How to File US Taxes as an NRI?

Filing taxes in the United States can be confusing for anyone, but for Non-Resident Indians (NRIs), it comes with additional layers of complexity. Whether you live abroad or earn income from the U.S., understanding the IRS tax rules for NRIs is essential. This blog simplifies the process of NRI tax filing in the USA and helps you understand your obligations, exemptions, and the documents you’ll need.

The first question many people ask is: Do NRIs need to pay taxes in the USA? The answer depends on your residency status and the source of your income.

If you’re a Non-Resident Alien (NRA) under U.S. tax laws but have income generated within the United States—like rental income, investments, or a U.S.-based job—you are generally required to file a US tax return for NRIs.

The IRS uses the Substantial Presence Test and Green Card Test to determine your tax residency status. Even if you don’t live in the U.S., you may still have to file under certain conditions.

The IRS tax rules for NRIs categorize your income into two types:

Effectively Connected Income (ECI): Income that is connected with a trade or business in the U.S. This includes wages, salaries, and tips. This income is taxed at the same rate as it is for U.S. citizens.

Fixed, Determinable, Annual, or Periodic (FDAP) Income: This includes interest, dividends, and rental income. FDAP is usually taxed at a flat 30%, unless a Double Taxation Avoidance Agreement (DTAA) lowers this rate.

Understanding the type of income, you have helps determine how you will be taxed.

If you’re wondering how do NRIs file taxes in the US, here’s a simplified process:

Step 1: Determine Your Tax Status

Use the IRS Substantial Presence Test or check your visa status to identify if you are a non-resident or resident alien for tax purposes.

Step 2: Collect Relevant Documents

You’ll need income statements (W-2, 1099 forms), passport, visa details, prior year’s tax returns, and bank documents showing foreign income.

Step 3: Choose the Correct IRS Forms for Non-Residents

For non-resident tax filing in the USA, use:

Form 1040-NR: For non-resident aliens

Form 8843: For exempt individuals such as students, teachers, or trainees

Form 8938 and FBAR (FinCEN Form 114): If you have foreign financial assets above a certain threshold

Step 4: Understand Deductions and Exemptions

There are certain tax exemptions for non-resident Indians in the USA, such as deductions under DTAA or student exemptions. Always check what benefits you qualify for.

Step 5: File Electronically or By Mail

You can file online using tax software that supports US tax filing process for NRIs, or mail your forms to the IRS.

The tax implications for NRIs in the USA vary based on the income source:

Employment in the U.S.: Subject to federal, state, and local taxes.

Investments and Dividends: May be taxed unless covered under DTAA.

Real Estate Rental Income: Taxable as ECI; eligible for deductions.

Foreign Income: Must be reported even if not taxed, especially if over threshold limits.

Reporting is crucial to stay compliant with the IRS and avoid penalties.

India and the U.S. have a Double Taxation Avoidance Agreement (DTAA) that allows NRIs to avoid being taxed twice on the same income. Under DTAA, you may be able to:

1. Claim tax credits
2. Exempt certain types of income from U.S. taxation
3. Lower withholding tax rates

Make sure to attach relevant DTAA disclosure forms with your tax return.

File on time: The usual deadline is April 15, but NRIs get an automatic extension to June 15. Still, interest applies to unpaid taxes after April 15.

Maintain proper records: Keep copies of tax returns, income statements, and proof of foreign income.

Seek expert help: If your case involves multiple countries, consult a tax advisor with NRI experience.

Filing US taxes for NRIs doesn’t have to be stressful. By understanding your residency status, knowing which IRS forms for non-residents to use, and being aware of your exemptions, you can confidently navigate the US tax filing process for NRIs. Don’t forget to utilize benefits under the Double Taxation Avoidance Agreement (DTAA) to avoid paying more than you owe.