[Reviewed 2/6/2024]
Taxable income received during your status as an F or J student is classified as either "effectively connected income" or "not effectively connected income." The type of income determines the tax rate applied to those types of income.
NOTE: When reading this page and looking at the 1040-NR, page 1, and 1040-NR's Schedule NEC: Keep in your mind that the 1040-NR and its schedules are designed not just for F or J student/scholar nonresident aliens. The IRS has reporting lines necessary to include income from all nonresident aliens' taxable activities.
Effectively connected to what? To a U.S. Trade or Business.
As a student on an F or J visa, your "U.S. Trade" is "student." When using tax software designed for nonresident returns (1040-NR), after you enter F or J visa student, the software will describe your occupation as "student." If you are a J visa visiting scholar, it will list an occupation such as "researcher" or "teacher." Below I will refer to students, but the same applies to J visa visiting scholars.
Common types of income that are "effectively connected" to your reason for being in the U.S. are:
Campus jobs
CPT (always related to your field of study)
OPT (always related to your field of study)
Scholarships and Grants (the taxable portion if any)
Effectively Connected Income is reported on 1040-NR, page 1. https://www.irs.gov/pub/irs-pdf/f1040nr.pdf
Fun Fact to Know and Tell: Interest paid to you related to a bank account that you opened in connection with being here a student is effectively connected, but it is not taxed and does not need to be reported on your 1040-NR.
So what is "Not Effectively Connected" Income?
For the nonresident alien on F or J student visa Not Effectively Connected Income is income that is not directly connected to your reason for being here: to be a student.
Examples of not effectively connected income are
Investing Income
Dividends (reported on 1099-DIV)
Capital Gains and Losses (reported on 1099-B)
Interest earned in connection with investing activity (reported on 1099-INT)
Other miscellaneous income earned in connection with investing activity (reported on 1099-MISC)
Income from work not authorized under (and in violation of) the terms of your visa
Prize money and awards. See IRS Pub 515 "Prizes and Awards"
Gambling income
Not Effectively Connected Income is reported on 1040-NR, Schedule NEC. https://www.irs.gov/pub/irs-pdf/f1040nrn.pdf