What IRS Form 1040-ES (NR) (2018) Is For
IRS Form 1040-ES (NR) (2018) is used by nonresident alien individuals to calculate and pay estimated tax to the Internal Revenue Service when they receive taxable income that is not subject to withholding during the tax year. This form helps determine tax liability for income that is effectively connected with a U.S. trade or business, ensuring that taxpayers meet their income tax obligations throughout the year. It guides nonresident aliens in managing estimated tax obligations and avoiding penalties.
When You’d Use IRS Form 1040-ES (NR) (2018)
You would use IRS Form 1040-ES (NR) (2018) when you meet specific tax obligations for the current tax year.
- You expect to owe at least $1,000 in income tax: This applies when withholding and available credits will not cover the tax shown for the current tax year based on your earnings and allowable deductions.
- Your taxable income is not subject to withholding: This applies to income such as self-employment earnings, rental income, or capital gains that require making estimated tax payments during the year.
- Your residency status meets nonresident alien rules: This applies when you fail the substantial presence test or the green card test and must follow tax rules designed for nonresident alien individuals.
- You received income effectively connected with a U.S. trade or business: This applies when you receive income taxed under graduated rates and must prepay estimated taxes on that income.
- You had a previous year's tax liability that triggers estimated tax requirements: This applies when the Internal Revenue Service determines that your prior tax returns require estimated tax payments to stay compliant with tax laws.
Key Rules or Details for the 2018 Tax Year
Several vital rules for IRS Form 1040-ES (NR) (2018) determine how nonresident alien taxpayers calculate and pay estimated taxes for the calendar year.
- Nonresident aliens must calculate tax on effectively connected income: This rule requires using graduated rates that apply to income taxed similarly to resident taxpayers.
- FDAP income may require applying a flat 30 percent rate or a treaty rate: This applies when interest, dividends, or royalty income is taxed separately from business income under special rules.
- Itemized deductions follow special rules, which include limits on deductions and requirements that differ from those applied to residents.
- Tax credits apply only when eligibility requirements are met: This requires meeting Internal Revenue Service criteria before claiming credits for the tax year.
- Quarterly due dates must be followed to avoid penalties: This includes making estimated tax payments by the required dates issued by the Internal Revenue Service for the current year.
Step-by-Step (High Level)
The high-level steps for completing IRS Form 1040-ES (NR) (2018) follow a clear structure created by the Internal Revenue Service.
- Gather income records to calculate expected taxable income: This includes reviewing wages, business earnings, capital gains, interest, and all income effectively connected with a U.S. trade or business.
- Determine residency status for tax purposes: This requires applying the substantial presence test and the green card test to confirm that you must file as a nonresident alien for the current tax year.
- Estimate total income tax for the current year: This involves applying the graduated rates for 2018 and adding self-employment tax if you receive qualifying business income.
- Subtract tax credits and expected withholding: This step helps determine the remaining tax liability that must be prepaid through estimated taxes.
- Divide and pay your quarterly estimated tax payments: This requires submitting each estimated tax payment by its due date using the IRS website or payment vouchers provided in the payment package.
- Record payments for use when you file Form 1040-NR: This ensures that your tax returns for the following year accurately report every payment you made throughout the current year.
Common Mistakes and How to Avoid Them
Several common errors occur when taxpayers use IRS Form 1040-ES (NR) (2018); however, each mistake can be prevented with proper attention and accurate recordkeeping.
- Incorrectly determining residency status: You can avoid this by applying the substantial presence test and the green card test to confirm whether you qualify as a nonresident alien before filing.
- Misunderstanding which income is effectively connected: You can avoid this by reviewing the Internal Revenue Service rules for business income, capital gains, and FDAP income to ensure you classify each type correctly.
- Forgetting to include self-employment tax: You can avoid this by calculating self-employment tax on net earnings whenever you receive income from business activities during the tax year.
- Missing estimated tax due dates: You can avoid this by marking the quarterly dates on your calendar and using electronic payment options to ensure timely payments.
- Using incorrect tax rates or treaty benefits: You can avoid this by checking whether your foreign country has a tax treaty with the United States that allows a lower treaty rate for certain types of income.
What Happens After You File
After you make estimated tax payments using IRS Form 1040-ES (NR) (2018), the Internal Revenue Service credits the amounts to your taxpayer account and tracks them for the tax year. When you later file your Form 1040-NR, these payments reduce the income tax you owe and may result in a refund if you paid more than required. If your payments were insufficient, the remaining balance must be paid with your tax return, and interest may apply until the balance is fully paid.
FAQs
Do nonresident aliens need to make estimated taxes on capital gains?
Yes, nonresident aliens must make estimated taxes on capital gains when the gains are effectively connected with a U.S. trade or business, and the expected tax will not be covered by withholding.
Can a tax treaty reduce the estimated tax for IRS Form 1040-ES (NR) (2018)?
Yes, a tax treaty can reduce the rate applied to certain types of income, and taxpayers may use the lower treaty rate when calculating their estimated tax obligations.
What happens if a nonresident alien becomes a resident alien later in the year?
A change to resident alien status creates a dual-status year. For tax purposes, estimated taxes must follow the rules for nonresident income for the portion of the year before the change in residency.
Are wages always included when making estimated tax payments?
No, wages with adequate withholding may reduce or eliminate the need for estimated tax payments, although estimated taxes are still required if withholding will not cover the total tax shown.
