Deductions and Credits · Itemized deductions and QBI

Allowed itemized deductions for Form 1040-NR

Start with the structural point. A nonresident alien’s standard deduction is zero by statute, so itemising is not an election — it is the only route to any deduction at all. And most deductions are available only to the extent they are connected with income effectively connected with a United States trade or business. Three escape that requirement, and the list is closed.

The rule

Deductions are confined twice over. In the case of a nonresident alien individual, deductions are allowed only for purposes of § 871(b) — the tax on effectively connected income — and, except as § 873(b) provides, only if and to the extent connected with income effectively connected with the conduct of a United States trade or business, apportioned and allocated as regulations provide (IRC § 873(a)). Income taxed under § 871(a) at the flat rate on fixed or determinable income carries no deductions at all.

Three exceptions, and only three. Allowed whether or not connected with effectively connected income (IRC § 873(b)):

• Casualty and theft losses under § 165 within § 165(c)(2) or (3), but only if the loss is of property located within the United States (§ 873(b)(1));
• Charitable contributions and gifts allowed by § 170 (§ 873(b)(2));
• The personal exemption under § 151, and only one, unless the taxpayer is a resident of a contiguous country or a national of the United States (§ 873(b)(3)).

The standard deduction is zero. A nonresident alien individual is one of four classes for which the standard deduction is zero (IRC § 63(c)(6)(B) and its closing text) — alongside a married individual filing separately where either spouse itemizes, a taxpayer with a short period from a change of accounting period, and an estate, trust, common trust fund or partnership.

Charitable gifts must be to a domestic organisation. The § 170 deduction preserved by § 873(b)(2) reaches only a corporation, trust, community chest, fund or foundation created or organised in the United States or a possession, or under United States, State, District of Columbia or possession law (IRC § 170(c)(2)(A)). A gift to a charity in the taxpayer’s home country does not qualify.

The taxing framework behind it. A nonresident alien engaged in a United States trade or business is taxed under § 1 or § 55 on taxable income effectively connected with that business, and in determining it gross income includes only effectively connected income (IRC § 871(b)(1), (2)).

Students and trainees are brought inside it. A nonresident alien temporarily present under an F, J, M or Q visa who is not otherwise engaged in a United States trade or business is treated as so engaged, and income described in the second sentence of § 1441(b) is treated as effectively connected to the extent derived from United States sources (IRC § 871(c)).

Current figures

How it works in practice

Establish the two income streams first, because they carry different consequences. Income effectively connected with a United States trade or business is taxed at graduated rates and supports connected deductions. Fixed or determinable annual or periodical income from United States sources is taxed under § 871(a) at a flat rate on gross amounts, and no deduction reduces it — a distinction that decides most returns before any deduction question arises.

Then take the § 873(b) list literally. Casualty losses need property located in the United States and, since 2018, still need to satisfy § 165(h)(5) — so a nonresident alien’s loss must be both domestic and attributable to a declared disaster. Charitable gifts need a domestic donee. And the personal exemption limb is now largely academic, since § 151(d)(5)(A) sets the exemption amount at zero, though the deduction for seniors added at § 151(d)(5)(C) sits in the same subsection.

Do not look for the standard deduction as an alternative. Section 63(c)(6)(B) sets it at zero, which is why a nonresident alien with only small connected deductions may end up with a larger taxable income than a resident on identical facts. Treaty provisions are the usual route to a different answer, and they have to be read individually.

Finally, remember what the § 67 suspension removed here as well. Unreimbursed employee expenses and investment expenses were the deductions a nonresident alien on assignment most often had, and they are gone for everyone.

How this has changed

The § 873(b) list shrank in substance without being amended. Its third exception — the personal exemption — has been worth nothing since § 151(d)(5)(A) set the exemption amount at zero for taxable years beginning after 2017, a change Pub. L. 119-21 left in place while adding the senior deduction at § 151(d)(5)(C). The statutory exception survives; the deduction it preserves does not exist. A live cross-reference to an amount that is zero.

Its first exception narrowed in 1998 and again in 2018. Pub. L. 105-277 § 4004(b)(3) rewrote § 873(b)(1) to reach losses within § 165(c)(2) as well as (3); then the 2018 disaster requirement in § 165(h)(5) narrowed what a personal casualty loss is for everyone. A nonresident alien now needs the loss to be of property located in the United States and attributable to a declared disaster.

The § 67 suspension hit this population hardest. Unreimbursed employee expenses were the characteristic deduction of a nonresident alien on temporary assignment, and they went with everything else in the miscellaneous class. Nothing in § 873 preserved them, because the disallowance operates on the definition of an itemized deduction rather than on who may claim it.

Treaty relief is the material variable and it is not in the Code. Section 894(a)(1) applies the title with due regard to treaty obligations, and many treaties give a nonresident alien access to deductions or to standard-deduction-equivalent relief that § 63(c)(6)(B) otherwise denies. The treaty text has to be read for the particular country; there is no general rule to state.

Exam focus

Expect the standard deduction offered as available. It is zero.

Expect two income streams, testing whether deductions reduce the flat-rate income. They do not.

Expect the three exceptions in a list with a fourth plausible item added.

Expect a foreign charity, which fails § 170(c)(2)(A) even though § 873(b)(2) preserves the deduction.

Check yourself

1. What is a nonresident alien individual’s standard deduction?

Answer: Zero. IRC § 63(c)(6)(B) lists a nonresident alien individual among the classes for which the standard deduction is zero.

2. May a nonresident alien deduct expenses against United States dividend income taxed at the flat rate?

Answer: No. IRC § 873(a) allows deductions only for purposes of § 871(b), which taxes effectively connected income; § 871(a) taxes fixed or determinable income on the gross amount.

3. Which deductions are allowed without any connection to effectively connected income?

Answer: Three, under IRC § 873(b) — casualty and theft losses within § 165(c)(2) or (3) for property located in the United States, charitable contributions under § 170, and one personal exemption under § 151 unless the taxpayer is a resident of a contiguous country or a United States national.

4. A nonresident alien donates to a charity organised in their home country. Is it deductible?

Answer: No. IRC § 170(c)(2)(A) requires the donee to be created or organised in the United States or a possession, or under United States, State, District of Columbia or possession law.

5. How is a student on an F-1 visa with no United States business treated?

Answer: As engaged in a United States trade or business, by IRC § 871(c), with the income described in the second sentence of § 1441(b) treated as effectively connected to the extent derived from United States sources — which brings § 871(b) rates and § 873(a) deductions into play.