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I am from Europe, and I did an internship in the US (California) in 2015. When filing my 2015 taxes, I ended up having to pay some small difference for the federal taxes, but got a refund on my state taxes, of roughly $1.6k. That was all the income I had in the US in 2016.

I did not enter the US in 2016 at all.

I managed to figure out that I don't need to file any California tax forms for 2016 (source: https://www.ftb.ca.gov/individuals/FileRtn/) but I am not sure about federal taxes.

I tried researching the problem, and got some information on it, but the situation is still a bit unclear. It seems that since I listed my state tax as an itemized deduction in my 2015 tax report, which I filed in 2016, the state refund I got in 2016 is, in fact, taxable.

In this situation, would I have to file my taxes (and possibly pay owed tax) for 2016, even though I never set foot in the US in that year, and my total income is just $1.6k?

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I believe you have to file a tax return, because state tax refund is considered income effectively connected with US trade or business, and the 1040NR instructions section "Who Must File" includes people who were engaged in trade or business in the US and had a gross income.

You won't end up having to pay any taxes as the income is less than your personal exemption of $4050.

  • I see. But am I still eligible to claim the personal exemption, given that the instructions for line 13 of 1040NR-EZ state that "You can claim exemptions only to the extent of your income that is effectively connected with a U.S. trade or business." Is a state tax refund considered "connected with a U.S. trade or business"? – Andrei Bârsan Mar 5 '17 at 17:59
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    @AndreiBârsan: Well, on the 1040NR, state tax refunds (line 11) is listed under the "Income Effectively Connected With U.S. Trade/Business", and the fact that you have to treat it as taxable income in the first place indicates that it is effectively connected, as nonresidents are not taxed on income that is not effectively connected to US trade or business. – user102008 Mar 5 '17 at 19:49
  • Thanks for the follow-up. So (as an example; I won't be filing 1040NR) basically anything not listed the "Schedule NEC—Tax on Income Not Effectively Connected With a U.S. Trade or Business" IS considered effectively connected with a US Trade or Business? – Andrei Bârsan Mar 5 '17 at 21:17
  • I have been researching this a little more, and have yet to find any 100% clear information. Do you know where exactly in the form instructions are state tax refund explicitly listed as "Income Effectively Connected With U.S. Trade/Business"? – Andrei Bârsan Mar 12 '17 at 18:10
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Did you claim the standard deduction in your tax return last year? If yes, then your state tax refund is not classed as taxable income this year, even though it is effectively connected with a US source.

Then you are probably not required to file a federal return, since the IRS says:

If you are any of the following, you must file a return:

  1. A nonresident alien individual engaged or considered to be engaged in a trade or business in the United States during the year. However, if your only U.S. source income is wages in an amount less than the personal exemption amount (see Publication 501, Exemptions, Standard Deduction, and Filing Information), you are not required to file.

  2. A nonresident alien individual who is not engaged in a trade or business in the United States and has U.S. income on which the tax liability was not satisfied by the withholding of tax at the source.

  3. ... (other cases not relevant to this question)

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Since $1.6k is less than the standard deduction, you like will not have to file a tax return.

There are a number of factors that determine whether you need to file a tax return — including your annual income, your age, your marital status, and whether or not you have dependents. It is important to make sure that you are exempt from filing so you don’t mistakenly neglect to submit a tax return to the IRS.

In most cases, you will need to file a return if any of the following are true:

Your gross income was over $10,000 as a single filer (or over $20,000 as a married couple filing jointly) You earned over $400 from self-employment You sold your home during the tax year You owe taxes because of your retirement account, either from distributions or excess contributions You owe Social Security and Medicare taxes on tips that were not reported to your employer, or on wages that your employer did not withhold these taxes from Note that there are many other circumstances that may require you to file an income tax return, even if none of the above factors apply to you. If you are unsure, a tax professional can help advise you on whether or not you need to file.

...

The Advantages of Filing a Federal Income Tax Return Even if you are not required by law to file a tax return, in some cases it may be in your interest to file one anyway. For example, almost anyone who has dependents can benefit by filing an income tax return.

Most people who are exempt from filing do not owe any taxes. However, they may still be eligible for a tax refund. There are several tax credits and tax deductions that you might qualify for, which can help reduce your tax liability or increase your tax refund.

NOTE: Non-refundable tax credits cannot exceed your tax liability — so once your tax balance is brought down to $0, you have maxed out on that credit for the year. On the other hand, refundable tax credits can go beyond your tax liability and result in a tax refund check.

https://www.irs.com/articles/who-has-file-federal-income-tax-return

  • Those are the rules for residents -- more exactly, tax residents which under US law includes all citizens even if they are living elsewhere. Filing requirements, and tax rules in general, are mostly different for nonresidents. – dave_thompson_085 Apr 8 '18 at 23:29

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