Internal Revenue Service United States Department of the Treasury
Level Basic Advanced Military International

Nonresident Income and Deductions

Taxation of Nonresidents

Topic Summary

In this lesson, you learned that:

  • The U.S. does not tax nonresident aliens' foreign-source income; income source needs to be determined before filing
  • Nonresident students' or scholars' income is "effectively connected" if they are studying, teaching, or doing research; it is reported on Form 1040NR or 1040NR-EZ
  • Some tax treaties provide for a limited exemption from tax for wages earned while temporarily studying, teaching, or performing research in the U.S.
  • Income received from interest, dividends, or gambling is not "effectively connected" and must be reported
  • Income in the form of a scholarship or fellowship is treated in one of three ways:
    • Section 117 exclusion
    • Exempt by treaty
    • Taxable
  • Nonresident students (except students and scholars from India) must itemize deductions but are limited in the type of expenses they can deduct
  • Nonresident students and scholars are subject to 30 percent taxation of U.S. capital gains, unless a tax treaty allows a lower rate