How Nonresident Taxes Work

By: Dave Roos

Withholding and Deductions for Nonresident Aliens

There are substantially different rules for resident and nonresident alien taxpayers when it comes to withholding taxes and claiming tax deductions and exemptions.

For example, both U.S. citizens and resident aliens are required to have income taxes withheld from each paycheck. A nonresident alien, however, can submit IRS form W-8ECI to claim that income from a specific source is effectively connected income (ECI), which is exempt from withholding [source: IRS].


Likewise, self-employed U.S. citizens and resident aliens must pay self-employment tax in April to cover their contributions to the Social Security and Medicare trust funds. Nonresident aliens are exempt from the self-employment tax. However, nonresident aliens employed by a U.S. business do have to pay into the Social Security and Medicare system [source: IRS]. Certain exemptions for foreign teachers and researchers apply.

When it's time to file taxes in April, nonresident aliens complete the 1040NR. As we mentioned earlier, they cannot file as married filing jointly. They also can't file as head of household. The only available filing statuses are single, married filing separately and qualifying widow(er).

Nonresident aliens cannot claim a standard deduction, but are allowed to itemize deductions related to their effectively connected income (ECI). For example, nonresident aliens can deduct charitable contributions, state and local taxes, unreimbursed medical expenses and expenses related to a U.S. business [source: IRS].

Nonresident aliens can also claim other common deductions for expenses like IRA contributions, student loan interest, self-employed health insurance premiums, health savings account contributions and moving expenses [source: IRS].

In most cases, nonresident aliens can only claim one personal exemption, but no exemptions for spouses or dependents. Residents of Mexico and Canada, however, can claim a spousal exemption (if the spouse has no earned income) and dependent exemptions for all qualifying children and relatives. Tax treaties with India and South Korea also allow spousal and dependent exemptions in certain cases [source: IRS].

The IRS enforces tighter limits on late filing for nonresident aliens. U.S. citizens and residents have up to three years to file a late tax return and still claim refunds and tax credits [source: IRS]. Nonresidents have a maximum of 16 months to file a return or forfeit all refunds and credits [source: IRS].