Straw residual retention is an emerging and promoted practice in rain-fed northwest China, but its effect on wheat photosynthetic characteristics, the utilization of water and nitrogen, and reactive nitrogen losses is poorly understood. A two-year consecutive field experiment was conducted to investigate the impacts of residual incorporation into soil and nitrogen application on wheat nitrogen and water utilization, yield and nitrogen losses during 2018–2020. The split-plot design of two tillage systems [conventional tillage (CT), and straw residue incorporated into soil (SR)] and three nitrogen rates [0 kg ha−1 (N0), 144 kg ha−1 (N144), 180 kg ha−1 (N180)] was implemented. Our results demonstrated that compared to CT, SR significantly influenced several key metrics. Compared with CT, SR increased the wheat photosynthetic rate (Pn), transpiration rate (Tr), leaf area index (LAI), leaf total chlorophyll (Chl-total), glutamine synthetase (GS) and nitrate reductase (NR) by an average of 5.38%, 12.75%, 8.21%, 5.79%, 16.21% and 20.08%, respectively (p < 0.05). In addition, SR increased the wheat grain yield and nitrogen uptake accumulation (NUA), evapotranspiration (ET), precipitation storage efficiency (PSE), and mineral nitrogen residual after harvest (except for SR-N180 in 2019–2020), but decreased the apparent nitrogen recovery when compared with CT. However, there was an insignificant difference in the ammonia (NH3) volatilization and nitrous oxide (N2O) emissions of SR and CT. With an increase in the N-fertilization rate, the Pn and Tr, NH3 volatilization, N2O emission, mineral nitrogen residual (except for SR-N180 in 2019–2020), LAI, Chl-total (except for SR-N180 and CT-N180 in 2018–2019), GS, NR, grain yield, WUE, and NUA increased significantly; however, the ET, PSE, apparent nitrogen recovery (ANR), and nitrogen harvest index (NHI) decreased significantly. Furthermore, the differences between N144 and N180 in terms of the photosynthetic characteristics of wheat, the utilization of water and nitrogen, and yield were not significant. Overall, straw retention with N144 could be recommended as a resource-saving and environment-friendly management practice in a rain-fed winter wheat–fallow cropping system in northwest China.