Income of a nonresident alien is divided into two categories: FDAP — Fixed, Determinable, Annual, or Periodical Fixed, Determinable, Annual, or Periodical (FDAP) income is all income, except: Gains derived from the sale of real or personal property (including market discount and option premiums, but not including original issue discount) Items of income excluded from gross income, without regard to the U.S. or foreign status of the owner of the income, such as tax-exempt municipal bond interest and qualified scholarship income Income is fixed when it is paid in amounts known ahead of time. Income is determinable whenever there is a basis for figuring the amount to be paid. Income can be periodic if it is paid from time to time. It does not have to be paid annually or at regular intervals. Income can be determinable or periodic, even if the length of time during which the payments are made is increased or decreased. FDAP income consists primarily of passive investment income — interest, dividends, rents, royalties, etc. In theory, FDAP income may consist of any kind of U.S. source income attributable to a foreign person. Deductions are not allowed against FDAP income and it is taxed at a flat 30% rate or lesser rate under a tax treaty. The FDAP income of a nonresident alien is reported on Schedule NEC (Form 1040-NR), Tax on Income Not Effectively Connected With a U.S. Trade or Business PDF. ECI — Effectively Connected Income Income which is Effectively Connected with a U.S. Trade or Business. The income must relate to an activity such as a trade or business under the principles of U.S. tax law (including the personal service income of an individual who performs services in the United States). Investment income will be considered to be ECI if: The income is associated with U.S. assets used in, or held for use in, the conduct of that trade or business; or The activities of that trade or business conducted in the U.S. are a material factor in the realization of the income. Deductions are allowed against ECI, and net ECI is taxed at the same graduated rates used by U.S. citizens. The ECI of a nonresident alien is reported on the appropriate forms and schedules that flow to page 1 of Form 1040-NR, U.S. Nonresident Alien Income Tax Return. Related Fixed, Determinable, Annual, Periodical (FDAP) Income Effectively Connected Income (ECI) Taxation of Nonresident Aliens Taxation of Nonresident Aliens (Tax Gap article)