinable, Annual, or Periodical (FDAP) Income: FDAP income is typically passive income from U.S. sources that is not effectively connected with a U.S. trade or business. Common examples include interest, dividends, rents, and royalties. This income is taxed at a flat 30% rate on a gross basis, which may be reduced by a tax treaty. No deductions are allowed against FDAP income. The tax is reported on Schedule NEC (Form 1040-NR).

	FDAP (Fixed, Determinable, Annual, Periodic)	ECI (Effectively Connected Income)
Examples	Interest, dividends, royalties, and rents (by default)	Income from a U.S. trade or business, such as wages, consulting fees, and real estate income with an ECI election
Tax Basis	Gross income (no deductions allowed)	Net income (deductions are allowed)
Tax Rate	30% flat rate, unless reduced by a treaty	Graduated rates from 10% to 37%, the same as for U.S. persons
Withholding	Yes, 30% is withheld by the payer, unless a treaty provides for a lower rate	Withholding depends on the type of income; estimated tax payments may be required
Reporting	The withholding agent reports on Form 1042-S; the NRA files Form 1040-NR only if required	Mandatory filing of Form 1040-NR, often with schedules like E or C

Part III: The Critical Rules on Deductions and Credits

The rules for deductions and credits for non-resident aliens differ significantly from those for U.S. residents.

The Standard Deduction

Non-resident aliens are not permitted to claim the standard deduction. Instead, you must itemize deductions on Schedule A (Form 1040-NR) to reduce your taxable income.

Allowable Itemized Deductions

NRAs are generally restricted to deductions with a direct connection to their ECI. These can include:

• State and Local Income Taxes (up to $10,000 per household).
• Gifts to qualified U.S. charities.
• Casualty and theft losses for property located in the U.S. under specific circumstances.

Tax Credits

While many credits are disallowed, NRAs may be eligible for the Child Tax Credit (if a resident of Canada or Mexico), the Foreign Tax Credit, and the Child and Dependent Care Credit under specific conditions. To claim any deductions or credits, you must file a “true and accurate” tax return on time. Failure to file can result in the IRS disallowing all deductions and credits.

Part IV: FIRPTA Withholding on U.S. Real Estate Sales

When a non-resident alien sells U.S. real estate, the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) requires the buyer to withhold a portion of the sale proceeds to ensure the collection of potential U.S. income tax.

Standard Withholding Rate

The standard FIRPTA withholding rate is 15% of the amount realized (typically the gross sales price). The buyer is the party responsible for withholding and remitting this tax to the IRS.

Reduced Rate and Exemptions for Personal Residences

• A full exemption from withholding exists if the buyer intends to use the property as their residence and the sales price is $300,000 or less.
• The withholding rate is reduced to 10% if the buyer will use the property as their residence and the sales price is more than $300,000 but not more than $1,000,000.

Exemption for Non-Recognition

Withholding may not be required if the seller provides the buyer with a written notice that no gain or loss is recognized on the transfer. This can occur in certain tax-deferred exchanges or due to a U.S. tax treaty. Sellers can also apply for a withholding certificate from the IRS to reduce or eliminate the withholding amount if the standard rate would lead to an overpayment of their actual tax liability.

Part V: U.S. Gift and Estate Tax for Non-Resident Aliens

The U.S. gift and estate tax rules for NRAs are distinct and depend on the type and location of the asset. It is crucial to understand that when these taxes are levied, they are calculated using a unified tax rate schedule that is completely separate from the rates used for ordinary income tax.

U.S. Gift Tax for NRAs

A non-resident alien (NRA) is subject to U.S. gift tax only on transfers of real and tangible property situated in the United States.

Taxable Gifts:

• Real property located in the U.S.
• Tangible personal property physically located in the U.S. (e.g., art, jewelry, vehicles, cash).

Non-Taxable Gifts:

Gifts of intangible property are generally not subject to U.S. gift tax for NRAs. This is a significant planning opportunity and includes assets such as:

• Stocks in U.S. corporations.
• Bonds and debt obligations of a U.S. person or entity.
• Cash held in a U.S. bank or brokerage account.

Exclusions:

• Annual Exclusion: For 2024, an NRA can gift up to $18,000 per person to any number of individuals without gift tax consequences.
• Spousal Exclusion: For 2024, an NRA can gift up to $185,000 to a non-U.S. citizen spouse tax-free. (Note: If the spouse is a U.S. citizen, gifts are generally unlimited).

Filing Requirements:

An NRA must file Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, if they make a gift of U.S. real or tangible property that exceeds the annual exclusion amounts.

U.S. Estate Tax for NRAs

Upon death, an NRA is subject to U.S. estate tax on their U.S.-sited assets. Unlike the gift tax rules, the definition of U.S.-sited assets for estate tax purposes is broader and includes U.S. stocks and certain debt obligations. The lifetime exemption for an NRA is only $60,000. This credit cannot be used to offset gift taxes during the NRA’s lifetime; it can only be applied against the U.S. estate tax at death.

Part VI: Taxation of Specific Investment Income

While the general rules for ECI and FDAP provide a framework, the U.S. tax code contains critical exceptions for specific types of investment income earned by non-resident aliens. Understanding these rules is essential for any NRA investing in the U.S. market.

1. Taxation of Capital Gains

For non-resident aliens, the tax treatment of capital gains depends heavily on the type of asset sold and the number of days the alien is present in the United States.

General Rule:

A non-resident alien is generally not subject to U.S. tax on capital gains from the sale of U.S. personal property, such as stocks, bonds, and mutual funds, provided the gains are not effectively connected with a U.S. trade or business and the NRA is in the U.S. for less than 183 days. This is a significant advantage for foreign investors.

Exceptions to the General Rule:

Capital gains are taxable to an NRA in the following situations:

• FIRPTA: Gains from the sale of a U.S. real property interest are considered ECI and are subject to tax and withholding.
• 183-Day Presence Rule: If a non-resident alien is physically present in the U.S. for 183 days or more during the tax year, their U.S. source capital gains (from sources other than U.S. real property) become taxable at a flat 30% rate (or a lower treaty rate). This tax applies even if the gain is not connected to a U.S. trade or business.

	U.S. Taxable?	Withholding?	Notes
Sale of U.S. stocks (not real estate)	No	No	If <183 days in U.S.
Sale of stock with >183 U.S. days present	Yes (30%)	No	Uncommon
Sale of U.S. real estate (FIRPTA)	Yes	15%	Final tax on 1040-NR
Sale of U.S. real property through partnership	Yes	37% (if NRA partner)	Net ECI applies

2. Taxation of Dividends

Dividends paid by U.S. corporations are considered U.S. source FDAP income.

• Tax Rate: This income is subject to a flat 30% withholding tax. The paying agent (e.g., a brokerage firm) is responsible for withholding this tax and remitting it to the IRS.
• Tax Treaties: The 30% rate can often be reduced by an applicable income tax treaty between the U.S. and the NRA’s country of residence. Rates of 15% are common under many treaties. To claim treaty benefits, the NRA must typically provide a Form W-8BEN to the withholding agent.

3. Taxation of Interest Income

While interest from U.S. sources is technically classified as FDAP income, there are two major exceptions that render most types of interest non-taxable for non-resident aliens.

• The Portfolio Interest Exemption: U.S. source “portfolio interest” received by a non-resident alien is completely exempt from the 30% tax. To qualify, the interest must be paid on debt obligations (such as corporate bonds or U.S. government securities) that were issued after July 18, 1984, and are in registered form. The NRA must provide a Form W-8BEN to the payer to certify their foreign status. This exemption does not apply if the interest is received from a corporation or partnership in which the NRA owns 10% or more of the voting power.
• The Bank Deposit Interest Exemption: Interest earned by a non-resident alien on deposits held at U.S. banks, savings and loan associations, credit unions, and insurance companies is not considered U.S. source income and is therefore not subject to U.S. income tax. This exemption applies as long as the interest is not effectively connected with a U.S. trade or business.

Due to these significant exemptions, most interest income and non-real estate capital gains earned by foreign investors in the U.S. are not subject to U.S. taxation.

Part VII: Taxation of Self-Employment Income

If a non-resident alien is self-employed and performs services in the United States, the income is considered ECI.

• Tax Treatment: The income is taxed on a net basis after business expenses are deducted, using the graduated U.S. income tax rates. A Form 1040-NR with Schedule C must be filed.
• Self-Employment Tax: Non-resident aliens are generally exempt from self-employment tax (Social Security and Medicare) unless a totalization agreement or treaty applies.
• Withholding: There is no automatic withholding on self-employment income for NRAs. Instead, they are required to make quarterly estimated tax payments using Form 1040-ES(NR).

Part VIII: Other Filing Considerations and Consequences

• Mandatory Schedules: Filing Form 1040-NR often requires attaching other forms, such as Schedule OI (Other Information), Schedule A (Itemized Deductions), and Schedule NEC (Tax on Income Not Effectively Connected). NRAs who own a single-member LLC in the USA must also file Form 5472.
• State Tax Filings: Earning income in a U.S. state with an income tax will likely trigger a separate state tax filing requirement.
• Consequences of Non-Compliance: Failing to file a required Form 1040-NR or pay taxes due can lead to severe consequences. These include:
  • Penalties and Interest: A failure-to-file penalty (up to 25% of unpaid tax) and a failure-to-pay penalty (up to 25% of unpaid tax), plus interest.
  • Loss of Deductions and Credits: The IRS can deny all deductions and credits if you fail to file a timely return.
  • Immigration Consequences: Tax non-compliance can be a significant barrier to future visa applications, green card applications, or naturalization.

Navigating this landscape requires careful attention to detail and a thorough understanding of a distinct and often counter-intuitive set of tax laws. Given the complexity, seeking professional guidance is often a prudent course of action.