In general, for federal income tax purposes in the United States, a foreign person who is a resident is entitled to claim the same deductions, exemptions, and credits as a U.S. citizen. A nonresident foreign person can generally claim deductions only to the extent that they relate to income effectively connected to a trade or business in the U.S. Nonresident foreign persons can claim a personal exemption and certain itemized deductions.
Nonresident foreign persons can claim a deduction for all reasonable and necessary expenses of a trade or business carried out in the United States, to the extent the expenses are related to income effectively connected to that trade or business. They can also claim a loss on transactions carried out for the purpose of generating effectively connected income.
Deductions for Determining Adjusted Gross Income
Generally, a nonresident foreign person is entitled to claim several of the same deductions for determining adjusted gross income that a U.S. citizen or resident can claim but again, to the extent the deductions are related to income effectively connected to a trade or business in the U.S.
If you are a nonresident foreign person in the U.S., you can claim a deduction for qualified contributions you make during the year to an Archer Medical Savings Account (MSA) and for contributions to a Health Savings Account (HSA). The deduction for contributions to an Archer MSA is calculated on Internal Revenue Service (IRS) Form 8853, and the deduction for contributions to a Health Savings Account on Form 8889.
Educator Expenses
If you are an eligible educator, you can deduct up to $250 of the cost of books, supplies, equipment, and other materials you use in the classroom. This deduction is claimed on line 24 of Form 1040NR.
Moving Expenses
If you are temporarily in the United States performing personal services, you can claim a deduction for your expenses of moving to the U.S., but not for your expenses to return to your home country or to some other workplace outside the U.S. In order to claim the deduction, you must meet the following time and distance tests:
Time:
You must work as a full-time employee for at least 39 weeks during the first 12 months after your move. Or if you are self-employed, you must work at least 39 weeks during the first 12 months and a total of at least 78 weeks during the first 24 months.
Distance:
Your new workplace must be at least 50 miles farther away from your previous home than your previous workplace was from your previous home. If you did not have a previous job, your workplace in the U.S. must be at least 50 miles from your previous home.
If you receive reimbursement from your employer for your moving expenses, the reimbursement must de deducted from the total moving expenses you can claim as a deduction.
You should note that when you claim a deduction for moving expenses, you cannot claim a deduction for travel expenses while you are temporarily away from your domicile for tax purposes, working in a foreign country (the U.S.). The deduction for moving expenses is based on a change in your main place of work, while the deduction for travel expenses is based on a temporary absence from your main place of work.
When you are self-employed, you can set up a pension plan and make contributions for yourself and your employees. These contributions may be tax deductible when the plan is qualified for tax purposes. Examples of qualified plans include SEP (Simplified Employee Pensions) and SIMPLE (Savings Incentive Match Plans for Employees). In order to claim this deduction, you must have earnings from self-employment that are effectively connected to a trade or business in the U.S.
When you have net earnings from self-employment for the year, you can claim a deduction for the cost of health insurance you maintain, under your business’s name, for yourself, your spouse, and dependents. When you are also covered by a health plan financed by your employer, if you also have a job, or by your spouse’s employer, you cannot claim a deduction for the health insurance you maintain under your business’s name for the time you are covered by the other plan provided by an employer.
Penalty on Early Withdrawal of Savings
When you have interest income that is effectively connected with a trade or business in the U.S. that includes taxable interest, you can take a deduction for a charge by the bank or other financial institution when you make an early withdrawal of savings. This penalty should be reported on the Form 1099-INT or 1099-OID that you receive. You cannot claim a deduction for a penalty on an early withdrawal of a deposit when the interest is not effectively connected.
Expenses Related to Taxable Scholarships
You can claim a deduction for qualified expenses for tuition, course-related fees, books, materials, and equipment to the extent the corresponding scholarships are included in your taxable income.
You can claim a deduction for the contributions you make to an Individual Retirement Account (IRA) that you set up for yourself, up to a certain maximum amount each year, if you have effectively connected taxable income. If you also participate in a retirement plan financed by an employer, your deduction may be limited. And if you are 50 years of age or older, you can make additional “catch-up” contributions.
Interest you pay on a student loan is deductible up to a maximum of $2,500. The student can be you, your spouse, or dependent, and the proceeds from the loan must be used to pay qualified education expenses, which include tuition, fees, books, materials, housing and meals. In order to claim this deduction, your modified adjusted gross income cannot be more than $70,000 and your filing status for federal income tax purposes cannot be married filing separately.
Domestic Production Activities Deduction
If you carry out any of the following production activities in the U.S. you could qualify for a deduction of up to 3% of your earnings from these activities: construction of real property in the U.S.; engineering or architectural services rendered in the U.S. for the construction of real property in the U.S.; or the leasing, rental, licensing, sale, exchange, or other disposition of tangible personal property, computer software, and recordings that were fabricated, harvested, or extracted, in total or in significant part in the U.S., a movie produced in the U.S., or electricity, natural gas, or drinking water produced in the U.S.
The preparation and sale of food and beverages in a retail sales establishment do not qualify for this deduction.
This deduction is calculated on Form 8903, which must be attached to your income tax return.
Other Deductions for Determining Adjusted Gross Income
On line 43 of Form 1040NR, which is the total of all the deductions for determining adjusted gross income, you can include other deductions for which there is not a separate line on the form. These deductions include expenses related to the performing arts, which are calculated on Form 2106 or 2106-EZ; reforestation amortization and expenses; refund of supplemental unemployment benefits; contributions to a section 501(c)(18)(D), pension plan; contributions by chaplains to a section 403(b) plan; and attorneys’ fees and court costs related to illegal discrimination lawsuits, provided that you declare any taxable income from these proceedings.
In general, nonresident foreign persons cannot claim the standard deduction. There is an exception for students and apprentices from India according to a tax treaty. Instead of the standard deduction, nonresident foreign persons can claim some of the same itemized deductions that U.S. citizens and residents can claim.
These deductions include state and local taxes, charitable donations, casualty losses, and miscellaneous deductions. The deductions are reported on Schedule A of Form 1040NR. You should note that when you file the simpler Form 1040NR-EZ, you can only claim the deduction for state and local taxes. Therefore, when you have other itemized deductions, you must use Form 1040NR.
A nonresident foreign person can claim an itemized deduction for charitable donations in the form of money or goods, made to qualified organizations in the U.S. You cannot claim a deduction for donations to an organization outside the country.
But you can claim a deduction for a donation to a qualified organization in the U.S. that transfers funds to a charitable organization abroad, if the organization in the U.S. controls the use of the funds, or when the organization abroad is an administrative branch of the U.S. organization.
Casualty or Theft Losses
You can claim a deduction for losses suffered as a result of a casualty or theft, even when the property involved is not connected to a trade or business in the U.S. The property must be located in the U.S. and can be personal property or property you held for generating income.
The amount that you can claim as a deduction is the fair market value of the property immediately before the casualty or theft less the fair market value immediately afterward, less any insurance reimbursement you receive. The amount of the loss cannot be more than the cost or adjusted basis of the property.
Miscellaneous Deductions
This category includes un-reimbursed expenses related to your job. You can claim a deduction for these expenses to the extent they exceed 2% of your adjusted gross income. Expenses related to your job include union dues, personal protection equipment, small tools, uniforms your employer requires you to use at work that are not suitable for use outside of work, medical exams required by your employer, dues for membership in professional organizations or chambers of commerce, subscriptions to professional journals, casualty losses of property used to render services as an employee, fees paid to an employment agency, the costs of looking for work in your present occupation or profession, certain expenses of education or training related to your work, and expenses related to the use of part of your home for job-related purposes.
On the dotted line next to the amount you report on line 9 of Schedule A for job-related expenses, you must indicate the type of expense. If you need more space, you can detail the expenses on a separate attachment to your tax return.
When you are claiming a deduction for job-related travel and entertainment expenses, or when you receive a reimbursement for the expenses you are reporting on line 9, you must complete and attach Form 2106.
Travel Expenses
If you are carrying on a trade or business in the U.S. temporarily, you can claim a deduction for your travel expenses. In general, you are considered to be in the U.S. temporarily when you maintain your tax domicile, which is your principal place of work or business, in another country, and you realistically expect that your stay in the U.S. will last one year or less, and your stay effectively does last one year or less, after which time you intend to return to your work or business in another country.
In these circumstances, you can claim a deduction for the following expenses, for yourself, but not for members of your family: transportation, including airfares and local transportation, by train, bus, taxi or others; lodging, which could include rent and utilities such as electricity, gas, and water, but not telephone, or hotel or motel expenses; and meals, which could be the actual expense, or a per diem rate, based on the date and the geographical area. These rates are published by the U.S. government. The rates for high cost areas can be found in Publication 1542, which is available in the IRS website at www.irs.gov. Rates for other areas are found in Publication 463, which is also available on the IRS website. You can claim a deduction for 50% of your expenses for meals.
You cannot claim a deduction for expenses related to income that is exempt from tax in the U.S., due to a tax treaty or some other reason. Therefore, when you have exempt income and other taxable income, you will need to prorate the expenses to determine the amount you can claim as a deduction.
Exemptions
Contrary to resident foreign persons, who can claim the same personal exemptions and exemptions for dependents as U.S. citizens, in general nonresident foreign persons can claim only one personal exemption, and this is when they are engaged in a trade or business in the U.S. But there are some exceptions.
Residents of Canada and Mexico
Residents of Canada and Mexico can claim a personal exemption for their spouse if the spouse had no gross taxable income in the U.S. (had no income from U.S. sources), and the spouse cannot be claimed as a dependent by another taxpayer in the U.S. They can also claim exemptions for dependents who meet the same tests as those that apply for determining whether a person is a dependent of U.S. citizens and residents.
Residents of Japan and the Republic of Korea
Residents of these countries can claim exemptions for their spouses and dependents based on tax treaties. There are two additional requirements that apply in this case: (1) the spouse and children who are claimed as dependents must have lived with the nonresident foreign person in the U.S. during part of the year, and (2) they must prorate the exemption based on the proportion of income from U.S. sources that is effectively connected with a trade or business in the U.S. to the total income from all sources during the year.
Students and Commercial Apprentices from India
These persons can claim exemptions for their spouses and dependents according to a tax treaty. They can claim an exemption for their spouse if the spouse had no gross income for the year and cannot be claimed as a dependent on another taxpayer’s return. They can claim exemptions for their dependents if they are not in the U.S. under “F-2”, “J-2”, or “M-2” visas and meet the same tests that apply for determining who qualifies as a dependent of a U.S. citizen or resident.
Reference:
Internal Revenue Service – Publication 519 – U.S. Tax Guide for Aliens: www.irs.gov
