The Tax Return
Your Filing Status - What Difference Does It Make?
- Choosing the proper filing status is important because it is used to determine what tax rate schedule you will use for your effectively connected income.
An explanation of filing status is in Publication 519 on page 22. It is also discussed in the instructions to Form 1040NR on page 5.
- If you are single on the last day of the tax year, check box 1 or 2 on Form 1040NR (or box 1 on Form 1040NR-EZ) in the space under "Filing Status."
- Some married persons who have dependent children and who did not live with their spouse for at least the last six months of the tax year may file as single.
- If you are in this category, and are a resident of Canada, Mexico, Japan, Korea, or a U.S. national, see the additional requirements in the instructions to Form 1040NR on page 5.
- If you are married on the last day of the tax year, and your spouse is a nonresident alien, you do not have the option to file a return jointly with your spouse if you are also a nonresident alien.
- If you file Form 1040NR or Form 1040NR-EZ you must file as married filing separately.
An Option to file as a U.S. resident If your spouse is a U.S. citizen or resident on the last day of the tax year, you can choose to file as a U.S. resident, and file a joint return with your spouse on Form 1040, Form 1040A or Form 1040-EZ. This includes situations in which your spouse is a nonresident alien at the beginning of the year, but a resident alien at the end of the year. Using this option might reduce your tax liability because you can claim dependency exemptions and the standard deduction, but you will not be allowed to take advantage of any tax treaty benefits. See the discussion on how to make this choice on pages 10 and 11 of Publication 519.
Personal and Dependency Exemptions An exemption is a statutory allowance that represents an individual. The exemption amount is adjusted for inflation each year. For 2003 the amount is $3,050. That means you can deduct $3,050 on your return (line 38 on Form 1040NR or line 13 on Form 1040NR-EZ) for each exemption you are allowed. You can claim a personal exemption on your return for yourself, unless another taxpayer who supports you can claim a dependency exemption for you. You can claim dependency exemptions for qualifying individuals, over half of whose support was provided by you. A discussion of exemptions begins on page 23 of Publication 519. There is also guidance in the Form 1040NR instructions on page 5.
Generally, whether you are married or single, you cannot deduct dependency exemptions as a nonresident, even if you are supporting family members. That means only one exemption (your personal exemption) is typically allowed on Form 1040NR. However, residents of Mexico and Canada and nationals of the United States are allowed to deduct exemptions under the same rules as U.S. residents. You cannot file Form 1040NR-EZ if you claim dependency exemptions.
Determining What Income is Taxable and How to Report It
A nonresident alien is subject to U.S. income tax only on certain income from sources within the United States, and on certain income connected with the conduct of a trade or business in the United States. Generally, income from sources outside the United States is not reported on the U.S. tax return of a nonresident.
U. S. source income is divided into two general categories
- income that is effectively connected with a U.S. trade or business
- income that is not effectively connected with a U.S. trade or business.
Effectively connected income
Income that is effectively connected with a U.S. trade or business is reported on the first page of Form 1040NR or Form 1040NR-EZ. It is subject to tax at the same graduated rates that apply to residents, and can be offset by allowable deductions and exemptions. It can also be partially or fully excluded from your income by treaty provisions between the United States and your home country. See "Where to Find Treaty Information" under Tax Treaties. If you are in the United States on an F, J, M or Q visa, you are considered engaged in business in the United States. That means any U.S. source income that is taxable to you in connection with your scholarly activities, such as wages or scholarship and fellowship grants, is included in this category. Also, any other income from personal services performed in the United States is generally considered effectively connected income.
Not effectively connected income
U.S. source income that is not effectively connected with a U.S. trade or business is reported on page 4 of Form 1040NR (you cannot use Form 1040NR-EZ if you have this type of income). It is generally taxed at a flat 30% rate and cannot be reduced by deductions and exemptions. Treaty provisions between your home country and the United States might provide for a lower rate of tax. See "Where to Find Treaty Information" under Tax Treaties. Income that is typical of this category is dividends, capital gains in excess of capital losses, prizes, awards and certain gambling winnings. If you are a nonresident alien, capital gains on stocks, securities and other personal property are taxable to you only if you are present in the U.S. for at least 183 days during the tax year. Generally, you cannot offset gambling winnings with gambling losses. However, if you happen to be a resident of Canada, you can claim gambling losses to the extent of gambling winnings under the U.S./Canada treaty. (See the instructions for Form 1040NR, page 16.) Note that bank interest received by nonresident aliens is not taxable.
Nonresident aliens are generally subject to tax on wages for services performed in the United States as effectively connected income. The general rules on personal service income are in Chapter Two of Publication 519 (page 11).There are exceptions to this general rule, however. First, note in Chapter Three of Publication 519 (page 13) that nonresident visitors on F, J, M and Q visas can exclude pay received from a foreign employer, other than a foreign government. Second, any wages you receive might be exempt from U.S. tax under a treaty between your country and the United States. See Publication 901 and Tax Treaties to learn about treaty benefits.
If you received taxable wages during the year, you should receive a Form W-2 from your employer within 30 days after the end of the year. If any of your wages are exempt from income tax under a tax treaty, you should receive a Form 1042-S rather than a W-2. Record your taxable wages on line 8 of Form 1040NR or line 3 of Form 1040NR-EZ. Do not include any amount exempt by treaty on these lines. The Federal income tax withheld is recorded on line 54 of Form 1040NR or line 19 of Form 1040NR-EZ. Any wages exempt by treaty are reported on line 22 of Form 1040NR and on page 5, Item M. On Form 1040NR-EZ they are reported on line 6 and on page 2, Item J. Attach one copy of any Form W-2 or Form 1042-S you received from your employer to the front of the return.
Scholarships and fellowships
Any scholarship or fellowship grant that is taxable to you is considered effectively connected income and is subject to graduated rates. It is reported on line 12 of Form 1040NR and on line 5 of Form 1040NR-EZ. There are three ways, described below, in which part or all or your scholarship or fellowship grant can be excluded from income.
Foreign source. If you receive a grant from a foreign payer, it is considered foreign source income and is not taxable. Generally, the source of a scholarship or fellowship grant is the source of the payer, regardless of who actually disburses the funds. Foreign source payments should not be reported on your tax return.
If you are a candidate for a degree, you can exclude amounts received as a scholarship or fellowship grant that you use for
- tuition and other fees you pay to the university to attend class.
- fees, books, supplies and equipment that are purchased because of course requirements.
The amounts you used for expenses other than tuition and course-related expenses (such as room, board and travel) are generally taxable. Also, any part of a scholarship or grant that is compensation for services cannot be excluded as a qualified scholarship. Report the amounts excluded on lines 12 and 29 on Form 1040NR, and on lines 5 and 8 on Form 1040NR-EZ. Attach one copy of any Form W-2 or Form 1042-S you received from the payor to the front of the return. Beginning in 2001, schools are no longer required to report qualified scholarships you receive in the form of tuition benefits, so Form 1042-S will no longer show these amounts and they need not be reported on your return. You are supposed to attach a statement to your return if you exclude qualified scholarship payments that are reported on a Form 1042-S. (See the instructions to Form 1040NR or Form 1040NR-EZ).The statement should show
- the amount of the grant
- the dates it covers.
- the grantor's name.
- expenses the grant covers and conditions of the grant.
- how much is taxable and tax exempt.
Here is a fill-in scholarship statement form in PDF format that you can fill in on the screen and print out for this purpose.
Treaty exempt scholarships.
If there is a tax treaty between the United States and your home country, it might contain a provision excluding scholarship payments. See Publication 901and Tax Treaties to learn about treaty benefits. On Form 1040NR, put the excluded amount on line 22 (but not on line 12) and complete Item M on page 5. On Form 1040NR-EZ, put the excluded amount on line 6 (but not on line 5) and complete Item J on page 2. Attach one copy of any Form W-2 or Form 1042-S you received from the payor to the front of the return.
Reporting interest, dividend and capital gain income is a little confusing. There are spaces provided to show it on page 1 of Form 1040NR and on page 4 as income not effectively connected with a U.S. trade or business. Reporting it on page 1 means it is effectively connected to a U.S. trade or business. To be effectively connected, the investment income must have a direct economic relationship to your United States trade or business. As a student or scholar, your trade or business in the United States is studying, teaching, or doing research. Therefore, it is very unlikely you have effectively connected investment income.
Report your investment income on page 4 of Form 1040NR (you cannot use Form 1040NR-EZ if you have this type of income). The tax rate is a flat 30% unless a treaty provision between the United States and your home country reduces the rate. See Publication 901, Table 1 (page 26) to see if a lower treaty rate applies. Show the income on page 4 and any U.S. tax withheld on the income, and compute the tax. Report the tax computed on page 4 on page 2, line 44, and show any U.S. tax withheld on line 56a.
Exempt interest. Interest paid on deposits with banks, on accounts or deposits with certain financial institutions, or on certain amounts held by insurance companies, are exempt from U.S. tax even though they are U.S. source income. If you file Form 1040NR, do not report this interest on page 1or 4. Instead, answer "yes" to Question L on page 5 and provide the information requested there. If you file Form 1040NR-EZ, do not report this interest on page 1, but complete Question J on page 2.
Allowable Deductions and Credits
Deductions and credits are generally less available for nonresident aliens than for residents. First, deductions and credits can only offset effectively connected income; income that is not effectively connected to a U.S. trade or business cannot be reduced by deductions and credits. Second, while residents can claim the standard deduction in lieu of itemized deductions, nonresidents (other than students and business apprentices from India) are not allowed to claim the standard deduction. Third, while most nonresidents must itemize their deductions, the deductions available to itemize are limited. Following are brief descriptions of some of the more common deductions and credits that might be available to you. For more information see Publication 519, beginning on page 20.
If you moved to the United States or from one city to another during the year, you can deduct moving expenses if you work full-time for at least 39 weeks during the 12 months right after you moved. You will need Form 3903 (instructions included), which you can download from the Treasury's Forms and Publications page. If you want more information on moving expenses, you can also download Publication 521, Moving Expenses. If you claim moving expenses you must file Form 1040NR; you are not eligible to file the shorter Form 1040NR-EZ. The deduction for moving expenses is shown on line 25 of Form 1040NR.
Itemized deductions are a special category of deductions listed on Schedule A (page 3) of Form 1040NR. Nonresidents from India can elect to claim the greater of their itemized deductions or the standard deduction (described below). If you are a nonresident from a country other than India, you cannot claim the standard deduction; you are only allowed to claim itemized deductions that you paid during the year. Look through the types of allowable itemized deductions on Schedule A. Also see descriptions of the individual deductions beginning on page 22 of Publication 519. The deductions are totaled on Schedule A, and then reported on line 33 of Form 1040NR.
State income taxes
If you had state and/or local income tax withheld from your wages during the year, you can claim the amount withheld on line 1 of Schedule A (the amount is shown on your W-2). This is typically the only itemized deduction nonresident alien students have. If this is the only itemized deduction you have, you can file Form 1040NR-EZ if you otherwise qualify. The amount goes on line 10. If you have additional itemized deductions, you must file Form 1040NR.
The standard deduction
The standard deduction is a statutory allowance available to all residents. It is also available to nonresident students and business apprentices from India under Article 21(2) of the United States - India tax treaty. Those taxpayers who claim the standard deduction cannot also claim itemized deductions. Also, if you are married filing separately, and your spouse itemizes deductions, you cannot claim the standard deduction. The standard deduction for a single taxpayer for 2003 is $4,750; for married taxpayers filing separately it is $4,750. If you qualify for the standard deduction, see page 24 of Publication 519 for reporting requirements.
Credit for child and dependent care expenses
Although this credit has a line on Form 1040NR, it is very unlikely you will qualify for it. If you are married, you must file a joint return with your spouse to claim the credit. But as you will see under Filing Status, you are not allowed to file a joint return as a nonresident alien. If you are single, you must be able to claim a dependency exemption for a "qualifying individual" to get the credit. A qualifying individual is a dependent under the age of 13 or a disabled dependent. As you will find under Personal and Dependency Exemptions, dependency exemptions are typically not allowed to nonresident aliens. For more information on this credit, see Publication 519, page 25.
The foreign tax credit
If you receive foreign source income that you also pay U.S. tax on, you can claim a foreign tax credit. However, since you generally do not pay U.S. tax on foreign source income, the credit is typically not available to you on foreign source income. Also, you cannot take any credit for taxes imposed by a foreign country on your U.S. source income if those taxes were imposed because you are a citizen or resident of the foreign country. See page 26 of Publication 519