What Is a 1040NR Form and Who Needs to File It?

The U.S. tax system requires different forms depending on residency status and income sources. Nonresident aliens earning certain types of U.S. income must file Form 1040NR to report earnings and determine tax obligations. Filing incorrectly or failing to file can result in penalties or loss of potential refunds.

Understanding when this form is required and how to complete it properly ensures compliance while potentially reducing tax liability.

Who Qualifies

Nonresident aliens with U.S.-sourced taxable income must file Form 1040NR. Tax residency is determined by the substantial presence test or visa classification. Those who do not meet the substantial presence threshold—183 days over a three-year period using a weighted formula—are classified as nonresidents. Certain visa holders, such as F-1 or J-1 students in their exempt years, also qualify.

Foreign individuals engaged in business or trade in the U.S. must file if they have effectively connected income (ECI), including self-employed individuals providing services in the U.S. or those in partnerships generating taxable earnings. Even if no tax is owed, filing is necessary to report income and claim treaty benefits.

Nonresident aliens receiving passive income, such as dividends, rental income, or royalties, may need to file if tax was incorrectly withheld or if they qualify for a refund. Foreign athletes, entertainers, and professionals working temporarily in the U.S. often fall into this category due to specific withholding rules.

Income That Requires This Form

Income reported on Form 1040NR falls into two categories: effectively connected income (ECI) and fixed, determinable, annual, or periodic (FDAP) income. ECI, tied to active business or employment in the U.S., is taxed at graduated rates. FDAP income, such as interest, dividends, and royalties, is generally subject to a flat 30% withholding rate unless reduced by a tax treaty.

Wages from U.S. employment are a common form of ECI. Nonresident aliens working for American companies or foreign businesses with U.S. operations must report earnings, even if taxed by their home country. Independent contractors performing services in the U.S. may also be subject to self-employment taxes depending on visa status and treaty provisions.

Investment income can also trigger a filing requirement. Dividends from U.S. corporations, rental income from U.S. properties, and capital gains from selling U.S. real estate or securities must be reported. While capital gains are generally not taxable for nonresident aliens unless they are present in the U.S. for at least 183 days in a given year, real estate sales are an exception. The Foreign Investment in Real Property Tax Act (FIRPTA) mandates a 15% withholding on the gross sale price of U.S. real estate owned by foreign individuals, which can be adjusted when filing Form 1040NR.

Scholarships, fellowships, and grants may also be taxable depending on the source and purpose of the funds. Amounts used for tuition and required fees are generally exempt, but stipends for living expenses, teaching, or research assistance are taxable. Some students and researchers may qualify for tax treaty provisions that reduce or eliminate taxation on these payments, but they must file Form 1040NR to claim these benefits.

Deductions and Exemptions

Nonresident aliens filing Form 1040NR have limited deductions but can reduce taxable income with certain expenses. One of the most significant deductions is for trade or business expenses. If earning ECI, they can deduct ordinary and necessary expenses related to generating that income, such as travel, lodging, and business-related meals, as well as depreciation on business assets.

State and local income taxes paid in U.S. jurisdictions may also be deducted, especially for nonresidents working in states with income tax, such as California or New York. Unlike U.S. residents, who can choose between the standard deduction and itemized deductions, nonresident aliens must itemize unless they qualify as residents for tax purposes under special rules.

Charitable contributions to U.S.-based tax-exempt organizations can lower taxable income if they meet IRS guidelines. Donations to foreign charities do not qualify. Additionally, gambling losses can be deducted but only up to the amount of gambling winnings reported as income. This is particularly relevant for nonresidents visiting the U.S. for gaming activities, as gambling winnings are often subject to a flat withholding tax.

Filing Process

Completing Form 1040NR requires gathering all relevant income documents, such as Form W-2 for wages or Form 1042-S for income subject to withholding. These documents provide details on earnings and taxes withheld, necessary for accurately reporting income and determining if additional tax is owed or if a refund is due. Ensuring all income statements are received before filing is important, as discrepancies can lead to processing delays or IRS inquiries.

The form is structured similarly to the standard 1040 but includes sections specific to nonresident aliens. Taxpayers must enter identifying information, including a taxpayer identification number (TIN), which can be either a Social Security number (SSN) or an Individual Taxpayer Identification Number (ITIN) if ineligible for an SSN. If an ITIN is needed, Form W-7 must be submitted with the tax return, which can extend processing time.

Tax Treaty Considerations

Many nonresident aliens benefit from tax treaties between their home country and the United States, which can reduce or eliminate certain tax liabilities. These agreements dictate how specific types of income are taxed and often provide exemptions or lower withholding rates on wages, dividends, interest, and royalties.

To claim treaty benefits, taxpayers must reference the applicable treaty article on Form 1040NR and may need to submit Form 8833, Treaty-Based Return Position Disclosure, if the claim involves a significant tax exemption. Many treaties allow students and researchers to exclude a portion of their income from taxation for a limited number of years. Some treaties also reduce withholding rates on investment income, such as the U.S.-Canada treaty, which lowers the standard 30% tax on dividends to 15% for eligible residents. Failure to properly claim these benefits can result in unnecessary tax payments, and in some cases, refunds may only be available through an amended return if the treaty position was not initially reported.