IRS Form 1040-NR (Schedule NEC)

IRS Form 1040-NR (Schedule NEC)  – Nonresident aliens with U.S.-source income face a unique U.S. tax system that splits income into two categories: effectively connected income (ECI) and income not effectively connected (often called FDAP or NEC income). Schedule NEC (Form 1040-NR) calculates the tax on the second category—typically taxed at a flat 30% rate (or lower treaty rate) on the gross amount, with limited or no deductions.

This IRS Form 1040-NR Schedule NEC guide explains the purpose, who must file it, what income to report, step-by-step completion instructions for tax year 2025, treaty benefits, common pitfalls, and how to claim refunds of overwithheld tax. Always download the latest forms from IRS.gov, including the provided PDF: https://www.irs.gov/pub/irs-pdf/f1040nrn.pdf.

What Is Schedule NEC (Form 1040-NR)?

Schedule NEC, formally titled “Tax on Income Not Effectively Connected With a U.S. Trade or Business,” is a required attachment to Form 1040-NR for nonresident aliens. It computes the flat-rate tax on U.S.-source FDAP (Fixed, Determinable, Annual, or Periodical) income and certain capital gains/losses that are not tied to a U.S. trade or business.

Key distinction:

  • ECI (e.g., U.S. wages from working in the U.S., business profits) → Reported on the main Form 1040-NR and taxed at graduated rates (like U.S. residents), with allowable deductions.
  • Non-ECI / FDAP / NEC income (e.g., dividends, royalties, certain interest, pensions) → Reported on Schedule NEC and taxed at 30% flat rate (or treaty-reduced rate) on the gross amount—no deductions generally allowed.

The total tax from Schedule NEC, line 15, transfers to Form 1040-NR, line 23a.

Example of Schedule NEC (Form 1040-NR) for tax year 2025

Who Must File Schedule NEC?

You generally need Schedule NEC if you are a nonresident alien (or certain estates/trusts) and:

  • Receive U.S.-source income not effectively connected with a U.S. trade or business.
  • Had tax withheld at source (e.g., via Form 1042-S) and want to report the correct (often lower) treaty rate or claim a refund of excess withholding.
  • Have U.S.-source capital gains not effectively connected (and were present in the U.S. 183 days or more in the tax year).
  • Qualify for the simplified refund procedure (no ECI, all income fully withheld, seeking refund of overwithheld tax).

Even if no additional tax is due, filing Form 1040-NR with Schedule NEC is often required to claim refunds or properly document treaty benefits.

Common Types of Income Reported on Schedule NEC

Part I covers FDAP and similar income. Typical examples include:

  • Dividends (from U.S. or foreign corporations, dividend equivalents).
  • Interest (non-portfolio or certain other interest).
  • Royalties (patents, copyrights, natural resources).
  • Rents and royalties from real property (if not elected as ECI).
  • Pensions and annuities (U.S. source, non-ECI portion).
  • Social Security benefits (85% taxable portion).
  • Gambling winnings (special rules for Canadians).
  • Alimony (from pre-2019 agreements).
  • Other FDAP income (prizes, awards, certain distributions).

Part II handles capital gains and losses from U.S.-source property sales/exchanges not effectively connected (e.g., stocks, if present 183+ days).

Note: U.S. real property interest gains are usually treated as ECI (report on Schedule D/4797 instead).

Tax Rates and Tax Treaty Benefits

The default rate is 30% on gross income. Many tax treaties reduce this to 0%, 10%, 15%, or other rates for dividends, interest, royalties, etc.

  • Use columns (a) 10%, (b) 15%, (c) 30%, or (d) Other (specify rate, including 0%).
  • To claim treaty benefits: Be a resident of the treaty country, meet all conditions (e.g., no U.S. permanent establishment), and properly document on Schedule OI (Form 1040-NR), item L. Attach Form 8833 if required for certain disclosures.
  • Report treaty-exempt income on Schedule NEC at the reduced rate (often 0% in column d) even if 30% was withheld—to claim a refund.

Consult IRS Publication 901 (U.S. Tax Treaties) and the specific treaty for your country.

How to Complete Schedule NEC: Step-by-Step (2025)?

Part I – Tax on Income Not Effectively Connected

Enter gross income in the appropriate row and rate column:

  • Lines 1a–1d: Dividends and dividend equivalents.
  • Lines 2a–2d: Interest.
  • Lines 3a–3d: Royalties.
  • Line 6: Real property income and natural resources royalties (non-ECI).
  • Line 7: Pensions and annuities.
  • Line 8: Social Security benefits (85% from Form SSA-1042S).
  • Line 9: Capital gain (from Part II, line 18).
  • Lines 10a–10c: Gambling winnings/losses (Canada residents only—net in column c).
  • Line 11: Gambling winnings (other countries—per treaty).
  • Line 12: Other income.

Line 13: Total income per column.
Line 14: Multiply line 13 by the rate at the top of each column.
Line 15: Add columns (a)–(d) → Enter on Form 1040-NR, line 23a.

Part II – Capital Gains and Losses

  • Line 16: Long-term capital gains from U.S. sources (non-ECI).
  • Line 17: Capital losses (limited rules—no carryovers generally).
  • Line 18: Net gain/loss → Flows to Part I, line 9.

Attach supporting forms (1042-S, 1099, SSA-1042S, etc.) when filing.

Visual reference: Schedule NEC in context with Schedule OI for treaty claims

Withholding, Refunds, and the Simplified Procedure

Payers usually withhold 30% on FDAP income and report on Form 1042-S. If a treaty applies or overwithholding occurred, file Form 1040-NR + Schedule NEC to recover the difference.

Simplified refund procedure (for those with only non-ECI income, fully withheld, no other U.S. tax obligations):

  • File minimal Form 1040-NR (name, ID, Schedule NEC, payments section, Schedule OI).
  • Attach withholding forms.
  • Claim refund of excess tax.

Common Mistakes to Avoid

  • Mixing ECI and non-ECI income.
  • Forgetting to claim treaty rates (and proper Schedule OI documentation).
  • Applying deductions to FDAP income (generally not allowed).
  • Omitting capital gains when present in the U.S. 183+ days.
  • Not attaching Forms 1042-S or 1099.

Where to Find Help and Download Forms (2025)

Important Disclaimer: This article provides general information based on current IRS guidance for tax year 2025 and is not tax or legal advice. Tax rules are complex and individual circumstances vary. Consult a qualified tax professional or the IRS for your specific situation. Filing deadlines are typically April 15 (or June 15 in some cases) for nonresident aliens.

Filing correctly with Schedule NEC helps ensure compliance, claim treaty benefits, and recover overwithheld taxes. For personalized assistance, consider using IRS Free File (if eligible) or professional tax software/services experienced with nonresident alien returns.

Keywords: IRS Form 1040-NR Schedule NEC, nonresident alien FDAP tax, 30% withholding refund, U.S. tax treaty benefits 2025, how to file 1040-NR non-ECI income.