The Internal Revenue Service (IRS) requires taxpayers to file either Form 1040 or Form 1040NR based on their residency status as resident aliens or nonresident aliens. This guide will explain who should file each form, how to determine your residency status, and the tax implications for reporting U.S.-sourced income.
Who is Required to File Form 1040NR?
Form 1040NR, often referred to as the nonresident alien income tax return, is the IRS form used by nonresident aliens to report their U.S.-sourced income. Nonresident aliens, who do not meet the substantial presence test or possess a green card, are generally required to file Form 1040NR if they have income generated from U.S. sources. U.S.-sourced income can include wages, dividends, taxable interest, capital gains, and even certain fellowship grants. This form ensures that nonresident aliens only pay taxes on income derived within the United States, rather than on worldwide income, which is typical for resident aliens and U.S. citizens.
The 1040NR form accommodates these unique requirements by allowing nonresident aliens to report specific income types, calculate itemized deductions (limited for nonresident aliens), and apply for treaty benefits if applicable. Tax treaties between the U.S. and other countries may offer certain exceptions and reduce tax rates on eligible income, allowing nonresident aliens to reduce their overall tax liability.
What’s the Difference Between Form 1040 and Form 1040NR?
Form 1040 is the standard individual income tax return used by U.S. citizens, Green Card Holders and resident aliens, covering all sources of income, including foreign-sourced income, and permitting a wide range of tax benefits, such as the child tax credit. In contrast, Form 1040NR is strictly for nonresident aliens and limits the types of income and deductions that can be claimed. For instance, nonresident aliens are generally not eligible to claim tax credits like the earned income tax credit or the student loan interest deduction, which are otherwise accessible on Form 1040.
Another key difference involves income reporting. While Form 1040 requires taxpayers to report their worldwide income, Form 1040NR limits reporting to U.S.-sourced income only, sparing nonresident aliens from paying taxes on their foreign income. Additionally, certain income, like capital gains or dividend income, may be taxed at reduced rates for nonresident aliens due to treaty benefits. However, nonresident aliens using Form 1040NR may need an individual taxpayer identification number (ITIN) if they do not qualify for a Social Security Number (SSN).
Related: Who Files 1040NR: Nonresident Alien Tax Return
What Happens if You File Form 1040NR Instead of Form 1040?
If you file Form 1040NR instead of Form 1040, several complications can arise with the IRS due to this error. Filing the wrong form can lead to delayed processing, potential penalties, and incorrect tax liabilities. For instance, if a resident alien mistakenly files Form 1040NR, they might underreport their taxable income by omitting foreign income sources, which are required on Form 1040. This underreporting may lead to unpaid taxes and interest charges on missed income.
Additionally, filing the incorrect form can result in missed tax credits and deductions, as Form 1040NR restricts many of the tax benefits available to U.S. residents, such as the Foreign Tax Credit and various itemized deductions.
To correct this, taxpayers should amend their tax return using Form 1040-X as soon as they realize the mistake. Many U.S. expats wrongly assume they become nonresident aliens after moving abroad, but as U.S. citizens or resident aliens, they are required to file Form 1040, reporting their worldwide income. Amending the tax return promptly helps avoid further penalties and ensures compliance with IRS tax rules for U.S. residents abroad.
How Do I Know if I am a Resident Alien or Nonresident Alien?
Determining whether you are a resident alien or a nonresident alien for tax purposes depends on specific IRS guidelines, primarily the substantial presence test and the green card test. A nonresident alien is generally someone who has not passed the substantial presence test (meaning they were not physically present in the U.S. for a significant portion of the tax year) and does not have a green card.
The substantial presence test is based on the number of days an individual was physically present in the U.S. over the current and previous two years. To pass the test, a person must be physically present in the U.S. for at least 31 days in the current tax year and a total of 183 days over the three-year period, calculated using a weighted formula. If a taxpayer does not meet this threshold, they are classified as a nonresident alien and would need to file Form 1040NR instead of Form 1040. This classification impacts the reporting of income, eligibility for tax credits, and the application of any tax treaties that may reduce tax liabilities for nonresident aliens.
Related: Nonresident Alien vs. Resident Alien: Understanding the Difference
Should I File Form 1040 or Form 1040NR?
The choice between Form 1040 and Form 1040NR largely depends on your residency status, which influences both income reporting and deductions. For nonresident aliens, Form 1040NR should be used to report U.S.-sourced income only, while Form 1040 requires U.S. residents and citizens to report their worldwide income. Filing the wrong tax form can create tax discrepancies and, in some cases, lead to unpaid taxes or missed deductions.
Nonresident aliens using Form 1040NR can claim certain itemized deductions, like state and local income taxes or charitable contributions, but are typically ineligible for credits available to residents, such as the earned income credit or child tax credit. Furthermore, nonresident aliens who receive fellowship grants, self-employment income, or dividend income may be subject to withholding taxes at rates established under applicable tax treaties. Filing the correct form is essential to avoid errors in the tax return, and the IRS recommends using e-filing services for greater accuracy and quicker processing.
Contact 1040 Abroad for Free Tax Advice
Choosing between Form 1040 and Form 1040NR is crucial for accurate tax filing and compliance with U.S. tax laws, especially for U.S. expats and nonresident aliens with U.S.-sourced income. At 1040 Abroad, we specialize in helping U.S. citizens and residents navigate complex tax obligations while abroad. Whether you need assistance determining your residency status, selecting the correct form, or understanding the impact of tax treaties, our team is here to offer free, expert tax advice tailored to your unique situation.
