What Is NRA Tax? An Overview for Non-Resident Aliens

The United States tax system has distinct rules for individuals who are not U.S. citizens or permanent residents. Understanding these tax provisions, often called “NRA tax,” is important for non-resident aliens (NRAs) earning income from U.S. sources. The Internal Revenue Service (IRS) applies different tax treatments to NRAs compared to U.S. citizens and resident aliens.

Determining Non-Resident Alien Status

An individual’s tax status, whether non-resident alien or resident alien, is determined by IRS criteria. An alien is any individual who is not a U.S. citizen or national. This distinction is important because it dictates how U.S. source income is taxed.

The IRS uses two primary tests to classify an individual as a resident alien: the Green Card Test and the Substantial Presence Test. An individual who does not meet either test is considered a non-resident alien. If an individual holds a U.S. green card, they pass the Green Card Test and are treated as a resident alien.

The Substantial Presence Test is based on the number of days an individual is present in the United States. To meet this test, an individual must be present for at least 31 days in the current year and 183 days during a three-year period that includes the current year and the two immediately preceding years.

There are exceptions to the Substantial Presence Test. These include “exempt individuals” such as students, teachers, trainees, and foreign government employees. Additionally, an individual may claim a “closer connection” to a foreign country if they were present in the U.S. for less than 183 days in the current year and maintain a stronger connection to that foreign country.

Categories of Taxable Income

The U.S. tax system categorizes income earned by non-resident aliens into two types: Effectively Connected Income (ECI) and Fixed, Determinable, Annual, or Periodical (FDAP) income. This distinction is important because each category is subject to different tax rates and rules.

Effectively Connected Income (ECI) arises from a U.S. trade or business. This includes wages, salaries, professional fees, or self-employment income. Income from certain real estate investments may also be treated as ECI. ECI is taxed at the same graduated rates that apply to U.S. citizens and resident aliens.

Fixed, Determinable, Annual, or Periodical (FDAP) income is passive income from U.S. sources not connected with a U.S. trade or business. Examples include interest, dividends, rents, royalties, pensions, annuities, certain gambling winnings, and alimony payments.

The difference between ECI and FDAP income lies in their tax treatment. FDAP income is subject to a flat 30% tax rate on the gross amount, unless a lower rate is provided by a tax treaty. Unlike ECI, deductions are not allowed against FDAP income.

How Non-Resident Alien Income is Taxed

Effectively Connected Income (ECI) is subject to the same progressive tax rates that apply to U.S. citizens and resident aliens. Allowable deductions related to ECI are taken before taxation.

For foreign corporations with ECI, a branch profits tax may also apply. This tax is imposed on the foreign corporation’s effectively connected earnings and profits not reinvested in a U.S. trade or business.

Fixed, Determinable, Annual, or Periodical (FDAP) income is subject to a flat 30% tax rate on the gross amount. This tax is collected through withholding at the source, where the U.S. payer deducts the tax before remitting payment to the non-resident alien. For example, a U.S. company paying dividends to an NRA would withhold 30%.

Certain types of FDAP income may be exempt from U.S. tax or subject to a reduced withholding rate. For example, interest on deposits with U.S. banks and certain portfolio interest from U.S. sources are generally exempt from the 30% tax.

Filing Requirements for Non-Resident Aliens

Non-resident aliens with U.S. source income are required to file a U.S. income tax return. The primary form for this is Form 1040-NR, U.S. Nonresident Alien Income Tax Return. This form reports both Effectively Connected Income and Fixed, Determinable, Annual, or Periodical income, and is used to claim deductions or credits.

An NRA must file Form 1040-NR if engaged in a U.S. trade or business during the tax year, even if income was exempt or zero. The form requires personal information, income details, and an Individual Taxpayer Identification Number (ITIN) if no Social Security Number. It also reports income where not all tax was withheld or special taxes are owed.

In addition to Form 1040-NR, NRAs may need other forms. Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting, is used to establish foreign status and claim treaty benefits for FDAP income. Without a completed Form W-8BEN, the payer may be required to withhold tax at the default 30% rate.

Exempt individuals, such as students and scholars, who have no taxable income may still need to file Form 8843, Statement for Exempt Individuals. This form explains their exempt status from the Substantial Presence Test. The tax filing deadline for NRAs who received wages subject to U.S. tax withholding is April 15 of the following year. Those who did not receive such wages have a June 15 deadline.

Impact of Tax Treaties

Tax treaties are bilateral agreements between the United States and other countries. They prevent double taxation and can alter U.S. tax obligations for non-resident aliens by reducing or eliminating U.S. tax on certain income. Specific benefits vary depending on the treaty and the individual’s country of residence.

Treaties provide for reduced withholding rates on FDAP income, such as dividends, interest, and royalties. They can also offer exemptions for certain types of ECI, like income from personal services, if the individual’s U.S. presence or income earned falls below specified thresholds.

Most U.S. tax treaties include a “saving clause” that preserves each country’s right to tax its own citizens and residents. However, many treaties also contain exceptions for non-resident aliens, allowing them to claim certain treaty benefits. These exceptions often apply to students, teachers, and researchers.

If a non-resident alien claims a tax treaty benefit that overrides a provision of the Internal Revenue Code, they must disclose this to the IRS. This disclosure is made on Form 8833, Treaty-Based Return Position Disclosure. Failure to disclose a treaty-based return position when required can result in penalties.