Expat and Nonresident Tax: Resident or Nonresident, 1040-NR, Treaties, and FIRPTA

You are a US resident for tax purposes if you are a US citizen, hold a green card, or meet the substantial presence test (physically present at least 31 days in the current year and 183 days under a weighted three-year formula). Residents are taxed on worldwide income; everyone else is a nonresident alien taxed only on US-source income.

The weighted formula counts all of the current year’s days, one third of last year’s days, and one sixth of the days from the year before that. Even if it adds to 183 or more, a closer connection exception (Form 8840) or a tax treaty tie-breaker can preserve nonresident status when your real home and ties remain abroad.

Some people are "exempt individuals" whose US days do not count at all: foreign students on F-1 visas for their first five years, and teachers and trainees on J visas for two years, among others. They file Form 8843 to document the status and often remain nonresidents far longer than their day count alone would suggest.

A US resident files Form 1040 and reports income from everywhere in the world. A nonresident alien files Form 1040-NR and reports only US-source income. The two returns also differ on deductions, filing status, and credits.

Nonresidents generally cannot take the standard deduction (with a notable treaty exception for students and apprentices from India), usually cannot file a joint return, and have limited access to credits and to claiming dependents. Itemized deductions on a 1040-NR are restricted to a short list tied to US-source income.

These limits are exactly why the resident-versus-nonresident determination matters so much: the same income can be taxed very differently depending on which return it belongs on, and electing residency (where available) can unlock the standard deduction and joint filing.

Effectively connected income (ECI) is income connected to a US trade or business, including wages and business profits, and it is taxed at the same graduated rates a US resident pays, on a net basis after deductions. FDAP income is fixed, determinable, annual, or periodical passive income such as dividends, interest, rents, and royalties, and it is taxed at a flat 30% on the gross amount with no deductions.

The distinction controls both the rate and the mechanics. ECI is reported on Form 1040-NR and netted against expenses; FDAP is usually collected by withholding at the source and may not require a return at all if withholding fully satisfies the tax.

US payers must withhold 30% of FDAP income paid to a nonresident and remit it to the IRS. A tax treaty between the US and your home country often reduces this rate, commonly to 15% or 0% on dividends and interest. To claim the lower rate, you give the payer a Form W-8BEN certifying your foreign status and treaty eligibility.

The payer reports the income and withholding on Form 1042-S. If too much was withheld, you recover the difference by filing Form 1040-NR and claiming the treaty rate, often disclosed on Form 8833. The portfolio interest exemption can also eliminate withholding on most US bond and bank interest paid to nonresidents.

Under FIRPTA (the Foreign Investment in Real Property Tax Act), the buyer must withhold 15% of the gross sale price when a foreign person sells a US real property interest, and remit it to the IRS. This is a collection mechanism, not the final tax; the seller files a US return to reconcile the actual gain and claim any refund.

The buyer is the withholding agent and reports on Form 8288 and 8288-A. A seller who expects the real tax to be far less than 15% of the price can apply for a withholding certificate on Form 8288-B before closing to reduce the amount held back. A limited residence exception removes withholding entirely when the price is $300,000 or less and an individual buyer will use the property as a residence, and the rate drops to 10% instead of 15% when an individual buyer will use it as a residence and the price is over $300,000 but not over $1,000,000.

Foreign owners who rent out US property can elect to treat the rental as effectively connected income, which lets them deduct expenses and pay tax on net rental income at graduated rates instead of 30% of gross rent.

A totalization agreement is a treaty between the US and another country that prevents workers from paying Social Security tax to both countries on the same earnings. The US has about 30 such agreements. A certificate of coverage from the country where you remain covered exempts you from the other country’s system.

This matters most for posted workers sent across borders by an employer and for self-employed people working abroad. A US self-employed expat normally still owes US self-employment tax even when claiming the Foreign Earned Income Exclusion, unless a totalization agreement assigns coverage to the foreign country. The agreements also let workers combine credits from both systems to qualify for benefits.

In the year you become or stop being a US resident, you usually file a dual-status return: nonresident for the part of the year before residency began and resident for the part after (or the reverse when you leave). You are taxed on worldwide income only for the resident portion and on US-source income for the nonresident portion.

Dual-status filers face restrictions: generally no standard deduction and no joint filing for the year. A first-year choice election, or a Section 6013(g) or 6013(h) election to be treated as a full-year resident with your spouse, can sometimes produce a better result by unlocking joint filing and the standard deduction. The right answer depends on the mix and timing of your income around the move.