Nonresident tax returns can be very challenging. That’s why we have created a tax course and easy to use filing software for nonresidents in the U.S. In this article, you’ll find out 7 important things you must know before you file a 1040NR or 8843.
#1 – The first thing you should know before filing your nonresident tax return is how to get a tax refund when you file.
What is a refund?
A tax refund is an amount of money returned to an individual who paid too much tax during the year. Some nonresidents think that a tax refund is automatically received when they file their taxes. This assumption is incorrect.
When filing taxes, two key amounts are calculated such as the amount of taxes a person should have paid and the amount of taxes a person actually paid. The amount of taxes actually paid is subtracted from the amount of taxes that should have been paid.
If the difference is a positive number, then it means that person owes taxes and will receive a tax bill. On the other hand, if the difference is a negative number, that person will receive a tax refund.
Let’s look at an example:
John is a nonresident from the Bahamas and he is filing his nonresident tax return for the year 2020. During the year, he made $5,000 worth of income from his job and paid federal taxes of $600 for the year. Calculate the amount of taxes John should have paid, the amount John actually paid, and the amount of taxes owed/refunded.
The amount John should have paid
John’s total tax for the year is calculated by multiplying his total income by the tax bracket percent in which his income falls in. According to the U.S. tax laws for 2020, any income below $9,875 will be taxed at 10%. So, John should have paid a total of $500 ($5,000 x 10%)
The amount John actually paid
The total amount of tax John actually paid was $600 worth of federal taxes.
The amount owed or refunded
To calculate John’s nonresident alien tax bill we must subtract the amount of taxes actually paid from the amount of taxes he should have paid. So, subtract $600 from $500 and we get a negative $100. This means that John will get a refund of $100 for the tax year 2020.
Tips on how to get a tax refund every year
Pay the correct amount of taxes or slightly more than you will owe
As a nonresident, you must understand that your employer is not responsible for deducting taxes from your paycheck. Truth is, most employers don’t know that international students must pay taxes on their income. With that being said, you must go to your payroll department and request they take out taxes from your paycheck.
If you think you will make an income between $0 – $9,875, then you must tell your employer to take out 10% – 12% each pay period for federal taxes. If you do this at the beginning of the year, then you would pay all of your taxes within the year and won’t have a tax bill when you file your taxes.
File your taxes as a resident if you’re married to a U.S. citizen/resident or pass the substantial presence test
Nonresidents are allowed to file their taxes the same way a U.S. citizen would if they are married to a U.S. citizen or resident within the year. Also, if you were living in the U.S. for 5 or more years, you may be able to pass the substantial presence test (SPT) which allows you to file your taxes as a resident. Use the SPT calculator to find out if you pass.
Benefits of filing your taxes as a resident
- Claim a U.S. standard deduction which gives you $12,400 (2020) worth of deductions. So, if you made an income of $12,400 or less, then you pay zero in taxes
- Claim education credits of $2,500 or $2,000. Some education credits are refundable and you can receive up to 40% of it back in the form of a tax refund. That means you could possibly receive up to $1,000 back in tax refunds
- Claim other credits and deductions for lower-income individuals like the Earned Income Credit and a few others
#2 – The second thing a nonresident must know before filing his/her nonresident tax return is how to avoid tax payments.
Every tax season, nonresidents pay huge tax bills simply because they do not know how to use the tax laws to their advantage. Due to this, they end up paying tax bills which can be avoided.
Last year, Tax Accountable filed 70+ nonresident tax returns. In the end, 38 nonresidents ended up with a total of $15,106 in tax bills. That means each person had to pay $397 on average. This can be avoid by following the tips below.
How to avoid a tax payment each year on your nonresident tax return?
I. Make an effort to gain knowledge about your nonresident tax return
A nonresident can make an effort to learn the basics of the U.S. tax laws and how to make them work. You can get access to Tax Accountable simple tax course that can teach you all the fundamentals.
II. Make an effort to pay your nonresident tax throughout the year
If you have an on-campus job, off-campus job, or you work as a resident advisor, you must ensure that your employers are taking taxes out of your paycheck each pay period and giving it to the government on your behalf. Most likely, your employer is not subtracting any payments from your check. This leaves you with a tax bill when you file.
III. Stack up more nonresident tax deductions throughout the tax year
Nonresidents can use a number of things to lower the amount of taxes they must pay such as charitable donations. If you donate money to a nonprofit organization like a church or charity, you can use the full amount as a deduction as long as you keep your receipt. Also, if you donated clothes to a charity like Goodwill, you can get a receipt for them and use the total amount as a deduction from taxes.
#3 – The third thing a nonresident must know before filing a nonresident tax return is the definition of a tax return.
So, what is a tax return?
A tax return is documentation filed with the U.S. tax authorities (IRS & State government) which reports the amount of money a person made and the amount of taxes a person paid within the year.
Throughout our time filing nonresident tax returns, Tax Accountable found that many nonresidents think that a tax return means that they are receiving a “return” or a “refund”. This is not true. Filing your taxes is actually a way for the tax office to know whether or not you’ve paid your taxes within the year. The overall objective of a tax return is to calculate the amount of taxes you should have paid and the amount of taxes you actually paid. This will determine whether you’ve underpaid or overpaid your taxes.
If you’ve underpaid taxes or in other words, did not pay enough taxes to the tax office, then you will receive a tax bill which means you owe the government money. On the other hand, if you’ve overpaid taxes or in other words, you paid too much taxes to the tax office, then you will receive a tax refund which means the government owes you money.
#4 – The fourth thing a nonresident must know before filing a nonresident tax return would be the filing requirements.
In the United States, all nonresidents are required to file a nonresident tax return. Whether you are a resident alien, nonresident alien, or a dual-status individual.
Resident Aliens (Green card holders, passed SPT or married to a U.S. citizen/resident)
Resident aliens are required to file a tax return. A resident can file their taxes just like a U.S. citizen. Filing can be done through any of the well-known tax software like TurboTax, H&R Block, or Tax Slayer.
Nonresident Aliens (F-1 student visa holders)
Nonresident aliens must file a nonresident tax return if they made income in the U.S. Whether taxes were withheld from that income or not. Also, nonresidents claiming tax treaty benefits must file a tax return. So, if your country has a tax treaty with the U.S., you are still required to file a nonresident tax return. Additionally, if a nonresident did not make any income, they are still required to complete tax form 8843 and mail it to the IRS.
Dual Status Individuals (persons who became residents during the year)
Dual status individuals are required to file tax returns. A dual status nonresident can file a joint tax return with their spouse or file a tax return by themselves the same as a U.S. citizen. Filing can be done through any of the well-known tax software like TurboTax, H&R Block, or Tax Slayer.
Failure to file your nonresident tax return
The IRS will not penalize a nonresident for not filing if they do not owe any taxes. However, they still must file tax form 8843. If you are planning to apply for any type of residency in the future, there is a possibility that you may be asked to provide proof of your previous nonresident tax return. Therefore, you should make an effort to file the necessary forms.
#5 – The fifth thing a nonresident must know before filing a nonresident tax return is their filing status.
In order to file your nonresident tax return, you must first determine your tax filing status.
Knowing your nonresident tax filing status will help you to determine where and how to file your tax return. There are essentially two types of residency statuses for a nonresident. The first is resident and the second is nonresident.
A resident alien is any individual who is permanently residing in the U.S., but does not have citizenship. So, if you have a green card, then you are considered a resident and can file taxes the same as a U.S. citizen.
A nonresident alien is any individual who is not a U.S. citizen or U.S. national. So, if you have an F-1 student visa but do not have a green card, then you are considered a nonresident and must file your taxes as a nonresident unless you pass the substantial presence test or you are married to a U.S. citizen or resident.
After determining which status you must file under, then, you can find a tax company to file with.
#6 – The sixth thing a nonresident must know before filing a nonresident tax return is how to lower their taxes with tax deductions.
In order to lower your taxes, you must use tax deductions
Tax deductions are benefits received which help to lower your taxable income or in other words, the amount of money you are taxed on.
As a nonresident, you are allowed to deduct the state and local income taxes you’ve paid on form W-2, property taxes, sales taxes on major purchases, student loan interest, and charitable contributions to organizations. It is important to maintain a proper record of the amounts you gave throughout the year by storing up your receipts until you file your taxes.
State & Local Income Tax Deduction
First, let’s take a look at the state and local income tax deduction. State and local income taxes are fully deductible in the year paid, no matter to which state they were paid in. These deduction amounts will normally be listed on your form W-2 or 1042-S in the box designated for state income taxes paid.
Property Tax Deduction
Second, let’s look at property taxes. If you have a residence in which you were required to pay property taxes for, then, the amount you paid for property taxes can be used as a deduction on your nonresident tax return.
Sales Tax On Major Purchases Deduction
Third, let’s look at sales tax on major purchases such as cars, boats, or houses. If you made a major purchase within the year and you want to use the sales taxes you’ve paid as a tax deduction, you can do so. Simply look on your purchase receipt and there should be a separate amount showing how much was paid for sales tax. This amount will be a deduction for you when filing your nonresident tax return.
Student Loan Interest Deduction
Next, let’s look at student loan interest deduction. If you have a student loan and you paid money on it within the year which you are filing taxes for, then, the interest you paid can be deducted on your nonresident tax return.
U.S. Charitable Contributions Deduction
Finally, let’s look at the charitable donations deduction. If you gave money or non cash items to a U.S. charity or nonprofit organization, then, you can use the total value as a deduction on your nonresident tax return. Charitable and nonprofit organizations generally include churches, charities, educational, scientific, and literary organizations; and organizations that work to prevent cruelty to children or animals.
Please be aware that you cannot deduct a cash contribution, regardless of the amount, unless you keep the following information:
- A bank statement containing the name of the charity, the date, and the amount, or
- A written communication (receipt) from the charity which includes the name of the charity, date of the contribution, and the amount of the contribution
Additionally, any state & local income tax paid, property taxes paid, sales taxes paid, student loan interest paid or contributions must have been paid or given within the year you are filing taxes. So, if you are filing taxes for the year 2020, then, all of your payments and donation receipts must have been paid or given in the year 2020.
#7 – The final thing a nonresident must know before filing a nonresident tax return is the definition of the Substantial Presence test (SPT).
What is the substantial presence test?
This is a test that helps to determine if an individual should be taxed as a resident or a nonresident. Passing this test does not mean that you are a resident of the U.S. This is a test that allows a nonresident to file his/her taxes as a resident without having a green card.
If you are a nonresident, who was present in the U.S. for less than 5 years, then you automatically fail this test. This means that you must file your taxes as a nonresident unless you are married to a U.S. citizen or U.S. resident.
How to pass/take the substantial presence test?
In order to pass this test, you must be physically present in the United States for at least 31 days during the tax year and a total of 183 days during a 3-year period including the year in which you are currently filing your taxes.
The days to count include all the days you were present in the tax year, one-third of the days you were present in the previous year, and one-sixth of the days you were present in the year before. If all of your physically present days add up to 183 or more, then you pass the substantial presence test.
This can be tough to understand so let’s look at an example:
Paul, an international student from France, came to the U.S. in August 2015 on an F-1 student visa. He is filing his taxes for the year 2019 and is wondering if he should file his taxes as a resident or as a nonresident.
Throughout the years, Paul traveled outside of the U.S. to his home country for fall breaks only. Other than that, he remained in the U.S. during spring breaks (10 days), summer breaks (106 days), and Christmas breaks (21 days).
Let’s determine whether Paul should file his taxes as a resident or a nonresident.
First, let us determine how many years Paul has been in the U.S. Paul arrived in 2015 and it is now the end of 2019, he has been in the U.S. for 5 years. These years include 2015, 2016, 2017, 2018, and 2019. Although he was not in the U.S. for the entire year 2015, it still counts as a complete year under this test.
Since Paul has a student visa and has been in the U.S. for 5 years, he qualifies to take the substantial test.
Next, let’s count the number of days he was present in the U.S. but not a student to determine if it all adds up to a total of 183 days. Since Paul has been in the U.S. for at least 31 days in 2019, he can now count all of the days he remained in the U.S. in 2019.
The total days for spring break was 10 days, summer was 106 days, and Christmas break was 21 days. This is a total of 137 days physically present in the year 2019. Since he stayed in the U.S. for the same amount of time every year, it means that he remained for 137 days each year.
According to the substantial presence test, within a three year period, Paul must count the total amount of days he was in the U.S. but not a student. This includes the total amount of days present in 2019, one-third of the days in 2018, and one-sixth of the days present in 2017.
This gives a total of 137 days for 2019, 45 days for 2018 (137×1/3), and 23 days for 2017 (137×1/6). In total, Paul has been physically present for 205 days (23+45+137) within the 3-year period.
Since 205 days exceeds 183 days required by the substantial presence test, Paul passes the test. Therefore, he can choose to file his taxes as a resident for the year 2019 and all other years going forward.
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