Two Types of Income
In the U.S, there are two types of income for a nonresident. The first type is foreign sourced income and the other is U.S. sourced income.
Foreign Source Income & U.S. Source Income
Foreign sourced income is money received from sources outside of the U.S. This includes money you receive from family, friends, or guardians. U.S. source income is any money you receive from sources inside the U.S. This includes money received from a job in the U.S.
How are these two types of income taxed?
The U.S. does not tax foreign sourced income, but they do tax your U.S. source income. There are two categories of U.S. source income such as effectively connected and non-effectively connected income.
Effectively connected income & Noneffectively connected income
Effectively connected income is taxed at the same rate as U.S. citizens. Non-effectively connected income is taxed at a flat rate of 30%. Let’s go over some U.S. income sources and determine whether they are effectively connected or non-effectively connected.
Wages & Salary Income
First, wage and salary income (W-2 income) are effectively connected and is taxed according to the U.S. tax brackets. If you made income of $9,875, then you will be required to pay 10% of that income for taxes unless your country have a tax treaty with the U.S. If you have income greater than $9,875, you can view all other tax percentages here.
Interest Income, Dividend Income, & Capital Gains
Second, interest income, dividend income, and interest income is non effectively connected. So, these funds will be taxed at a flat 30% rate unless a you have other tax benefits or rules to lower the tax rate. If you received interest income from your bank, this income does not need to be reported on your taxes.
Scholarship & Fellowship
Third, income from Scholarships and Fellowship (1042-S income) can be nontaxable, taxable, or exempted by a treaty. A student does not need to pay taxes on their scholarship if it only pays for tuition, fees, books, supplies, and required equipment.
If the student was required to perform services for the scholarship, then that amount paid is taxable and will be reported on form 1042-S. If the student’s country has a tax treaty which exempts the scholarship from tax, then the scholarship would be tax exempt.