Introduction: Nonresident Alien Tax Rate Explained for 2027
There is no single tax rate for every nonresident alien. What you owe depends on the type of income, whether it is U.S.-source, whether it is effectively connected with a U.S. trade or business (ECI), and whether a treaty applies.
For an Australian resident, that matters even without a green card or U.S. citizenship. U.S. rental income, dividends, or work on U.S. soil can all trigger withholding or a filing duty. The IRS has already published 2027 figures, so you can plan with real numbers.
This guide covers residency tests, ECI and FDAP rates, the U.S.-Australia treaty, Form 1040-NR, withholding, state taxes and common mistakes.
Key Takeaways
- Nonresident aliens are generally taxed on U.S.-source income, not worldwide income.
- Net ECI faces graduated rates; most passive U.S. income faces 30% gross withholding.
- Treaty ceilings are 15% on dividends, 10% on interest, 5% on royalties.
- FIRPTA withholding of 10% to 15% is not the final tax.
- U.S. tax never replaces Australian reporting or foreign income tax offset analysis.
What Is a Nonresident Alien for U.S. Tax Purposes?
A nonresident alien (NRA) is a non-U.S. citizen who meets neither the green card test nor the substantial presence test for the calendar year, subject to exceptions and treaty rules.
Citizenship, visa type, SSN, ITIN and tax residency are separate things. An Australian investor holding U.S. shares may hold an ITIN and still be an NRA. A student on a U.S. visa may be an NRA for several years because exempt days are not counted.
How the IRS determines nonresident alien status
- Green card test: lawful permanent residents are generally U.S. tax residents.
- Substantial presence test: at least 31 days in the current year and 183 weighted days across three years.
- Closer connection exception: fewer than 183 actual current-year days, a foreign tax home and closer foreign ties. Claim it on Form 8840.
- Treaty tie-breaker: Article 4 of the U.S.-Australia treaty looks at permanent home, habitual abode, and personal and economic ties. A dual resident claiming treaty residence files Form 1040-NR with Form 8833.
The weighting is: all current-year days, plus one-third of the prior year, plus one-sixth of the year before. The IRS gives an example: 120 days in each year across 2023, 2024 and 2025 gives 120 + 40 + 20 = 180, which falls short of 183.
Exempt individuals (certain students, teachers, trainees and government-related people) can exclude specified days. That affects day counting only. It is not a blanket exemption from income tax, and Form 8843 documents it.
Resident, nonresident and dual-status
| Status | Taxed on | Usual return |
|---|---|---|
| Resident alien | Worldwide income | Form 1040 |
| Nonresident alien | U.S.-connected income | Form 1040-NR |
| Dual-status | Split year, each part treated separately | Dual-status return |
How the U.S. Nonresident Alien Tax Rate Works in 2027
Two systems run side by side. Which one applies depends on how the income is classified.
Effectively connected income and graduated rates
ECI includes wages for work performed in the U.S., self-employment income and profits from a U.S. business. Under IRC 871(b), it is taxed after allowable deductions at graduated rates.
The 2027 single-filer brackets, published in Revenue Procedure 2026-35:
| Rate | Taxable income |
|---|---|
| 10% | Up to $12,800 |
| 12% | $12,800 to $52,025 |
| 22% | $52,025 to $109,125 |
| 24% | $109,125 to $208,325 |
| 32% | $208,325 to $264,550 |
| 35% | $264,550 to $661,375 |
| 37% | Over $661,375 |
The marginal bracket is not your effective rate. Take a hypothetical $60,000 of net ECI. Only the slice above $52,025 is taxed at 22%; the rest is taxed at 10% and 12%. The blended rate lands well below 22%. This is an illustration only.
Limits for NRAs:
- The $16,600 standard deduction generally is not available. The exception covers certain students and apprentices under the U.S.-India treaty, not Australian residents.
- Married filing jointly and head of household are unavailable.
- The earned income credit cannot be claimed.
FDAP income and statutory withholding
FDAP means fixed, determinable, annual or periodical income: interest, dividends, rents, royalties and certain pension payments. Under IRC 871(a), non-ECI FDAP faces a 30% tax on gross income, with no deductions. Withholding agents collect it under IRC 1441.
Some items escape it. Qualifying bank-deposit interest and portfolio interest can be exempt under domestic rules.
Withholding is collected at source. It may differ from the final liability once a return is filed.
Rate versus withholding: the distinction readers miss
"Tax rate" can mean several different things:
- Graduated rate: the 10% to 37% brackets on net ECI.
- Statutory withholding rate: the flat 30% on gross FDAP.
- Treaty rate: a ceiling that may reduce the statutory rate.
- State tax: a separate layer in some states.
- Payroll tax: Social Security and Medicare, a different system.
Forms W-8BEN, W-8ECI and 1042-S affect withholding. They do not decide your overall tax residency.
Which Income Is Taxable and How the U.S.-Australia Treaty Changes the Outcome
Sourcing: where the work happens
Compensation is sourced where services are physically performed, not by the employer's country or the bank account paid into. An Australian consultant working remotely from Sydney for a U.S. client has foreign-source pay. If she spends 30 days working in New York, that portion is U.S.-source.
The IRS gives a sourcing example: a hockey player paid $150,000 for 242 service days, 194 of them in the U.S., has $120,248 of U.S.-source pay. Mixed-location work requires time allocation.
The U.S.-Australia treaty
The treaty is the 1982 convention as amended by the 2001 protocol.
| Article | Effect for individuals |
|---|---|
| 10: Dividends | 15% ceiling |
| 11: Interest | 10% ceiling, subject to exemptions |
| 12: Royalties | 5% ceiling |
| 14: Independent services | Taxed in residence state unless a fixed base exists or presence exceeds 183 days |
| 15: Employment | Short-stay exemption needs all conditions met |
| 18: Pensions | Private pensions taxed in residence state; U.S. Social Security taxed by the U.S. |
| 22: Double-tax relief | Australian credit, subject to Australian limits |
Treaty benefits are not automatic:
- Give Form W-8BEN to the payer, not the IRS
- File Form 8833 when a position requires disclosure; failure can cost $1,000
The treaty's 183-day tests are separate from the weighted residency test.
Australian reporting
Australian tax residents declare foreign income to the ATO. A foreign income tax offset may apply for qualifying U.S. tax paid, with conditions and limits. A treaty reduction does not remove Australian tax.
Real estate, rental income and capital gains
Non-ECI U.S. rent faces 30% withholding on gross rent. Under IRC 871(d), you can elect to treat qualifying real property income as ECI, deduct expenses and pay graduated rates on net income. The election covers all qualifying property, not selected ones.
FIRPTA withholding applies when a foreign person sells U.S. real property:
| Transaction | Withholding on amount realised |
|---|---|
| Buyer's residence, up to $300,000 | 0% |
| Buyer's residence, $300,000 to $1M | 10% |
| General rule, including over $1M | 15% |
Per the January 2026 Form 8288 instructions, Form 8288 is due by the 20th day after transfer. Form 8288-B can request a reduced withholding certificate.
Gains on publicly traded securities differ. They are not taxable to an NRA present fewer than 183 actual days, with exceptions. That is the actual-day count, not the weighted test.
Filing, Withholding, and Common Compliance Duties
An NRA generally files Form 1040-NR when engaged in a U.S. trade or business, or when withholding did not fully satisfy U.S. tax. Refund and treaty claims also require a return.
Documents to gather:
- Passport and visa records
- U.S. day counts
- Forms W-2 and 1042-S
- Brokerage and rental statements
- Forms W-8 and treaty-residence evidence
- Records of expenses and deductions
Key forms:
| Form | Purpose |
|---|---|
| 1040-NR | NRA income tax return |
| 8840 | Closer connection exception |
| 8843 | Excluded-day information |
| 8833 | Treaty position disclosure |
| W-8BEN | Treaty certification to payer |
| 1042-S | U.S.-source income and withholding |
| 8288-A | Transferor withholding credit |
| W-7 | ITIN application |
Under the 2025 instructions, the deadline was April 15, 2026 for wage earners subject to withholding and June 15, 2026 otherwise. Check the instructions for your return year.
Late filing costs 5% of unpaid tax per month, up to 25%. Late payment adds 0.5% per month, up to 25%.
Common mistakes:
- Assuming a treaty applies automatically
- Confusing an ITIN with tax residency
- Leaving out U.S. rental income
- Overlooking state returns
- Treating withholding as the final calculation
VJM Global prepares Form 1040-NR returns and supports treaty disclosures and ITIN applications for nonresidents with U.S.-source income. Australian businesses and investors with cross-border needs can request a tax and compliance assessment. No one can guarantee a particular U.S. tax outcome, and outcomes depend on your facts.
State Taxes, Retirement Income, and Practical Guidance for Australian Taxpayers
State tax treatment
Federal NRA status does not decide state treatment.
- California: source income can require Form 540NR, and treaty-excluded federal income may need adding back.
- New York: source income can require IT-203, and convenience-of-employer rules affect remote work.
- Texas and Florida: no individual income tax.
Payroll tax and retirement income
U.S.-performed work generally attracts Social Security and Medicare tax.
The U.S.-Australia totalisation agreement is a separate question from the income tax treaty. Qualifying assignments expected to last five years or less generally keep home-country coverage with a certificate.
Retirement income needs its own analysis:
- Default NRA withholding on Social Security is 25.5% of gross benefits (30% of 85%).
- Treaty Article 18(2) preserves U.S. taxation of U.S. Social Security.
- U.S. pension distributions face 30% withholding absent treaty relief. Qualifying private pensions can get residence-state treatment.
- State treatment varies. Do not assume any state exempts every retirement payment.
A decision path
- Determine your U.S. tax status.
- Identify the income source.
- Classify it as ECI or FDAP.
- Check treaty eligibility.
- Review withholding documents.
- Assess Australian reporting and the foreign income tax offset.
- Get advice when several countries or states are involved.
Frequently Asked Questions
What is the tax rate for a foreign resident?
It depends on the country, income type, source and treaty position, and on whether you mean withholding or final tax. In the U.S., see the ECI and FDAP distinction above.
What is a nonresident alien in the U.S.?
A tax term for someone who is not a U.S. citizen and fails both the green card and substantial presence tests. It is separate from citizenship, immigration status and Australian tax residence.
What states let you keep all of your social security and 401(k)?
It varies by state and is separate from federal NRA status. Check the relevant state's rules and the U.S.-Australia treaty. Texas and Florida have no individual income tax.
Do Australian residents pay U.S. tax on U.S.-source income?
Often, yes, on certain U.S.-source income, even as NRAs. The treaty and Australian foreign income rules affect the final result.
Which tax form does a nonresident alien use to file a U.S. tax return?
Form 1040-NR in applicable cases. Forms 8843, 8833, W-8BEN or a state return may also be relevant.
How is nonresident alien income taxed in the United States?
Net ECI is taxed at graduated rates. Non-ECI FDAP generally faces 30% gross withholding. Treaty provisions can reduce or change the result.
