Interest income tax for US nonresidents explained: Everything you need to know

Are you a nonresident living in the US? Getting to grips with the complexities of the US tax system can be daunting, especially for nonresidents dealing with interest income.

However, a basic understanding of some of the key information regarding interest income can be crucial for ensuring compliance and avoiding potential and unnecessary penalties!

Interest income is just one of the many forms of income you may earn in the US.

This article will help you grasp the key aspects and obligations associated with your interest income as a nonresident.

What is interest income?

Firstly, let’s properly define what interest income is.

Interest income is the interest earned by an individual for lending funds over a period of time.

Examples of types include interest income earned from savings accounts, certificates of deposit, and bonds.

It is also important to note that interest income is not the same as dividend income.

Do foreigners pay taxes on US interest income?

If you are considered a nonresident alien (NRA), interest income paid to you from US sources will generally be subject to tax. The interest income tax rate is 30%.

However, it is important to highlight that this rate will be lessened if your country has a tax treaty.

Always check if your home country has such treaty with the US, as it might save you money! (If you are unsure about the topic of tax treaties, you can check it out here).

Is bank interest taxable for nonresident aliens?

Nonresidents are exempt on certain types given such interest income is not effectively connected with a US trade or business and provided interest income originates from the following sources:

• A US bank account
• A US savings and loan association
• A US credit union
• A US insurance company
• Certain portfolio interest

However, this should still be reported on Form 1042-S.

Additionally, non-residents must provide a W-8BEN form to institutions (e.g. bank) to inform them that you are a nonresident alien, and the interest income accruing to your account at these institutions is not subject to taxation.

This can be notoriously tricky for nonresidents to complete. If in doubt or in need of a helping hand, you can use Sprintax to correctly prepare your W-8BEN form and ensure that you are correctly taxed from the start.

How do I report interest income as a nonresident alien?

It is crucial for nonresidents to comply with their tax obligations. If you do not file correctly or on time you risk obtaining penalties and fines from IRS, and potentially harming future US visa applications.

Remember, the US tax deadline will fall on 15 April 2025.

The 1040-NR form is the primary tax return form for nonresidents who earned US-sourced income. This needs to be filed during tax season. You must file tax exempt interest alongside taxable interest in this form.

How can Sprintax help me with my interest income?

Naturally, many nonresidents in the US feel uneasy and overwhelmed about the prospect of handling their tax obligations independently.

That’s where Sprintax can assist you! When you file with Sprintax, you can enjoy a stress-free service from start to finish. Using Sprintax simplifies the tax-filing process, saving you time and giving you peace of mind that your taxes are handled efficiently and correctly.

You can rest assured that your US tax return will be fully compliant when you use Sprintax.  

Plus, if you have any questions throughout the tax filing process, our live chat team are on hand 24/7 to support you.

With Sprintax you can:

• Save time and stress!
• Be 100% tax compliant
• Determine your residency status
• Prepare a fully compliant US tax return
• E-file form 1040-NR
• 24/7 support

Check out Sprintax tax preparation and compliance software for foreign investors in the U.S.