Deductions and Credits for Non-resident alien

Itemized deductions
  • by admin
  • December 14, 2020

When it comes to the personal taxation of a non-resident alien in the United States, you may need to get an understanding of tax terms that can help you minimize your income taxes payable. In this blog, we will try to explain those terms which relate to the taxation of a non-resident alien in the United States.

 

On your personal income tax return. in the United States, you have options to claim either standard deductions or itemized deductions, you can not claim both.

Standard Deduction and non-resident alien

The standard deduction is a flat amount that you can claim on your personal tax return every year. Up to this amount your income is not taxable. In Canadian taxation, this amount is called the Basic personal amount (BPA). In the United States, the amount you can claim depends on your filing status,  like unmarried, married filing jointly, etc. If you are a non-resident alien, the standard deduction is not available to you. A non-resident alien can not claim “Standard Deduction.” This makes a big difference when comparing the income taxation of a resident alien Vs. non-resident alien. Please visit Non-resident alien” for more information.  However, India’s business apprentices and students may standard deduction, if they are eligible under Article 21 of the U.S.A.-India Income Tax Treaty.

Deductions and nonresident alien

Now, let’s look into itemized deductions. As opposed to a U.S. resident, a non-resident alien can only claim certain items on their itemized deduction.  Please also visit our blog for “Itemized deductions” on Schedule A of your 1040 individual income tax return if you want to learn more about these deductions. Furthermore, your claim for this deduction is limited to the effectively connected income reported on your tax return. You can claim deductions to find out the taxable income that is effectively connected to U.S. trade or business. You generally cannot claim deductions related to income that is not connected with your U.S. trade or business.

The only option a  non-resident alien has is to claim only certain itemized deductions. However, to be eligible to claim these certain itemized deductions your need to have taxable income that is effectively connected with a U.S. trade or business. These deductions include:

  • Local and state income taxes paid,
  • Charitable contributions and donations to qualifying U.S. organizations,
  • Casualty and theft losses if you are from a federally declared disaster, and
  • Other itemized deductions.

Exemptions

For tax years beginning after December 31, 2017, non-resident aliens cannot claim a personal exemption deduction for themselves, their spouses, or their dependents.

Adjustments to Gross Income

Non-resident aliens may claim certain adjustments to gross income if they meet the relevant qualifications, including the following:

  1. Individual Retirement Account (IRA) Deduction
  2. Archer Medical Saving Account (MSA) Deduction
  3. Deduction for Health Savings Account (HSA)
  4. Deduction for Student Loan Interest Paid
  5. Members of the Armed Forces can claim Moving Expenses
  6. Health Insurance paid by Self-Employed
  7. SEP, SIMPLE, and Qualified Plans by Self-Employed
  8. Excluded from income such as Scholarship and Fellowship Grants

Deduction for Qualified Business Income 

You may be able to deduct a maximum of 20% of your qualified net business income from your qualified trade or business, plus 20% of your qualified PTP income and REIT dividends.

 

Credits

If you are a non-resident alien and receive effectively connected income, you may be able to claim some of the following credits:

  • Foreign tax credit
  • Credit for Child and dependent care
  • Credit for Retirement savings contributions
  • Child tax credit
  • Credit for other dependents
  • Adoption credit
  • Credit for prior-year minimum tax

Education and Earned Income Credits

Generally, you cannot claim the Earned Income Tax Credit, the Lifetime Learning Credit, or the Hope Credit,  If you are a non-resident alien for any part of the year. However, you may claim an adjustment for the student loan interest deduction.

Self-Employment Tax

Non-resident aliens are not liable to pay self-employment tax.

Note: Despite the general rules mentioned above, self-employment tax may be imposed on a non-resident alien under the terms of an international social security agreement.

Resources used: https://www.irs.gov/

Disclaimer: Information in the blog/post/article has been presented for a broad and simple understanding. This is not legal advice. RKB Accounting & Tax Services does not accept any liability for its application in any real situations. You need to contact your accountant or us for further information.

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