Introduction U.S. Tax Guide Important Changes for Aliens · Introduction For tax purposes, an alien...

ContentsIntroduction ........................................ 1

Important Changes ............................ 2

Important Reminders ......................... 2

1. Nonresident Alien or ResidentAlien? ........................................... 3

2. Source of Income ........................ 10

3. Exclusions From Gross Income 12

4. How Income of Aliens Is Taxed 14

5. Figuring Your Tax ...................... 19

6. Dual-Status Tax Year ................. 24

7. What, When, and Where To File 32

8. Paying Tax ThroughWithholding or Estimated Tax ... 33

9. Tax Treaty Benefits .................... 40

10. Employees of ForeignGovernments and InternationalOrganizations .............................. 42

11. Departing Aliens and the Sailingor Departure Permit .................... 43

12. How To Get More Information . 45

Appendix A—Tax Treaty ExemptionProcedure for Students .............. 46

Appendix B—Tax Treaty ExemptionProcedure for Teachers andResearchers ................................. 48

Index .................................................... 51

IntroductionFor tax purposes, an alien is an individual

who is not a U.S. citizen. Aliens are classifiedas nonresident aliens and resident aliens.This publication will help you determine yourstatus and give you information you will needto file your U.S. tax return. Resident aliensgenerally are taxed on their worldwide in-come, the same as U.S. citizens. Nonresidentaliens are taxed only on their income fromsources within the United States and on cer-tain income connected with the conduct of atrade or business in the United States.

What you need to know. Table A, What YouNeed To Know About U.S. Taxes, providesa list of questions you need to answer to helpyou meet your U.S. tax obligations. After eachquestion is the chapter or chapters in thispublication where you will find the relateddiscussion.

The information in this publication is notas comprehensive for resident aliens as it isfor nonresident aliens. Resident aliens aregenerally treated the same as U.S. citizensand can find more information in other IRSpublications.

Departmentof theTreasury

InternalRevenueService

Publication 519Cat. No. 15023T

U.S. Tax Guidefor AliensFor use in preparing

1997 Returns

Get forms and other information faster and easier by: COMPUTER• World Wide Web ➤ www.irs.ustreas.gov• FTP ➤ ftp.irs.ustreas.gov• IRIS at FedWorld ➤ (703) 321-8020 FAX• From your FAX machine, dial ➤ (703) 368-9694See How To Get More Information in this publication.

Table A. What You Need To Know About U.S. Taxes

Commonly Asked Questions Where To Find The Answer

Am I a nonresident alien or resident alien?

The following questions relate to topics covered in this publication. The answers to these most commonly asked questionswill help you prepare your U.S. tax return.

Can I be a nonresident alien and a resident alien in the same year?

I am a resident alien and my wife is a nonresident alien, are therespecial rules for us?

Is all of my income subject to U.S. tax?

Do I have to pay U.S. income tax on my scholarship?

How much U.S. income tax will I have to pay?

I moved to the U.S. this year. Can I deduct my moving expenses onmy U.S. return?

Can I claim an exemption for my spouse and children?

I pay income taxes to my home country. Can I get credit for thesetaxes on my U.S. tax return?

What forms must I file and when and where do I file them?

How do I pay my U.S. income taxes?

Am I eligible for any benefits under a tax treaty?

Are employees of foreign governments and internationalorganizations exempt from U.S. tax?

Is there anything special I have to do before leaving the UnitedStates?

See chapter 1.

● See Dual Status Aliens in chapter 1.

● See chapter 6.

● See Nonresident Spouse Treated as aResident in chapter 1.

● See Community Income in chapter 2.

● See Chapter 2.

● See Chapter 3.

● See Scholarships, Grants, Prizes, and Awardsin chapter 2.

● See Scholarships and Fellowship Grants inchapter 3.

● See chapter 9.

See chapter 4.

See Deductions in chapter 5.

See Exemptions in chapter 5.

See Tax Payments and Credits in chapter 5.

See chapter 7.

See chapter 8.

● See Income Entitled to Tax Treaty Benefits inChapter 8.

● See chapter 9.

See chapter 10.

● See chapter 11.

● See Expatriation Tax in chapter 4.

Important ChangesExclusion of gain from sale of home. If yousold your main home after May 6, 1997, youmay be able to exclude from income up to$250,000 of the gain realized on the sale. Seechapter 3 for more information.

Resident aliens from France. The UnitedStates and France have come to an agree-ment to relieve double taxation of U.S. per-manent residents who receive wages andpensions for governmental services per-formed for the government of France. Gen-erally, If you received income of this type in1996, the income is taxable only in France.You should attach the following statement toyour 1996 U.S. income tax return (Form1040): “I/We am/are not taxable in the UnitedStates under Article 19 of the Income TaxConvention between the United States andFrance on compensation or pension income

received in 1996 for services rendered to theFrench Government that are of a govern-mental nature, pursuant to a 1997 CompetentAuthority agreement between the UnitedStates and France. ” If you have already filedyour 1996 return and did not include this in-come, you do not have to amend your returnto include the above statement. If you filedyour 1996 return and paid tax on this income,you should file an amended return and in-clude the above statement on your claim forrefund.

For 1997 this income is taxable in theUnited States. See chapter 10 for more in-formation.

Important RemindersIndividual taxpayer identification number(ITIN). The IRS will issue an ITIN to a non-resident or resident alien who does not have

and is not eligible to get a social securitynumber. To apply for an ITIN, file Form W–7,Application for IRS Individual Taxpayer Iden-tification Number, with the IRS. An ITIN is fortax use only. It does not entitle the holder tosocial security benefits or change the holder'semployment or immigration status under U.S.law. See Identification Numbers in chapter 5.

Form 1040NR–EZ. You may be able to useForm 1040NR–EZ, U.S. Income Tax Returnfor Certain Nonresident Aliens With No De-pendents. This form is shorter and easier toprepare than Form 1040NR. To see if youmeet the conditions for filing this form, seeForm 1040NR–EZ in chapter 7.

Earned income credit for nonresident al-iens. If you are a nonresident alien for anypart of the year, you cannot claim the earnedincome credit unless you elect to be treatedas a resident alien for tax purposes.

Taxation of U.S. social security benefitsreceived by nonresident aliens. 85% ofany U.S. social security benefit received bya nonresident alien is subject to tax at a rateof 30%, unless exempt by treaty.

Change of address. If you change yourmailing address, be sure to notify the InternalRevenue Service using Form 8822, Changeof Address.

Nonresident aliens who filed Form1040NR or Form 1040NR–EZ with the Inter-nal Revenue Service Center, Philadelphia,PA 19255, should send the form there. Resi-dent aliens should send the form to theInternal Revenue Service Center for their oldaddress (addresses for the Service Centersare on the back of the form).

Expatriation tax. If you are a former U.S.citizen or former long-term U.S. resident,special tax rules may apply to you. SeeExpatriation Tax in chapter 4.

1.NonresidentAlien orResident Alien?

IntroductionYou should first determine whether, for in-come tax purposes, you are a resident alienor a nonresident alien. Figure 1–A will helpyou find whether you are a resident or non-resident alien.

If you are both a nonresident and residentin the same year, you have a dual status.Dual status is explained later. Also explainedlater is a choice to treat your nonresidentspouse as a resident and some other specialsituations.

TopicsThis chapter discusses:

• How to determine if you are a nonresi-dent, resident, or dual-status alien

• How to treat a nonresident spouse as aresident alien

Useful ItemsYou may want to see:

Form (and Instructions)

m 1040 U.S. Individual Income Tax Return

m 1040A U.S. Individual Income Tax Return

m 1040NR U.S. Nonresident Alien IncomeTax Return

m 8833 Treaty-Based Return PositionDisclosure Under Section 6114or 7701(b)

m 8840 Closer Connection ExceptionStatement for Aliens

m 8843 Statement for Exempt Individualsand Individuals With a MedicalCondition

See chapter 12 for information about get-ting these publications and forms.

Nonresident Aliens If you are an alien (not a U.S. citizen), youare considered a nonresident alien unless youmeet one of the two tests described next un-der Resident Aliens.

Resident Aliens You are a resident alien of the United Statesfor tax purposes if you meet either the greencard test or the substantial presence testfor the calendar year (January 1–December31). Even if you do not meet either of thesetests, you may be able to choose to betreated as a U.S. resident for part of the year.See First-Year Choice under Dual Status Al-iens, later.

Green Card Test You are a resident for tax purposes if you area lawful permanent resident of the UnitedStates at any time during the calendar year.(However, see Dual Status Aliens, later.) Thisis known as the “green card” test. You are alawful permanent resident of the UnitedStates at any time if you have been given theprivilege, according to the immigration laws,of residing permanently in the United Statesas an immigrant. You generally have thisstatus if the Immigration and NaturalizationService (INS) has issued you an alien regis-tration card, also known as a “green card”.You continue to have resident status underthis test unless it is taken away from you oris administratively or judicially determined tohave been abandoned.

Resident status taken away. Resident sta-tus is considered to have been taken awayfrom you if the U.S. government issues youa final administrative or judicial order of ex-clusion or deportation. A final judicial orderis an order that you may no longer appeal toa higher court of competent jurisdiction.

Resident status abandoned. An adminis-trative or judicial determination of abandon-ment of resident status may be initiated byyou, the INS, or a U.S. consular officer.

If you initiate the determination, yourresident status is considered to be aban-doned when you file either of the followingwith the INS or U.S. consular officer:

1) Your application for abandonment, or

2) Your Alien Registration Receipt Card at-tached to a letter stating your intent toabandon your resident status.

You must file the letter by certified mail, returnreceipt requested. You must keep a copy ofthe letter and proof that it was mailed andreceived.

If the INS or U.S. consular officer initiatesthis determination, your resident status willbe considered to be abandoned when thefinal administrative order of abandonment isissued. If you are granted an appeal to afederal court of competent jurisdiction, a finaljudicial order is required.

CAUTION!

A long-term resident who ceases tobe a lawful permanent resident maybe subject to special reporting re-

quirements and tax provisions. SeeExpatriation Tax in chapter 4.

Substantial Presence Test You will be considered a U.S. resident for taxpurposes if you meet the substantial presencetest for the calendar year. To meet this test,you must be physically present in the UnitedStates on at least:

1) 31 days during the current year, and

2) 183 days during the 3-year period thatincludes the current year and the 2 yearsimmediately before that, counting:

a) All the days you were present in thecurrent year, and

b) 1 / 3 of the days you were present inthe first year before the currentyear, and

c) 1 / 6 of the days you were present inthe second year before the currentyear.

Example. You were physically present inthe United States on 120 days in each of theyears 1995, 1996, and 1997. To determine ifyou meet the substantial presence test for1997, count the full 120 days of presence in1997, 40 days in 1996 (1/3 of 120), and 20days in 1995 (1/6 of 120). Since the total forthe 3-year period is 180 days, you are notconsidered a resident under the substantialpresence test for 1997.

The term United States includes the fol-lowing:

1) All 50 states and the District ofColumbia,

2) The territorial waters of the UnitedStates, and

3) The seabed and subsoil of those sub-marine areas that are adjacent to U.S.territorial waters and over which theUnited States has exclusive rights underinternational law to explore and exploitnatural resources.

The term does not include U.S. possessionsand territories or U.S. airspace.

Chapter 1 Nonresident Alien or Resident Alien?

Figure 1-A. Nonresident Alien or Resident Alien?

Start here to determine your status for 1997

Yes No

Were you a lawful permanent resident of the United States (had a“green card”) at any time during 1997?

Were you physically present in the United States on at least 31days during 1997?

Were you physically present in the United States on at least 183days during the 3-year period consisting of 1995, 1996, and1997, counting all days of presence in 1997, 1⁄3 the days ofpresence in 1996, and 1⁄6 the days of presence in 1995?3

Do you still meet the 183-day test of the preceding question ifyou disregard days for which you were an exempt individual(student, teacher, diplomat, etc., as discussed under ExemptIndividual)?

Were you physically present in the United States on at least 183days during 1997?

Can you show that for 1997 you have a tax home in a foreigncountry and have a closer connection to that country than to theUnited States?

You are aresident alienfor U.S. taxpurposes.1,2

You are anonresidentalien for U.S.tax purposes.

1 If this is your first or last year of residency, you may have a dual status for the year. See the discussion of Dual Status Aliens in Chapter 1.2 In some circumstances you may still be considered a nonresident alien under an income tax treaty between the U.S. and your country. Check the provisions of

the treaty carefully.3 Do not count the days you were unable to leave the United States because of a medical condition that arose while you were in the United States.4 If you meet the substantial presence test for 1998, you may be able to choose treatment as a U.S. resident alien for part of 1997. For details see Substantial

Presence Test under Resident Aliens and First-year choice under Dual-Status Aliens in Chapter 1.

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Days of Presencein the United StatesYou are treated as present in the UnitedStates on any day if you are physically pres-ent in the country at any time during the day.However, there are exceptions to this rule.Do not count the following as days of pres-ence in the United States for the substantialpresence test:

1) Days you commute to work in the UnitedStates from a residence in Canada orMexico if you regularly commute fromCanada or Mexico,

2) Days you are in the United States forless than 24 hours when you are intransit between two places outside theUnited States,

3) Days you were unable to leave theUnited States because of a medicalcondition that developed while you werein the United States, and

4) Days you were an exempt individual.

The specific rules that apply to each of thesefour categories are discussed next.

Regular commuters from Canada orMexico. Do not count the days on which youcommute to work in the United States fromyour residence in Canada or Mexico if youregularly commute from Canada or Mexico.You are considered to commute regularly ifyou commute to work in the United States onmore than 75% of the workdays during yourworking period.

For this purpose, “commute” means totravel to work and return to your residencewithin a 24–hour period. “Workdays” are thedays on which you work in the United Statesor Canada or Mexico. “Working period”means the period beginning with the first dayin the current year on which you are phys-ically present in the United States to work andending on the last day in the current year onwhich you are physically present in the UnitedStates to work. If your work requires you tobe present in the United States only on aseasonal or cyclical basis, your working pe-riod begins on the first day of the season orcycle on which you are present in the UnitedStates to work and ends on the last day of theseason or cycle on which you are present inthe United States to work. You can have morethan one working period in a calendar year,and your working period can begin in onecalendar year and end in the following calen-dar year.

Example. Maria Perez lives in Mexicoand works for Compania ABC in its office inMexico. She was assigned to her firm's officein the United States from February 1 throughJune 1. On June 2, she resumed her em-ployment in Mexico. On 69 days, Maria com-muted each morning from her home in Mexicoto work in Compania ABC's U.S. office. Shereturned to her home in Mexico on each ofthose evenings. On 7 days, she worked in herfirm's Mexico office. For purposes of thesubstantial presence test, Maria does notcount the days she commuted to work in theUnited States because those days equalmore than 75% of the workdays during theworking period (69 workdays in the UnitedStates divided by 76 workdays in the workingperiod equals 90.8%).

Days in transit. For the substantial presencetest, do not count the days you are in theUnited States for less than 24 hours and youare in transit between two places outside theUnited States. You are considered to be intransit if you engage in activities that aresubstantially related to completing travel toyour foreign destination. For example, if youtravel between airports in the United Statesto change planes en route to your foreigndestination, you are considered to be intransit. However, you are not considered tobe in transit if you attend a business meetingwhile in the United States. This is true evenif the meeting is held at the airport.

Medical condition. For the substantialpresence test, do not count the days you in-tended to leave, but could not leave theUnited States because of a medical conditionor problem that developed while you were inthe United States. Whether you intended toleave the United States on a particular day isdetermined based on all the facts and cir-cumstances. For example, you may be ableto establish that you intended to leave if yourpurpose for visiting the United States couldbe accomplished during a period that is notlong enough to qualify you for the substantialpresence test. However, if you need an ex-tended period of time to accomplish the pur-pose of your visit and that period wouldqualify you for the substantial presence test,you would not be able to establish an intentto leave the United States before the end ofthat extended period.

In the case of an individual who is judgedmentally incompetent, proof of intent to leavethe United States can be determined by ana-lyzing the individual's pattern of behavior be-fore he or she was judged mentally incom-petent.

If you qualify to exclude days of presencebecause of a medical condition, you must filea fully completed Form 8843 with the IRS.See Form 8843 later.

You cannot exclude any days of presencein the United States under the following cir-cumstances.

1) You were initially prevented from leav-ing, were then able to leave, but re-mained in the United States beyond areasonable period for making arrange-ments to leave.

2) You returned to the United States fortreatment of a medical condition thatdeveloped during a prior stay.

3) The condition existed before your arrivalin the United States and you were awareof the condition. It does not matterwhether you needed treatment for thecondition when you entered the UnitedStates.

Exempt individual. For the substantialpresence test, do not count days for whichyou are an exempt individual. The term “ex-empt individual” does not refer to someoneexempt from U.S. tax, but to anyone in thefollowing categories.

1) An individual temporarily present in theUnited States as a foreign government-related individual.

2) A teacher or trainee temporarily presentin the United States under a “J” or “Q”visa, who substantially complies with therequirements of the visa.

3) A student temporarily present in theUnited States under an “F,” “J,” “M,” or“Q” visa, who substantially complies withthe requirements of the visa.

4) A professional athlete temporarily in theUnited States to compete in a charitablesports event.

The specific rules for each of these fourcategories are discussed next.

Foreign government-related individ-uals. A foreign government-related individualis an individual (or a member of the individ-ual's immediate family) who is temporarilypresent in the United States—

1) As a full-time employee of an interna-tional organization,

2) By reason of diplomatic status, or

3) By reason of a visa (other than a visathat grants lawful permanent residence)that the Secretary of the Treasury de-termines represents full-time diplomaticor consular status.

An international organization is anypublic international organization that thePresident of the United States has designatedby Executive Order as being entitled to theprivileges, exemptions, and immunities pro-vided for in the International OrganizationsAct. An individual is a full-time employee ifhis or her work schedule meets the organ-ization's standard full-time work schedule.

An individual is considered to have full-time diplomatic or consular status if he orshe:

1) Has been accredited by a foreign gov-ernment that is recognized by the UnitedStates,

2) Intends to engage primarily in officialactivities for that foreign governmentwhile in the United States, and

3) Has been recognized by the President,Secretary of State, or a consular officeras being entitled to that status.

Members of the immediate family includethe individual's spouse and unmarried chil-dren (whether by blood or adoption) but onlyif the spouse's or unmarried children's visastatuses are derived from and dependent onthe exempt individual's visa classification.Unmarried children are included only if they:

1) Are under 21 years of age,

2) Reside regularly in the exempt individ-ual's household, and

3) Are not members of another household.

The immediate family of an exempt individualdoes not include attendants, servants, orpersonal employees.

Teachers and trainees. A teacher ortrainee is an individual, other than a student,who is temporarily in the United States undera “J” or “Q” visa and substantially complieswith the requirements of that visa. You areconsidered to have substantially compliedwith the visa requirements if you have notengaged in activities that are prohibited byU.S. immigration laws and could result in theloss of your visa status.

Also included are immediate family mem-bers of exempt teachers and trainees. Seethe definition of immediate family earlier, un-der Foreign government-related individuals.


You will not be an exempt individual as ateacher or trainee if you were exempt as ateacher, trainee, or student for any part of 2of the 6 preceding calendar years. However,you will be an exempt individual if you wereexempt as a teacher, trainee, or student forany part of 3 (or fewer) of the 6 precedingcalendar years and—

1) A foreign employer paid all your com-pensation during the current year, and

2) A foreign employer paid all of your com-pensation during each of the preceding6 years you were present in the UnitedStates as a teacher or trainee.

A foreign employer includes an office or placeof business of an American entity in a foreigncountry or a U.S. possession.

If you qualify to exclude days of presenceas a teacher or trainee, you must file a fullycompleted Form 8843 with the IRS. See Form8843 later.

Example. Carla was temporarily in theUnited States during the year as a teacheron a “J” visa. Her compensation for the yearwas paid by a foreign employer. Carla wastreated as an exempt teacher for the past 2years but her compensation was not paid bya foreign employer. She will not be consid-ered an exempt individual for the current yearbecause she was exempt as a teacher for atleast 2 of the past 6 years.

If her compensation for the past 2 yearshad been paid by a foreign employer, shewould be an exempt individual for the currentyear.

Students. A student is any individual whois temporarily in the United States on an “F,”“J,” “M,” or “Q” visa and who substantiallycomplies with the requirements of that visa.You are considered to have substantiallycomplied with the visa requirements if youhave not engaged in activities that are pro-hibited by U.S. immigration laws and couldresult in the loss of your visa status.

Also included are immediate family mem-bers of exempt students. See the definitionof immediate family earlier, under Foreigngovernment-related individuals.

You will not be an exempt individual as astudent if you have been exempt as ateacher, trainee, or student for any part ofmore than 5 calendar years unless you es-tablish to the satisfaction of the IRS districtdirector that you do not intend to reside per-manently in the United States and you havesubstantially complied with the requirementsof your visa. The facts and circumstances tobe considered in determining if you havedemonstrated an intent to reside permanentlyin the United States include, but are not lim-ited to:

1) Whether you have maintained a closerconnection to a foreign country (dis-cussed later), and

2) Whether you have taken affirmativesteps to change your status from non-immigrant to lawful permanent residentas discussed later under Closer Con-nection to a Foreign Country.

If you qualify to exclude days of presenceas a student, you must file a fully completedForm 8843 with the IRS. See Form 8843 later.

Professional athletes. A professionalathlete who is temporarily in the United Statesto compete in a charitable sports event is an

exempt individual. A charitable sports eventis one that meets the following conditions:

1) The main purpose is to benefit a qual-ified charitable organization,

2) The entire net proceeds go to charity,and

3) Volunteers perform substantially all thework.

In figuring the days of presence in theUnited States, you can exclude only the dayson which you actually competed in a sportsevent. You cannot exclude the days on whichyou were in the United States to practice forthe event, to perform promotional or otheractivities related to the event, or to travel be-tween events.

If you qualify to exclude days of presenceas a professional athlete, you must file a fullycompleted Form 8843 with the IRS. See Form8843 next.

Form 8843. If you exclude days of presencein the United States because you fall into anyof the following categories, you must file afully completed Form 8843.

1) You were unable to leave the UnitedStates as planned because of a medicalcondition.

2) You were temporarily in the UnitedStates as a teacher or trainee on a “J”or “Q” visa.

3) You were temporarily in the UnitedStates as a student on an “F,” “J,” “M,”or “Q” visa.

4) You were a professional athlete com-peting in a charitable sports event.

Attach Form 8843 to your 1997 income taxreturn. If you do not have to file a return, sendthe form or statement to the Internal RevenueService Center, Philadelphia, PA 19255 bythe due date for filing your income tax return.The due date for filing is discussed in chapter7.

If you do not timely file Form 8843, youcannot exclude the days you were present inthe United States as a professional athleteor because of a medical condition that arosewhile you were in the United States. Thisdoes not apply if you can show by clear andconvincing evidence that you took reasonableactions to become aware of the filing re-quirements and significant steps to complywith those requirements.

Closer Connectionto a Foreign CountryEven if you meet the substantial presencetest, you can be treated as a nonresident al-ien if you:

1) Are present in the United States for lessthan 183 days during the year,

2) Maintain a tax home in a foreign countryduring the year, and

3) Have a closer connection during the yearto one foreign country in which you havea tax home than to the United States(unless you have a closer connection totwo foreign countries, discussed next).

Closer connection to two foreign coun-tries. You can demonstrate that you have acloser connection to two foreign countries

(but not more than two) if you meet all of thefollowing conditions:

1) You maintained a tax home beginningon the first day of the year in one foreigncountry,

2) You changed your tax home during theyear to a second foreign country,

3) You continued to maintain your tax homein the second foreign country for the restof the year,

4) You had a closer connection to eachforeign country than to the United Statesfor the period during which you main-tained a tax home in that foreign country,and

5) You are subject to tax as a resident un-der the tax laws of either foreign countryfor the entire year or subject to tax as aresident in both foreign countries for theperiod during which you maintained a taxhome in each foreign country.

Tax home. Your tax home is the generalarea of your main place of business, em-ployment, or post of duty, regardless of whereyou maintain your family home. Your taxhome is the place where you permanently orindefinitely work as an employee or a self-employed individual. If you do not have aregular or main place of business becauseof the nature of your work, then your tax homeis the place where you regularly live. If youdo not fit either of these categories, you areconsidered an itinerant and your tax home iswherever you work.

For determining whether you have acloser connection to a foreign country, yourtax home must also be in existence for theentire current year, and must be located inthe same foreign country for which you areclaiming to have a closer connection.

Foreign country. In determining whetheryou have a closer connection to a foreigncountry, the term “foreign country” means:

1) Any territory under the sovereignty of theUnited Nations or a government otherthan that of the United States,

2) The territorial waters of the foreigncountry (determined under U.S. law),

3) The seabed and subsoil of those sub-marine areas which are adjacent to theterritorial waters of the foreign countryand over which the foreign country hasexclusive rights under international lawto explore and exploit natural resources,and

4) Possessions and territories of the UnitedStates.

Establishing a closer connection. You willbe considered to have a closer connection toa foreign country than the United States if youor the IRS establishes that you have main-tained more significant contacts with the for-eign country than with the United States. Indetermining whether you have maintainedmore significant contacts with the foreigncountry than with the United States, the factsand circumstances to be considered include,but are not limited to, the following:

1) The country of residence you designateon forms and documents.

2) The types of official forms and docu-ments you file, such as Form 1078,


Certificate of Alien Claiming Residencein the United States, or Form W–8, Cer-tificate of Foreign Status.

3) The location of:

a) Your permanent home,

b) Your family,

c) Your personal belongings, such ascars, furniture, clothing, and jew-elry,

d) Your current social, political, cul-tural, or religious affiliations,

e) Your business activities (other thanthose that constitute your taxhome),

f) The jurisdiction in which you hold adriver's license, and

g) The jurisdiction in which you vote.

It does not matter whether your permanenthome is a house, an apartment, or a furnishedroom. It also does not matter whether you rentor own it. It is important, however, that yourhome be available at all times, continuously,and not solely for short stays.

You cannot claim you have a closer con-nection to a foreign country if either of thefollowing applies:

1) You personally applied, or took othersteps during the year, to change yourstatus to that of a permanent resident,or

2) You had an application pending for ad-justment of status during the currentyear.

Steps to change your status to that of a per-manent resident include, but are not limitedto, the filing of the following forms:

Form I–508, Waiver of Immunities

Form I–485, Application for Status as Per-manent Resident

Form I–130, Petition for Alien Relative, onyour behalf

Form I–140, Petition for Prospective Immi-grant Employee, on your behalf

Form ETA–750, Application for Alien Em-ployment Certification, on your behalf

Form OF–230, Application for Immigrant Visaand Alien Registration

Form 8840. You must attach a fully com-pleted Form 8840 to your income tax returnif you have a closer connection to a foreigncountry or countries.

If you do not have to file a return, send theform to the Internal Revenue Service Center,Philadelphia, PA 19255, by the due date forfiling your income tax return. The due date forfiling is discussed later in chapter 7.

If you do not timely file Form 8840, youcannot claim a closer connection to a foreigncountry or countries. This does not apply ifyou can show by clear and convincing evi-dence that you took reasonable actions tobecome aware of the filing requirements andsignificant steps to comply with those re-quirements.

Effect of Tax TreatiesThe rules given here to determine if you area U.S. resident do not override tax treaty de-finitions of residency. If your residency is de-termined under a treaty and not under therules discussed here, you must file a fullycompleted Form 8843 if the payments or in-come items reportable because of that deter-mination are more than $100,000. If you area dual resident taxpayer, you can still claimthe benefits under an income tax treaty. Adual resident taxpayer is one who is a resi-dent of both the United States and anothercountry under each country's tax laws. Theincome tax treaty between the two countriesmust contain a provision that provides forresolution of conflicting claims of residence.If you are treated as a resident of a foreigncountry under a tax treaty, you are treated asa nonresident alien in figuring your U.S. in-come tax. For purposes other than computingyour tax, you will be treated as a U.S. resi-dent. For example, the rules discussed heredo not affect your residency time periods asdiscussed later, under Dual Status Aliens.

Information to be reported. If you are adual resident taxpayer and you claim treatybenefits, you must timely file a return (includ-ing extensions) using Form 1040NR or Form1040NR–EZ, and compute your tax as anonresident alien. You must also attach a fullycompleted Form 8833, Treaty-Based ReturnPosition Disclosure Under Section 6114 or7701(b). See Reporting Treaty BenefitsClaimed in chapter 9, for more information onreporting treaty benefits.

Dual Status AliensYou can be both a nonresident alien and aresident alien during the same tax year. Thisusually occurs in the year you arrive or departfrom the United States. Aliens who have dualstatus should see chapter 6 for informationon filing a return for a dual-status tax year.

First Year of ResidencyIf you are a U.S. resident for any calendaryear, but you were not a U.S. resident at anytime during the preceding calendar year, youare a U.S. resident only for the part of thecalendar year that begins on the residencystarting date. You are a nonresident alien forthe part of the year before that date.

Substantial presence test. If you meet thesubstantial presence test for a calendar year,your residency starting date is generally thefirst day you are present in the United Statesduring that calendar year. However, you donot have to count up to 10 days of actualpresence in the United States if on those daysyou establish that:

1) You had a closer connection to a foreigncountry than to the United States, and

2) Your tax home was in that foreign coun-try.

See Closer Connection to a Foreign Countryearlier.

In determining whether you can excludeup to 10 days, the following rules apply.

1) You can exclude days from more thanone period of presence as long as the

total days in all periods are not morethan 10.

2) You cannot exclude any days in a periodof consecutive days of presence if all thedays in that period cannot be excluded.

3) Although you can exclude up to 10 daysof presence in determining your resi-dency starting date, you must includethose days when determining whetheryou meet the substantial presence test.

Example. Ivan Ivanovich is a citizen ofRussia. He came to the United States for thefirst time on January 6, 1997, to attend abusiness meeting and returned to Russia onJanuary 10, 1997. His tax home remained inRussia. On March 1, 1997, he moved to theUnited States and resided here for the restof the year. Ivan is able to establish a closerconnection to Russia for the period January6-10. Thus, his residency starting date isMarch 1.

Statement required to exclude up to 10days of presence. You must attach astatement to your income tax return if you areexcluding up to 10 days of presence in theUnited States for purposes of your residencystarting date. You must sign and date thisstatement and include a declaration that it ismade under penalties of perjury. The state-ment must contain the following information(as applicable).

1) Your name, address, U.S. taxpayeridentification number (if any) and U.S.visa number (if any).

2) Your passport number and the name ofthe country that issued your passport.

3) The tax year for which the statementapplies.

4) The first day that you were present in theUnited States during the year.

5) The dates of the days you are excludingin figuring your first day of residency.

6) Sufficient facts to establish that you havemaintained your tax home in and acloser connection to a foreign countryduring the period you are excluding.

If you are not required to file a return, sendthe statement to the Internal Revenue ServiceCenter, Philadelphia, PA 19255, on or beforethe due date for filing your tax return. The duedate for filing is discussed in chapter 7.

If you do not file the required statementas explained above, you cannot claim thatyou have a closer connection to a foreigncountry or countries. Therefore, your first dayof residency will be the first day you arepresent in the United States. This does notapply if you can show by clear and convincingevidence that you took reasonable actions tobecome aware of the requirements for filingthe statement and significant steps to complywith those requirements.

Green card test. If you meet the green cardtest at any time during a calendar year, butdo not meet the substantial presence test forthat year, your residency starting date is thefirst day in the calendar year on which youare present in the United States as a lawfulpermanent resident.

If you meet both the substantial presencetest and the green card test, your residencystarting date is the earlier of the first day


during the year you are present in the UnitedStates under the substantial presence test oras a lawful permanent resident.

Residency during the preceding year. Ifyou were a U.S. resident during any part ofthe preceding calendar year and you are aU.S resident for any part of the current year,you will be considered a U.S. resident at thebeginning of the current year. This applieswhether you are a resident under the sub-stantial presence test or green card test.

Example. Robert Bach is a citizen ofSwitzerland. He came to the United Statesas a U.S. resident for the first time on May1, 1996, and remained until November 5,1996, when he returned to Switzerland.Robert came back to the United States onMarch 5, 1997, as a lawful permanent resi-dent and still resides here. In calendar year1997, Robert's U.S. residency is deemed tobegin on January 1, 1997, because he qual-ified as a resident in calendar year 1996.

First-Year ChoiceIf you do not meet either the green card testor the substantial presence test for 1996 or1997 and you did not choose to be treatedas a resident for part of 1996, but you meetthe substantial presence test for 1998, youcan choose to be treated as a U.S. residentfor part of 1997. To make this choice, youmust:

1) Be present in the United States for atleast 31 days in a row in 1997, and

2) Be present in the United States for atleast 75% of the number of days begin-ning with the first day of the 31-day pe-riod and ending with the last day of 1997.For purposes of this 75% requirement,you can treat up to 5 days of absencefrom the United States as days of pres-ence in the United States.

When counting the days of presence in (1)and (2) above, do not count the days youwere in the United States under any of thefour circumstances discussed earlier underDays of Presence in the United States.

If you make the first-year choice, yourresidency starting date for 1997 is the first dayof the earliest 31-day period (described in (1)above) that you use to qualify for the choice.You are treated as a U.S. resident for the restof the year. If you are present for more thanone 31-day period and you satisfy condition(2) above for each of those periods, yourresidency starting date is the first day of thefirst 31-day period. If you are present for morethan one 31-day period but you satisfy con-dition (2) above only for a later 31-day period,your residency starting date is the first dayof the later 31-day period.

Example 1. Juan DaSilva is a citizen ofthe Philippines. He came to the United Statesfor the first time on November 1, 1997, andwas here on 31 consecutive days (from No-vember 1 through December 1, 1997). Juanreturned to the Philippines on December 1and did not come back to the United Statesuntil December 17, 1997. He stayed in theUnited States for the rest of the year. During1998, Juan was a resident of the UnitedStates under the substantial presence test.

Juan can make the first-year choice for 1997because he was in the United States in 1997for a period of 31 days in a row (November1 through December 1) and for at least 75%of the days following (and including) the firstday of his 31-day period (46 total days ofpresence in the United States divided by 61days in the period from November 1 throughDecember 31 equals 75.4%). If Juan makesthe first-year choice, his residency startingdate will be November 1, 1997.

Example 2. The facts are the same as inExample 1, except that Juan was absent fromthe United States on December 24, 25, 29,30, and 31. He can make the first-year choicefor 1997 because up to 5 days of absenceare considered days of presence for purposesof the 75% requirement.

Statement required to make the first-year choice. You must attach a statementto your income tax return to make the first-year choice. The statement must contain yourname and address and specify the following:

1) That you are making the first-yearchoice,

2) That you were not a resident in 1996,

3) That you are a resident under the sub-stantial presence test in 1998,

4) The number of days of presence in theUnited States during 1998,

5) The date or dates of your 31-day periodof presence and the period of continuouspresence in the United States during1997, and

6) The date or dates of absence from theUnited States during 1997 that you aretreating as days of presence.

You cannot file the form or statement untilyou meet the substantial presence test for1998. If you have not met the test for 1998as of April 15, 1998, you can request an ex-tension of time for filing your 1997 Form 1040until a reasonable period after you have metthat test. To request an extension to file, useForm 4868, Application for Automatic Exten-sion of Time To File U.S. Individual IncomeTax Return. You should pay with this form theamount of tax you expect to owe for 1997figured as if you were a nonresident alien theentire year. You can use Form 1040NR orForm1040NR–EZ to figure the tax. Enter thetax on Form 4868. If you do not pay the taxdue, you will be charged interest on any taxnot paid by the regular due date of your re-turn, and you may be charged a penalty onthe late payment. If you need more time afterfiling Form 4868, file Form 2688, Applicationfor Additional Extension of Time To File U.S.Individual Income Tax Return.

Once you make the first-year choice, youmay not revoke it without the approval of theInternal Revenue Service.

If you do not follow the procedures dis-cussed here for making the first-year choice,you will be treated as a nonresident alien forall of 1997. However, this does not apply ifyou can show by clear and convincing evi-dence that you took reasonable actions tobecome aware of the filing procedures andsignificant steps to comply with the proce-dures.

Last Year of ResidencyIf you were a U.S. resident in 1997 but arenot a U.S resident during any part of 1998,you cease to be a U.S. resident on your res-idency termination date. Your residencytermination date is December 31, 1997.

Special residency termination date. Yourresidency termination date is:

1) The last day in 1997 that you are phys-ically present in the United States, if youmet the substantial presence test,

2) The first day in 1997 that you are nolonger a lawful permanent resident of theUnited States, if you met the green cardtest, or

3) The later of (1) or (2), if you met bothtests.

You can use these dates only if, for the re-mainder of 1997, your tax home was in aforeign country and you had a closer con-nection to that foreign country. See CloserConnection to a Foreign Country, earlier.

CAUTION!

A long-term resident who ceases tobe a lawful permanent resident maybe subject to special reporting re-

quirements and tax provisions. SeeExpatriation Tax in chapter 4.

Statement required to establish your resi-dency termination date. You must attach astatement to your income tax return to es-tablish your residency termination date. Youmust sign and date this statement and includea declaration that it is made under penaltiesof perjury. The statement must contain thefollowing information (as applicable).

1) Your name, address, U.S. taxpayeridentification number (if any), and U.S.visa number (if any).

2) Your passport number and the name ofthe country that issued your passport.

3) The tax year for which the statementapplies.

4) The last day that you were present in theUnited States during the year.

5) Sufficient facts to establish you havemaintained your tax home in and thatyou have a closer connection to a foreigncountry following your last day of pres-ence in the United States during the yearor following the abandonment orrescission of your status as a lawfulpermanent resident during the year.

6) The date that your status as a lawfulpermanent resident was abandoned orrescinded.

7) Sufficient facts (including copies of rele-vant documents) to establish that yourstatus as a lawful permanent residenthas been abandoned or rescinded.

8) If you can exclude days under the deminimis presence rule, discussed later,include the dates of the days you areexcluding and sufficient facts to establishthat you have maintained your tax homein and that you have a closer connectionto a foreign country during the period youare excluding.

If you are not required to file a return, sendthe statement to the Internal Revenue ServiceCenter, Philadelphia, PA 19255, on or before


the due date for filing your income tax return.The due date for filing is discussed in chapter7.

If you do not file the required statementas explained above, you cannot claim thatyou have a closer connection to a foreigncountry or countries. This does not apply ifyou can show by clear and convincing evi-dence that you took reasonable actions tobecome aware of the requirements for filingthe statement and significant steps to complywith those requirements.

De minimis presence. If you are a U.S.resident because of the substantial presencetest and you qualify to use the special resi-dency termination date discussed earlier, youcan exclude up to 10 days of actual presencein the United States in determining your resi-dency termination date. In determiningwhether you can exclude up to 10 days, thefollowing rules apply.

1) You can exclude days from more thanone period of presence as long as thetotal days in all periods are not morethan 10.

2) You cannot exclude any days in a periodof consecutive days of presence if all thedays in that period cannot be excluded.

3) Although you can exclude up to 10 daysof presence in determining your resi-dency termination date, you must includethose days when determining whetheryou meet the substantial presence test.

Example. Lola Bovary is a citizen ofMalta. She came to the United States for thefirst time on March 1, 1997, and resided hereuntil August 25, 1997. On December 12,1997, Lola came to the United States for va-cation and stayed here until December 16,1997, when she returned to Malta. She is ableto establish a closer connection to Malta forthe period December 12-16. Lola is not a U.S.resident for tax purposes during 1998 and canestablish a closer connection to Malta for therest of calendar year 1997. Lola is a U.S.resident under the substantial presence testfor 1997 because she was present in theUnited States for 183 days (178 days for theperiod March 1 to August 25 plus 5 days inDecember). Lola's residency termination dateis August 25, 1997.

Residency during the next year. If you area U.S. resident during any part of 1998 andyou are a resident during any part of 1997,you will be taxed as a resident through theend of 1997. This applies whether you havea closer connection to a foreign country thanthe United States during 1997, and whetheryou are a resident under the substantialpresence test or green card test.

Choosing To Be Taxed as aResident Alien for the EntireTax YearIf you are a dual-status alien, you can chooseto be treated as a U.S. resident for the entireyear if:

1) You were a nonresident alien at the be-ginning of the year,

2) You are a resident alien or U.S. citizenat the end of the year,

3) You are married to a U.S. citizen or res-ident alien at the end of the year, and

4) Your spouse joins you in making thechoice.

This includes situations in which both you andyour spouse were nonresident aliens at thebeginning of the tax year and both of you areresident aliens at the end of the tax year.

If you make this choice, you and yourspouse are both treated as U.S. residents forthe entire year for income tax purposes, andyou are both taxed on worldwide income.Making the choice also means that you mustfile a joint return for the year of the choice.

If you make this choice, neither you noryour spouse can make this choice for anylater tax year, even if you are separated, di-vorced, or remarried.

Making the choice. You should attach astatement signed by both spouses to yourjoint return for the year of the choice thatcontains the following information:

1) A declaration that you both qualify tomake the choice and that you choose tobe treated as U.S. residents for the en-tire tax year, and

2) The name, address, and taxpayer iden-tification number (SSN or ITIN) of eachspouse. (If one spouse died, include thename and address of the person whomakes the choice for the deceasedspouse.)

You generally make this choice when youfile your joint return. However, you also canmake the choice by filing Form 1040X. AttachForm 1040 or Form 1040A and write“Amended” across the top of the correctedreturn. If you make the choice with anamended return, you and your spouse mustalso amend any returns that you may havefiled after the year for which you made thechoice.

You generally must file the amended jointreturn within 3 years from the date you filedyour original U.S. income tax return or 2 yearsfrom the date you paid your income tax forthat year, whichever is later.

A similar choice is available if, at the endof your tax year, you are a nonresident alienmarried to a U.S. citizen or resident. SeeNonresident Spouse Treated as a Resident,next. If you previously made that choice, andit is still in effect, you do not need to make thechoice explained here.

CAUTION!

If you file a joint return under thisprovision, the special instructions andrestrictions for dual-status taxpayers

in chapter 6 do not apply to you.

Nonresident SpouseTreated as a ResidentIf, at the end of your tax year, you are marriedand one spouse is a U.S. citizen or a residentalien and the other spouse is a nonresidentalien, you can choose to treat the nonresidentspouse as a U.S. resident. This includes sit-uations in which one spouse is a nonresidentalien at the beginning of the tax year, but aresident alien at the end of the year, and theother spouse is a nonresident alien at the endof the year.

If you make this choice, you and yourspouse are treated for income tax purposesas residents for your entire tax year. Neitheryou nor your spouse can claim tax treatybenefits as a resident of a foreign country fora tax year for which the choice is in effect.You must file a joint income tax return for theyear you make the choice, but you and yourspouse can file joint or separate returns inlater years.

Example 1. Pat Smith, a U.S. citizen, ismarried to Norman, a nonresident alien. Patand Norman make the choice to treat Normanas a resident alien by attaching a statementto their joint return. Although Pat and Normanmust file a joint return for the year of election,they can file joint or separate returns for lateryears.

Example 2. Bob and Sharon Williams aremarried and both are nonresident aliens atthe beginning of the year. In June, Bob be-came a resident alien and remained a resi-dent for the rest of the year. Bob and Sharonboth choose to be treated as resident aliensby attaching a statement to their joint return.Bob and Sharon must file a joint return for theyear of election, but they can file either jointor separate returns for later years.

How To Make the ChoiceAttach a statement, signed by both spouses,to your joint return for the first tax year forwhich the choice applies. It should contain thefollowing:

1) A declaration that one spouse was anonresident alien and the other spousea U.S. citizen or resident alien on the lastday of your tax year, and that youchoose to be treated as U.S. residentsfor the entire tax year, and

2) The name, address, and identificationnumber of each spouse. (If one spousedied, include the name and address ofthe person making the choice for thedeceased spouse.)

You generally make this choice when youfile your joint return. However, you can alsomake the choice by filing a joint amendedreturn on Form 1040X. Attach Form 1040 orForm 1040A and write “Amended” across thetop of the corrected return. If you make thechoice with an amended return, you and yourspouse must also amend any returns that youmay have filed after the year for which youmade the choice.

You generally must file the amended jointreturn within 3 years from the date you filedyour original U.S. income tax return or 2 yearsfrom the date you paid your income tax forthat year, whichever is later.

CAUTION!

If you file a joint return under thisprovision, the special instructions andrestrictions for dual-status taxpayers

in chapter 6 do not apply to you.

Suspending the ChoiceThe choice to be treated as a resident aliendoes not apply to any tax year (after the taxyear you made the choice) if neither spouseis a U.S. citizen or resident alien at any timeduring the tax year.

Example. Dick Brown was a resident al-ien on December 31, 1994, and married toJudy, a nonresident alien. They chose to treatJudy as a resident alien and filed joint 1994


and 1995 income tax returns. On January 10,1996, Dick became a nonresident alien. Judyhad remained a nonresident alien throughoutthe period. Dick and Judy could have filedjoint or separate returns for 1996. However,since neither Dick nor Judy is a resident alienat any time during 1997, their choice is sus-pended for that year. If either has U.S. sourceincome or foreign source income effectivelyconnected with a U.S. trade or business in1997, they must file separate returns as non-resident aliens. If Dick becomes a residentalien again in 1997, their choice is no longersuspended.

Ending the ChoiceOnce made, the choice to be treated as aresident applies to all later years unless sus-pended (as explained above) or ended in oneof the following ways.

1) Revocation. Either spouse can revokethe choice for any tax year, provided heor she makes the revocation by the duedate for filing the tax return for that taxyear. The spouse who revokes must at-tach a signed statement declaring thatthe choice is being revoked. The state-ment must include the name, address,and identification number of eachspouse. (If one spouse dies, include thename and address of the person who isrevoking the choice for the deceasedspouse.) The statement also must in-clude a list of any states, foreign coun-tries, and possessions that have com-munity property laws in which eitherspouse is domiciled or where real prop-erty is located from which either spousereceives income. File the statement asfollows:

a) If the spouse revoking the choicemust file a return, attach the state-ment to the return for the first yearthe revocation applies,

b) If the spouse revoking the choicedoes not have to file a return, butdoes file a return (for example, toobtain a refund), attach the state-ment to the return, or

c) If the spouse revoking the choicedoes not have to file a return anddoes not file a claim for refund,send the statement to the InternalRevenue Service Center where youfiled the last joint return.

2) Death. The death of either spouse endsthe choice, beginning with the first taxyear following the year the spouse died.However, if the surviving spouse is aU.S. citizen or resident and is entitled tothe joint tax rates as a surviving spouse,the choice will not end until the close ofthe last year for which these joint ratesmay be used. If both spouses die in thesame tax year, the choice ends on thefirst day after the close of the tax year inwhich the spouses died.

3) Legal separation. A legal separationunder a decree of divorce or separatemaintenance ends the choice as of thebeginning of the tax year in which thelegal separation occurs.

4) Inadequate records. The Internal Rev-enue Service can end the choice for any

tax year that either spouse has failed tokeep adequate books, records, andother information necessary to determinethe correct income tax liability, or toprovide adequate access to those rec-ords.

If the choice is ended for any of thesereasons, neither spouse can make this choicein any later tax year.

Special Situations If you are a nonresident alien from AmericanSamoa, or Puerto Rico, you may be treatedas a resident alien.

If you are a nonresident alien in the UnitedStates and a bona fide resident of AmericanSamoa or Puerto Rico during the entire taxyear, you are taxed, with certain exceptions,according to the rules for resident aliens ofthe United States. For more information, seechapter 5.

If you are a nonresident alien from Amer-ican Samoa or Puerto Rico who does notqualify as a bona fide resident of AmericanSamoa or Puerto Rico for the entire tax year,you are taxed as a nonresident alien.

Resident aliens who formerly were bonafide residents of American Samoa or PuertoRico are taxed according to the rules for res-ident aliens.

2.Source ofIncome

IntroductionAfter you have determined your alien status,you must determine the source of your in-come. This chapter will help you determinethe source of different types of income youmay receive during the tax year. This chapteralso discusses special rules for married indi-viduals who are domiciled in a country withcommunity property laws.


• Income source rules

• Community income


Publication

m 520 Scholarships and Fellowships

m 721 Tax Guide to U.S. Civil ServiceRetirement Benefits

See chapter 12 for information about get-ting these publications.

Resident AliensA resident alien's income is generally subjectto tax in the same manner as a U.S. citizen;that is, a resident alien is taxed on and mustreport income from all sources, includingsources outside the United States.

If you are a resident alien, you must reportall interest, dividends, wages, or other com-pensation for services, income from rentalproperty or royalties, and other types of in-come on your U.S. tax return. You must reportthese amounts whether from sources withinor outside the United States.

Nonresident AliensA nonresident alien usually is subject to U.S.income tax only on U.S. source income. Thisis income from sources within the UnitedStates and on certain income connected withthe conduct of a trade or business in theUnited States.

Table 2-1, near the end of this chapter,gives the general rules for determining U.S.source income that apply to most nonresidentaliens. The following discussions cover thegeneral rules as well as the exceptions tothese rules.

TIPNot all items of U.S. source incomeare taxable. See chapter 3.

Interest Generally, income from U.S. sources includesinterest on bonds, notes, or other interest-bearing obligations of U.S. residents or do-mestic corporations. Interest from U.S.sources also includes interest paid by a do-mestic or foreign partnership or foreign cor-poration engaged in a U.S. trade or businessat any time during the tax year. Interest in-come also includes original issue discount. Inaddition, all interest received by a nonresidentalien individual from a state, the District ofColumbia, or the U.S. Government during thetax year is income from U.S. sources.

The place or manner of payment is im-material in determining the source of the in-come.

Exceptions. U.S. source interest incomedoes not include the following items.

1) Interest paid by a resident alien or a do-mestic corporation if for the 3–year pe-riod ending with the close of the payer'stax year preceding the interest paymentat least 80% of the payer's total grossincome—

a) Is from sources outside the UnitedStates, and

b) Is attributable to the active conductof a trade or business by the indi-vidual or corporation in a foreigncountry or a U.S. possession.

2) Interest paid by a foreign branch of adomestic corporation or a domesticpartnership on deposits or withdrawableaccounts with mutual savings banks,cooperative banks, credit unions, do-mestic building and loan associations,and other savings institutions charteredand supervised as savings and loan orsimilar associations under federal or

Chapter 2 Source of Income

state law if the interest paid or creditedcan be deducted by the association.

3) Interest on deposits with a foreignbranch of a domestic corporation or do-mestic partnership, but only if the branchis in the commercial banking business.

Dividends In most cases, dividend income received fromdomestic corporations is U.S. source income.Dividend income from foreign corporations isusually foreign source income. Exceptions toboth of these rules are discussed below.

First exception. Dividends received from adomestic corporation are not U.S. source in-come if the corporation elects to take thePuerto Rico economic activity credit or thepossession tax credit.

Second exception. Part of the dividendsreceived from a foreign corporation is U.S.source income if 25% or more of its totalgross income for the 3–year period endingwith the close of its tax year preceding thedeclaration of dividends was effectively con-nected with a trade or business in the UnitedStates. If the corporation was formed lessthan 3 years before the declaration, use itstotal gross income from the time it wasformed. Determine the part that is U.S.source income by multiplying the dividend bythe following fraction:

Foreign corporation’s gross incomeconnected with a U.S. trade orbusiness for the 3-year period

Foreign corporation’s gross incomefrom all sources for that period

Personal Services All wages and any other compensation forservices performed in the United States areconsidered to be from sources in the UnitedStates. The only exception to this rule is dis-cussed in chapter 3, under Employees offoreign persons, organizations, or offices.

If your compensation is for personal ser-vices performed both inside and outside theUnited States, you must figure the amount ofincome that is for services performed in theUnited States. You usually do this on a timebasis. That is, you must include in gross in-come as U.S. source income the amount thatresults from multiplying the total amount ofcompensation by the following fraction:

Number of days you performedservices in the United States

Total number of days of service forwhich you receive payment

Example. Jean Blanc, a nonresident al-ien, is a professional hockey player with aU.S. hockey club. Under Jean's contract, hereceived $98,500 for 242 days of play duringthe year. This includes days spent at pre-season training camp, days during the regularseason, and playoff game days. Of the 242days, Jean spent 194 days performing ser-vices in the United States and 48 days playinghockey in Canada. Jean's U.S. source in-come is $78,963, figured as follows:

194

2423 $98,500 = $78,963

Reenlistment bonus. A reenlistment bonusreceived by a nonresident alien forreenlistment in the U.S. Navy while in a for-eign country is income for services performedoutside the United States.

Transportation income. All income fromtransportation that begins and ends in theUnited States is treated as derived fromsources in the United States. Fifty percent oftransportation income from personal servicesis U.S. source income if the transportation isbetween the United States and a U.S. pos-session.

Transportation income is income from theuse of a vessel or aircraft. This is true whetherthe vessel or aircraft is owned, hired, orleased, or the income is from the performanceof services directly related to the use of avessel or aircraft. The term “vessel oraircraft” includes any container used in con-nection with a vessel or aircraft.

If you are engaged in any other foreigntrade, you should consider your wages re-ceived for services performed in the UnitedStates or its territorial waters as being fromsources in the United States. However, seethe discussion of Employees of foreign per-sons, organizations, or offices in chapter 3,and any tax treaty provisions that may apply.For information on how U.S. source trans-portation income is taxed, see chapter 4.

Scholarships, Grants,Prizes, and AwardsGenerally, the source of scholarships, fellow-ship grants, grants, prizes, and awards is theresidence of the payer regardless of who ac-tually disburses the funds. However, see Ac-tivities to be performed outside the UnitedStates, later.

For example, payments for research orstudy in the United States made by the UnitedStates, a noncorporate U.S. resident, or adomestic corporation, are from U.S. sources.Similar payments from a foreign governmentor foreign corporation are foreign sourcepayments even though the funds may bedisbursed through a U.S. agent.

Payments made by an entity designatedas a public international organization underthe International Organizations ImmunitiesAct are from foreign sources.

Activities to be performed outside theUnited States. Scholarships, fellowshipgrants, targeted grants, and achievementawards received by nonresident aliens foractivities performed, or to be performed, out-side the United States are not U.S. sourceincome.

CAUTION!

These rules do not apply to amountspaid as salary or other compensationfor services.

Pensions and Annuities When you receive a pension from a domestictrust for services performed both in and out-side the United States, part of the pensionpayment is from U.S. sources. That part is theamount attributable to earnings of the trustand the employer contributions made for ser-vices performed in the United States. Thisapplies whether the distribution is made undera qualified or nonqualified stock bonus, pen-sion, profit-sharing, or annuity plan (whetheror not funded).

If you performed services as an employeeof the United States, you may receive a dis-tribution from the U.S. Government under aplan, such as the Civil Service RetirementAct, that is treated as a qualified pension plan.To the extent the distribution can be attributedto basic U.S. salary for services performedoutside the United States, it is treated as in-come from sources outside the United States,and is not taxable. For more information, getPublication 721, Tax Guide to U.S. Civil Ser-vice Retirement Benefits.

Rents or Royalties Your U.S. source income includes rent androyalty income received during the tax yearfrom property located in the United States orfrom any interest in that property.

U.S. source income also includes rentsor royalties for the use of, or for the privilegeof using, in the United States, intangibleproperty such as patents, copyrights, secretprocesses and formulas, goodwill, trade-marks, franchises, and similar property.

Real Property Real property is land and buildings and gen-erally anything built on, growing on, or at-tached to land.

Gross income from sources in the UnitedStates includes gains, profits, and incomefrom the sale or other disposition of realproperty located in the United States.

Natural resources. The income from thesale of products of any farm, mine, oil or gaswell, other natural deposit, or timber locatedin the United States and sold in a foreigncountry, or located in a foreign country andsold in the United States, is partly fromsources in the United States. For informationon determining that part, see section1.863–1(b) of the Income Tax Regulations.

Personal Property Personal property is property, such as ma-chinery, equipment, or furniture, that is notreal property.

Income from the sale or exchange of per-sonal property by a nonresident alien individ-ual generally has its source in the UnitedStates if the individual has a tax home in theUnited States. If the individual does not havea tax home in the United States, the incomegenerally is considered to be from sourcesoutside the United States.

Tax home. Your tax home is the generalarea of your main place of business, em-ployment, or post of duty, regardless of whereyou maintain your family home. Your taxhome is the place where you permanently orindefinitely work as an employee or a self-employed individual. If you do not have aregular or main place of business becauseof the nature of your work, then your tax homeis the place where you regularly live. If youdo not fit either of these categories, you areconsidered an itinerant and your tax home iswherever you work.

Inventory property. Inventory property ispersonal property that is stock in trade or thatis held primarily for sale to customers in theordinary course of your trade or business.Income from the sale in the United States ofinventory property generally has its sourcewithin the United States, regardless of where

Chapter 2 Source of Income

you purchased the property. Income from thesale of inventory property outside the UnitedStates (even though you purchased it withinthe United States) has its source outside theUnited States. These rules apply even if yourtax home is not in the United States.

If you produce inventory property in theUnited States and sell it outside the UnitedStates, or produce it outside the United Statesand sell it in the United States, your incomefrom the sale is partly from sources in theUnited States and partly from sources outsidethe United States. For information on makingthis allocation, see section 1.863–3 of the In-come Tax Regulations.

Depreciable personal property. To deter-mine the source of any gain from the sale ofdepreciable personal property, you must firstfigure the part of the gain that is not more thanthe total depreciation adjustments on theproperty. You allocate this part of the gain tosources in the United States based on theratio of U.S. depreciation adjustments to totaldepreciation adjustments. The rest of this partof the gain is considered to be from sourcesoutside the United States.

For this purpose, “U.S. depreciation ad-justments” are the depreciation adjustmentsto the basis of the property that are allowablein figuring taxable income from sources withinthe United States. However, if the property isused predominantly in the United States dur-ing a tax year, all depreciation deductions al-lowable for that year are treated as U.S. de-preciation adjustments. But there are someexceptions for certain transportation, com-munications, and other property used inter-nationally.

Gain from the sale of depreciable propertythat is more than the total depreciation ad-justments on the property is sourced as if theproperty were inventory property, as dis-cussed above.

The basis of property usually means thecost (money plus the fair market value ofother property or services) of property youacquire. Depreciation is an amount deductedto recover the cost or other basis of a tradeor business asset. The amount you can de-duct depends on the property's cost, whenyou began using the property, how long it willtake to recover your cost, and which depre-ciation method you use. A depreciation de-duction is any deduction for depreciation oramortization or any other allowable deductionthat treats a capital expenditure as a deduct-ible expense.

Intangible property. The general rule fordetermining the source of income from salesof personal property applies to sales of in-tangibles. Intangible property includes pat-ents, copyrights, secret processes or formu-las, goodwill, trademarks, trade names, orother like property. The general rule appliesonly to the extent the payments for the prop-erty do not depend on the productivity, use,or disposition of the intangible. To the extentthe payments for the intangible property dodepend on the productivity, use, or dispositionof the property, their source is determined asthough the payments were royalties, as dis-cussed earlier. If payments for goodwill do notdepend on its productivity, use, or disposition,their source is the country in which thegoodwill was generated.

To the extent gain from the sale of an in-tangible does not exceed its depreciation ad-

Table 2-1. Summary of Source Rules for Income of Nonresident Aliens

Type of Income: Source Determined By:

Compensation for personal services

Dividends

Interest

Rents

Royalties—Natural resources

Royalties—Patents, copyrights, etc.

Pensions

Sale of inventory—purchased

Sale of personal property (other thaninventory property)

Sale of real property

Where services are performed

Residence of paying corporation

Residence of payor

Where property is located


Where property is used

Where services were performed

Where property is sold

Tax home of seller


Sale of inventory—produced Allocation

Sale of natural resources Allocation

justments, treat the gain as if the intangiblewere depreciable personal property, dis-cussed earlier.

Sales through offices or fixed places ofbusiness. Despite any of the above rules, ifyou do not have a tax home in the UnitedStates, but you maintain an office or otherfixed place of business in the United States,treat the income from any sale of personalproperty (including inventory property) that isattributable to that office or place of businessas being from U.S. sources. However, thisrule does not apply to sales of inventoryproperty for use, disposition, or consumptionoutside the United States if an office or otherfixed place of business of the taxpayer out-side the United States materially participatedin the sale.

If you have a tax home in the UnitedStates but maintain an office or other fixedplace of business outside the United States,income from sales of personal property, otherthan inventory, depreciable property, or in-tangibles, that is attributable to that foreignoffice or place of business is treated as beingfrom sources outside the United States.However, this rule does not apply unless anincome tax of at least 10% of the income fromthe sale is actually paid to a foreign country.

Community Income Generally, if you are married and you or yourspouse are subject to the community propertylaws of a foreign country, a U.S. state, or aU.S. possession, you generally must followthose laws to determine the income of your-self and your spouse for U.S. tax purposes.But you must disregard certain communityproperty laws if:

1) Both you and your spouse are nonresi-dent aliens, or

2) One of you is a nonresident alien and theother is a U.S. citizen or resident and youdo not both choose to be treated as U.S.residents as explained in chapter 1.

In these cases, you and your spouse mustreport community income as explained below.

Earned income. Earned income of aspouse, other than trade or business incomeand a partner's distributive share of partner-ship income, is treated as the income of thespouse whose services produced the income.That spouse must report all of it on his or herseparate return.

Trade or business income. Trade or busi-ness income, other than a partner's distribu-tive share of partnership income, is treatedas the income of the person who exercisessubstantially all of the management and con-trol over the trade or business. That spousemust report all of it on his or her separatereturn.

Partnership income (or loss). A partner'sdistributive share of partnership income istreated as the income (or loss) of the partner.The partner must report all of it on his or herseparate return.

Separate property income. Income derivedfrom the separate property of one spouse(and which is not earned income, trade orbusiness income, or partnership distributiveshare income) is treated as the income of thatspouse. That spouse must report all of it onhis or her separate return. Use the appropri-ate community property law to determinewhat is separate property.

Other community income. All other com-munity income is treated as provided by theapplicable community property laws.

3.Exclusions FromGross Income

IntroductionResident and nonresident aliens are allowedexclusions from gross income if they meet

Chapter 3 Exclusions From Gross Income

certain conditions. An exclusion from grossincome is generally income you receive thatis not included in your U.S. income and is notsubject to U.S. tax. This chapter covers someof the more common exclusions allowed toresident and nonresident aliens.


• Nontaxable interest

• Certain compensation paid by a foreignemployer

• Scholarships and fellowship grants

• Gain from sale of home


Publication

m 54 Tax Guide for U.S. Citizens andResident Aliens Abroad

m 523 Selling Your Home

See chapter 12 for information about get-ting these publications.

Resident AliensResident aliens may be able to exclude thefollowing items from their gross income.

Foreign Earned Income andHousing AmountIf you are physically present in a foreigncountry or countries for at least 330 full daysduring any period of 12 consecutive months,you may qualify to exclude from your incomeup to $70,000 of income earned abroad, plusa housing amount if you are an employee.You may also qualify for these exclusions ifyou are a bona fide resident of a foreigncountry and you are a citizen or national of acountry with which the United States has anincome tax treaty. For more information, seePublication 54, Tax Guide for U.S. Citizensand Resident Aliens Abroad.

Foreign country. The term “foreigncountry” means any territory under the sov-ereignty of a government other than that ofthe United States. The term also includesterritorial waters of the foreign country, theairspace over the foreign country, and theseabed and subsoil of submarine areas ad-jacent to the territorial waters of the foreigncountry.

Nonresident AliensNonresident aliens can exclude the followingitems from their gross income.

InterestU.S. source interest income that is not con-nected with a U.S. trade or business is ex-cluded from income if it is from:

1) Deposits (including certificates of de-posit) with persons in the banking busi-ness,

2) Deposits or withdrawable accounts withmutual savings banks, cooperativebanks, credit unions, domestic buildingand loan associations, and other savingsinstitutions chartered and supervised assavings and loan or similar associationsunder federal or state law (if the interestpaid or credited can be deducted by theassociation), and

3) Amounts held by an insurance companyunder an agreement to pay interest onthem.

Government obligations. Interest on obli-gations of a state or political subdivision, theDistrict of Columbia, or a U.S. possession,generally is not included in income. However,interest on certain private activity bonds,arbitrage bonds, and certain bonds not inregistered form is included in income.

Portfolio interest. U.S. source interest in-come that is not connected with a U.S. tradeor business and that is portfolio interest onobligations issued after July 18, 1984, is ex-cluded from income. Portfolio interest is in-terest (including original issue discount) thatis paid on obligations:

1) Not in registered form (bearer obli-gations) that are sold only to foreign in-vestors, and the interest on which ispayable only outside the United Statesand its possessions, and that has on itsface a statement that any U.S. personholding the obligation will be subject tolimitations under the U.S. income taxlaws,

2) In registered form that are targeted toforeign markets and the interest onwhich is paid through financial insti-tutions outside the United States, or

3) In registered form that are not targetedto foreign markets, if you furnish thepayer of the interest (or the withholdingagent) a statement that you are not aU.S. person. You can make this state-ment on a Form W–8, Certificate of For-eign Status, or on a substitute form sim-ilar to Form W–8. In either case, thestatement must be signed under penal-ties of perjury, must certify that you arenot a U.S. citizen or resident, and mustinclude your name and address.

Portfolio interest does not include interestthat you receive on an obligation issued by acorporation of which you own, directly or in-directly, 10% or more of the total voting powerof all classes of voting stock. Portfolio interestdoes not include interest that you receive onan obligation issued by a partnership of whichyou own, directly or indirectly, 10% or moreof the capital or profits interests.

Portfolio interest does not include contin-gent interest. Contingent interest is:

1) Interest that is determined by referenceto—

a) Any receipts, sales, or other cashflow of the debtor or related person,

b) Income or profits of the debtor orrelated person,

c) Any change in value of any propertyof the debtor or a related person,or

d) Any dividend, partnership distribu-tions, or similar payments made bythe debtor or a related person.

2) Any other type of contingent interest thatis identified by the Secretary of theTreasury in regulations.

For the definition of “related person” in con-nection with any contingent interest, and forthe exceptions that apply to interest describedin item (1), see subparagraphs (B) and (C)of Internal Revenue Code section 871(h)(4).

Portfolio interest includes any contingentinterest paid or accrued on any indebtednesswith a fixed term that was issued—

1) On or before April 7, 1993, or

2) After April 7, 1993, pursuant to a writtenbinding contract in effect on that dateand at all times thereafter before thatindebtedness was issued.

Services Performedfor Foreign EmployerIf you were paid by a foreign employer, yourU.S. source income may be exempt from U.S.tax, but only if you meet one of the situationsdiscussed next.

Employees of foreign persons, organiza-tions, or offices. If three conditions exist,your performance of personal services in theUnited States during the time you are a non-resident alien is not considered to be fromU.S. sources and is tax exempt. If you do notmeet any one of the conditions, your incomefrom personal services performed in theUnited States is considered to be from U.S.sources and is taxed according to the rulesin chapter 4.

The three conditions are:

1) You perform personal services as anemployee of or under a contract with anonresident alien individual, foreignpartnership, or foreign corporation, notengaged in a trade or business in theUnited States; or you work for an officeor place of business maintained in aforeign country or possession of theUnited States by a U.S. corporation, aU.S. partnership, or a U.S. citizen orresident,

2) You perform these services while youare a nonresident alien temporarilypresent in the United States for a periodor periods of not more than a total of 90days during the tax year, and

3) Your pay for these services is not morethan $3,000.

If your pay for these services is more than$3,000, the entire amount is income from atrade or business within the United States.To find if your pay is more than $3,000, donot include any amounts you get from youremployer for advances or reimbursements ofbusiness travel expenses, if you were re-quired to and did account to your employerfor those expenses. If the advances or re-imbursements are more than your expenses,include the excess in income paid to you forpersonal services performed.

A day means a calendar day during anypart of which you are physically present in theUnited States.

Chapter 3 Exclusions From Gross Income

Example 1. During 1997, Henry Smythe,a nonresident alien from a nontreaty country,worked for an overseas office of a domesticpartnership. Henry, who uses the calendaryear as his tax year, was temporarily presentin the United States for 60 days during 1997performing personal services for the overseasoffice of the partnership. That office paid hima total gross salary of $2,800 for those ser-vices. During 1997, he was not engaged in atrade or business in the United States.

Example 2. The facts are the same as inExample 1, except that Henry's total grosssalary for the services performed in theUnited States during 1997 was $4,500. Hereceived $2,875 in 1997, and $1,625 in 1998.During 1997, he was engaged in a trade orbusiness in the United States because thecompensation for his personal services in theUnited States was more than $3,000.

Students and exchange visitors. Nonres-ident alien students and exchange visitorspresent in the United States under section101(a)(15)(F), (J), (M), or (Q) of the Immi-gration and Nationality Act can exclude fromgross income pay received from a foreignemployer.

This group includes bona fide students,scholars, trainees, teachers, professors, re-search assistants, specialists, or leaders in afield of specialized knowledge or skill, or per-sons of similar description. It also includes thealien's spouse and minor children if theycome with the alien or come later to join thealien.

A nonresident alien temporarily present inthe United States under section 101(a)(15)(J)of the Immigration and Nationality Act in-cludes an alien individual entering the UnitedStates as an exchange visitor under theMutual Educational and Cultural ExchangeAct of 1961.

Foreign employer. A foreign employeris:

1) A nonresident alien individual, foreignpartnership, or foreign corporation, or

2) An office or place of business main-tained in a foreign country or in a U.S.possession by a domestic corporation,a domestic partnership, or an individualwho is a citizen or resident of the UnitedStates.

The term “foreign employer” does not in-clude a foreign government. Pay from a for-eign government that is exempt from U.S. in-come tax is discussed in chapter 10.

Income from certain annuities. Do not in-clude in income any annuity received undera qualified annuity plan, or from a qualifiedtrust exempt from U.S. income tax if:

1) You receive the annuity only becauseof personal services performed outsidethe United States while you were a non-resident alien; or personal services per-formed inside the United States whileyou were a nonresident alien that meetsthe three conditions described in Em-ployees of foreign persons, organiza-tions, or offices, earlier, and

2) At the time the first amount is paid asan annuity under the plan (or by thetrust), 90% or more of the employees forwhom contributions or benefits are pro-vided under the annuity plan (or under

the plan of which the trust is a part) arecitizens or residents of the United States.

If the annuity qualifies under condition (1)but not condition (2) above, you do not haveto include the amount in income if:

1) You are a resident of a country that givesa substantially equal exclusion to U.S.citizens and residents, or

2) You are a resident of a beneficiary de-veloping country under the Trade Act of1974.

If you are not sure whether the annuity isfrom a qualified annuity plan or qualified trust,ask the person who made the payment.

Income affected by treaties. Income of anykind that is exempt from U.S. tax under atreaty to which the United States is a party isexcluded from your gross income. Income onwhich the tax is only limited by treaty, how-ever, is included in gross income. See chap-ter 9.

Gain From the Sale ofYour Main HomeIf you sold your main home after May 6, 1997,you may be able to exclude $250,000 of thegain on the sale of your home. If you aremarried and file a joint return, you may beable to exclude $500,000. For more informa-tion, see Publication 523.

CAUTION!

This exclusion does not apply tononresident aliens who are subject tothe expatriation tax rules discussed in

chapter 4.

Ownership and use test. To qualify for theexclusion you must have owned and used thehome as your main home for at least twoyears during the five-year period ending onthe date of sale.

Scholarships andFellowship Grants If you are a candidate for a degree, you maybe able to exclude from your income part orall of the amounts you receive as a qualifiedscholarship. The rules discussed here applyto both resident and nonresident aliens.

TIPIf a nonresident alien receives a grantthat is not from U.S. sources, it is notsubject to U.S. tax. See Scholarships,

Grants, Prizes, and Awards in chapter 2 todetermine whether your grant is from U.S.sources.

Qualified scholarship. A qualified scholar-ship is any amount you receive as a scholar-ship or fellowship grant that you use accord-ing to the conditions of the grant for:

1) Tuition and fees required to enroll in, orto attend, an educational institution, or

2) Fees, books, supplies, and equipmentthat the educational institution requiresfor the courses of instruction.

Amounts you receive from a scholarship orfellowship that you use for other expenses,

such as room and board or travel, are notexcludable from income.

Terms of grant. Your scholarship or fel-lowship can still qualify as tax-free even if theterms do not provide that it only be used fortuition and course-related expenses. It willqualify if you use the grant proceeds for tuitionand course-related expenses. However, if theterms of the grant require its use for otherpurposes, such as room and board, or specifythat the grant cannot be used for tuition orcourse-related expenses, the amounts re-ceived under the grant cannot be excludedfrom income.

Candidate for a degree. The term candidatefor a degree means a student (whether fullor part-time) who:

1) Attends a primary or secondary schoolor is pursuing a degree at a college oruniversity, or

2) Attends an educational institution that isauthorized and accredited to provide aprogram that is acceptable for full credittoward a bachelor's or higher degree, orto provide a program of training to pre-pare students for gainful employment ina recognized occupation.

Payment for services. You cannot excludefrom income the portion of any scholarshipor fellowship, including any tuition reduction,that represents payment for teaching, re-search, or other services which the grantorrequires as a condition for receiving thescholarship or fellowship. This is true even ifall candidates for a degree are required toperform the services as a condition for re-ceiving the degree.

Example. On January 7, Maria Gomez isnotified of a scholarship of $2,500 for thespring semester. As a condition for receivingthe scholarship, Maria must serve as a part-time teaching assistant. Of the $2,500 schol-arship, $1,000 represents payment for herservices. Assuming that Maria meets all otherconditions, she can exclude no more than$1,500 from income as a qualifiedscholarship.

4.How Income ofAliens Is Taxed

IntroductionResident and nonresident aliens are taxed indifferent ways. Resident aliens are generallytaxed in the same way as U.S. citizens.Nonresident aliens are taxed based on thesource of their income and whether or nottheir income is effectively connected with aU.S. trade or business. The following dis-cussions will help you determine if incomeyou receive during the tax year is effectivelyconnected with a U.S. trade or business and

Chapter 4 How Income of Aliens Is Taxed

how it is taxed.


• Income that is effectively connected witha U.S. trade or business

• Income that is not effectively connectedwith a U.S. trade or business


Publication

m 544 Sales and Other Dispositions ofAssets

m 1212 List of Original Issue Discount In-struments


m 6251 Alternative MinimumTax—Individuals

m W–8 Certificate of Foreign Status

m Schedule D (Form 1040) Capital Gainsand Losses


Resident AliensResident aliens are generally taxed in thesame way as U.S. citizens. This means thattheir worldwide income is subject to U.S. taxand must be reported on their U.S. tax return.Income of resident aliens is subject to thegraduated tax rates that apply to U.S. citi-zens. Resident aliens use the Tax Table andTax Rate Schedules located in the Form 1040instructions, which apply to U.S. citizens.

Nonresident Aliens A nonresident alien's income that is subjectto U.S. income tax must be divided into twocategories:

1) Income that is effectively connected witha trade or business in the United States,and

2) Income that is not effectively connectedwith a trade or business in the UnitedStates (discussed under The 30% Tax).

The difference between these two cate-gories is that effectively connected income,after allowable deductions, is taxed at grad-uated rates. These are the same rates thatapply to U.S. citizens and residents. Incomethat is not effectively connected is taxed at aflat 30% (or lower treaty) rate.

CAUTION!

If you were formerly a U.S. citizen orresident alien, these rules may notapply. See Expatriation Tax, later in

this chapter.

Trade or Businessin the United States Generally, you must be engaged in a tradeor business during the tax year to be able totreat income received in that year as effec-tively connected with that trade or business.Whether you are engaged in a trade or busi-ness in the United States depends on thenature of your activities. The discussions thatfollow will help you determine whether youare engaged in a trade or business in theUnited States.

Personal Services If you perform personal services in the UnitedStates at any time during the tax year, youusually are considered engaged in a trade orbusiness in the United States.

TIPCertain compensation paid to a non-resident alien by a foreign employeris not included in gross income. For

more information, see Services Performed forForeign Employer in chapter 3.

Other Trade or BusinessActivitiesOther examples of being engaged in a tradeor business in the United States follow.

Students and trainees. You are consideredengaged in a trade or business in the UnitedStates if you are temporarily present in theUnited States as a nonimmigrant under sub-paragraphs (F), (J), (M), or (Q) of section101(a)(15) of the Immigration and NationalityAct. Subparagraph (J) includes a nonresidentalien individual admitted to the United Statesas an exchange visitor under the MutualEducational and Cultural Exchange Act of1961. The taxable part of any scholarship orfellowship grant that is U.S. source income istreated as effectively connected with a tradeor business in the United States.

Business operations. If you own and oper-ate a business in the United States sellingservices, products, or merchandise, you are,with certain exceptions, engaged in a tradeor business in the United States.

Partnerships. If you are a member of apartnership that at any time during the taxyear is engaged in a trade or business in theUnited States, you are considered to be en-gaged in a trade or business in the UnitedStates.

Beneficiary of an estate or trust. If you arethe beneficiary of an estate or trust that isengaged in a trade or business in the UnitedStates, you are treated as being engaged inthe same trade or business.

Trading in stocks, securities, and com-modities. If your only U.S. business activityis trading in stocks, securities, or commodities(including hedging transactions) through aU.S. resident broker or other agent, you arenot engaged in a trade or business in theUnited States.

For transactions in stocks or securities,this applies to any nonresident alien, includinga dealer or broker in stocks and securities.

For transactions in commodities, this ap-plies to commodities that are usually tradedon an organized commodity exchange and totransactions that are usually carried out atsuch an exchange.

This discussion does not apply if you havea U.S. office or other fixed place of businessat any time during the tax year through which,or by the direction of which, you carry out yourtransactions in stocks, securities, or com-modities.

Trading for a nonresident alien's ownaccount. You are not engaged in a trade orbusiness in the United States if trading foryour own account in stocks, securities, orcommodities is your only U.S. business ac-tivity. This applies even if the trading takesplace while you are present in the UnitedStates or is done by your employee or yourbroker or other agent.

This does not apply to trading for your ownaccount if you are a dealer in stocks, securi-ties or commodities. This does not necessar-ily mean, however, that as a dealer you areconsidered to be engaged in a trade or busi-ness in the United States. Determine thatbased on the facts and circumstances in eachcase or under the rules given above in Trad-ing in stocks, securities, and commodities.

EffectivelyConnected Income If you are engaged in a U.S. trade or busi-ness, all income, gain, or loss for the tax yearthat you get from sources within the UnitedStates (other than certain investment income)is treated as effectively connected income.This applies whether or not there is any con-nection between the income and the trade orbusiness being carried on in the United Statesduring the tax year.

Two tests, described later, determinewhether certain items of investment income(such as interest, dividends, and royalties) aretreated as effectively connected with thatbusiness.

In limited circumstances, some kinds offoreign source income may be treated as ef-fectively connected with a trade or businessin the United States. For a discussion of theserules, see Foreign Income, later.

Investment Income Investment income from U.S. sources thatmay or may not be treated as effectivelyconnected with a U.S. trade or businessgenerally falls into three categories:

1) Fixed or determinable income (interest,dividends, rents, royalties, premiums,annuities, etc.),

2) Certain gains (some of which are con-sidered capital gains), and

3) Capital gains (and losses).

Use the two tests, described next, to de-termine whether an item of U.S. source in-come falling in one of these categories andreceived during the tax year is effectivelyconnected with your U.S. trade or business.If the tests indicate that the item of income iseffectively connected, you must include it withyour other effectively connected income. If theitem of income is not effectively connected,include it with all other income discussed un-der The 30% Tax, later in this chapter.

Asset-use test. This test usually applies toincome that is not directly produced by tradeor business activities. Under this test, if anitem of income is from assets (property) usedin, or held for use in, the trade or business in


the United States, it is considered effectivelyconnected.

An asset is used in, or held for use in, thetrade or business in the United States if theasset is:

1) Held for the principal purpose of pro-moting the conduct of a trade or busi-ness in the United States,

2) Acquired and held in the ordinary courseof the trade or business conducted in theUnited States (for example, an accountreceivable or note receivable arisingfrom that trade or business), or

3) Otherwise held to meet the presentneeds of the trade or business in theUnited States and not its anticipated fu-ture needs.

Generally, stock of a corporation is nottreated as an asset used in, or held for usein, a trade or business in the United States.

Business-activities test. This test usuallyapplies when income, gain, or loss comesdirectly from the active conduct of the tradeor business. The business-activities test ismost important when:

1) Dividends or interest are received by adealer in stocks or securities,

2) Royalties are received in the trade orbusiness of licensing patents or similarproperty, or

3) Service fees are earned by a servicingbusiness.

Under this test, if the conduct of the U.S.trade or business was a material factor inproducing the income, the income is consid-ered effectively connected.

Personal Service IncomeYou usually are engaged in a U.S. trade orbusiness when you perform personal servicesin the United States. Personal service incomeyou receive in a tax year in which you areengaged in a U.S. trade or business is effec-tively connected with a U.S. trade or busi-ness. Income received in a year other thanthe year you performed the services is alsoeffectively connected if it would have beeneffectively connected if received in the yearyou performed the services. Personal serviceincome includes wages, salaries, commis-sions, fees, per diem allowances, and em-ployee allowances and bonuses. The incomemay be paid to you in the form of cash, ser-vices, or property.

If you engaged in a U.S. trade or businessonly because you perform personal servicesin the United States during the tax year, in-come and gains from assets, and gains andlosses from the sale or exchange of capitalassets are generally not effectively connectedwith your trade or business. However, if thereis a direct economic relationship betweenyour holding of the asset and your trade orbusiness of performing personal services, theincome, gain, or loss is effectively connected.

Transportation income. Transportation in-come is effectively connected if you meet thefollowing two conditions:

1) You had a fixed place of business in theUnited States involved in earning the in-come, and

2) At least 90% of your U.S. source trans-portation income is attributable to regu-larly scheduled transportation.

If you meet both of these conditions, includeyour wages with your other effectively con-nected personal service income. “Regularlyscheduled transportation” means that a shipor aircraft follows a published schedule withrepeated sailings or flights at regular intervalsbetween the same points for voyages orflights that begin or end in the United States.This definition applies to both scheduled andchartered air transportation. “Fixed place ofbusiness” generally means a place, site,structure, or other similar facility throughwhich you engage in a trade or business.

If you do not meet the two conditionsabove, the income is not effectively con-nected and different rules apply. See Trans-portation Tax, later in this chapter.

Pensions. If you were engaged in a U.S.trade or business in a tax year because youperformed personal services in the UnitedStates, and you later receive a pension orretirement pay as a result of these services,the retirement pay is effectively connectedincome in each year you receive it. This istrue whether or not you are engaged in a U.S.trade or business in the year you receive theretirement pay.

Business Profits and Losses,and Sales TransactionsAll profits or losses from U.S. sources that arefrom the operation of a business in the UnitedStates are effectively connected with a tradeor business in the United States. For exam-ple, profit from the sale in the United Statesof inventory property purchased either in thiscountry or in a foreign country is effectivelyconnected trade or business income. A shareof U.S. source profits or losses of a partner-ship that is engaged in a trade or business inthe United States is also effectively connectedwith a trade or business in the United States.

Real Property Gain or Loss Gains and losses from the sale or exchangeof U.S. real property interests (whether or notthey are capital assets) are taxed as if youare engaged in a trade or business in theUnited States. You must treat the gain or lossas effectively connected with that trade orbusiness.

U.S. real property interest. This is any in-terest in real property located in the UnitedStates or the Virgin Islands or any interest ina domestic corporation that is a U.S. realproperty holding corporation. Real propertyincludes:

1) Land and unsevered natural products ofthe land, such as growing crops, timber,mines, wells, and other natural deposits,

2) Improvements on land, includingbuildings, other permanent structures,and structural components of these, and

3) Personal property associated with theuse of real property, such as farming,mining, forestry, or construction equip-ment or property used in lodging facilitiesor rented office space, unless the per-sonal property is—

a) Disposed of more than one yearbefore or after the disposition of thereal property, or

b) Separately sold to persons unre-lated either to the seller or to thebuyer of the real property.

A corporation is a U.S. real propertyholding corporation if the fair market value ofthe corporation's U.S. real property interestsare at least 50% of the total fair market valueof:

1) The corporation's U.S. real property in-terests, plus

2) The corporation's interests in real prop-erty located outside the United States,plus

3) The corporation's other assets that areused in or held for use in a trade orbusiness.

You generally are subject to tax on thesale of the stock in any domestic corporationunless you establish that the corporation isnot a U.S. real property holding corporation.

A U.S. real property interest does not in-clude a class of stock of a corporation that isregularly traded on an established securitiesmarket, unless you hold more than 5% of thefair market value of that class of stock. Aninterest in a foreign corporation owning U.S.real property generally is not a U.S. realproperty interest unless the corporationchooses to be treated as a domestic corpo-ration.

Alternative minimum tax. There may be aminimum tax on your net gain from the dis-position of U.S. real property interests. Figurethe amount, if any, of this tax on Form 6251.

Withholding of tax. If you dispose of a U.S.real property interest, the buyer may have towithhold tax. See the discussion of TaxWithheld on Real Property Sales, in chapter8.

Foreign Income Under limited circumstances, you must treatthree kinds of foreign source income as ef-fectively connected with a trade or businessin the United States. These circumstancesare:

1) You have an office or other fixed placeof business in the United States to whichthe income can be attributed,

2) That office or place of business is amaterial factor in producing the income,and

3) The income is produced in the ordinarycourse of the trade or business carriedon through that office or other fixed placeof business.

An office or other fixed place of businessis a material factor if it significantly contrib-utes to, and is an essential economic elementin, the earning of the income.

The three kinds of foreign source incomeare:

1) Rents and royalties for the use of, or forthe privilege of using, intangible personalproperty located outside the UnitedStates or from any interest in suchproperty. Included are rents or royaltiesfor the use, or for the privilege of using,


outside the United States, patents,copyrights, secret processes and formu-las, goodwill, trademarks, trade brands,franchises, and similar properties if therents or royalties are from the activeconduct of a trade or business in theUnited States.

2) Dividends or interest from the activeconduct of a banking, financing, or simi-lar business in the United States, or froma corporation the principal business ofwhich is trading in stocks or securities forits own account.

3) Income, gain, or loss from the sale out-side the United States—through the U.S.office or other fixed place ofbusiness—of stock in trade, property thatwould be included in inventory if on handat the end of the tax year, or propertyheld primarily for sale to customers in theordinary course of business. This will notapply if you sold the property for use,consumption, or disposition outside theUnited States and an office or other fixedplace of business in a foreign countrywas a material factor in the sale.

Tax on EffectivelyConnected Income Income you receive during the tax year thatis effectively connected with your trade orbusiness in the United States is, after allow-able deductions, taxed at the rates that applyto U.S. citizens and residents.

Generally, you can receive effectivelyconnected income only if you are a nonresi-dent alien engaged in trade or business in theUnited States during the tax year. However,income you receive from the sale or ex-change of property, the performance of ser-vices, or any other transaction in another taxyear is treated as effectively connected in thatyear if it would have been effectively con-nected in the year the transaction took placeor you performed the services.

Example. Ted Richards, a nonresidentalien, entered the United States in August1996 to perform personal services in the U.S.office of his overseas employer. He workedin the U.S. office until December 25, 1996,but did not leave this country until January11, 1997. On January 7, 1997, he receivedhis final paycheck for services performed inthe United States during 1996. All of Ted'sincome during his stay here is U.S. sourceincome.

During 1996, Ted was engaged in thetrade or business of performing personalservices in the United States. Therefore, allamounts paid him in 1996 for services per-formed in the United States during 1996 areeffectively connected with that trade or busi-ness during 1996.

The salary payment Ted received in Jan-uary 1997 is U.S. source income to him in1997. It is effectively connected with a tradeor business in the United States because hewas engaged in a trade or business in theUnited States during 1996 when he per-formed the services that earned the income.

Real property income. You may be able tochoose to treat all income from real propertyas effectively connected. See Income FromReal Property, later in this chapter.

The 30% TaxTax at a 30% (or lower treaty) rate applies tocertain items of income or gains from U.S.sources but only if the items are not effec-tively connected with your U.S. trade or busi-ness.

Fixed or Determinable IncomeThe 30% (or lower treaty) rate applies to thegross amount of U.S. source fixed or deter-minable annual or periodic gains, profits, orincome.

Income is fixed when it is paid in amountsknown ahead of time. Income is determina-ble whenever there is a basis for figuring theamount to be paid. Income can be periodicif it is paid from time to time. It does not haveto be paid annually or at regular intervals. In-come can be determinable or periodic evenif the length of time during which the pay-ments are made is increased or decreased.

Items specifically included as fixed or de-terminable income are interest (other thanoriginal issue discount), dividends, rents,premiums, annuities, salaries, wages, andother compensation. Other items of income,such as royalties, also may be subject to the30% tax.

TIPSome fixed or determinable incomemay be exempt from U.S. tax. Seechapter 3 if you are not sure whether

the income is taxable.

Original issue discount. If you sold, ex-changed, or received a payment on a bondor other debt instrument that was issued at adiscount after March 31, 1972, all or part ofthe original issue discount (OID) (other thanportfolio interest) may be subject to the 30%tax. The amount of OID is the difference be-tween the stated redemption price at maturityand the issue price of the debt instrument.The 30% tax applies in the following circum-stances:

1) You received a payment on an obli-gation. In this case, the amount of OIDsubject to tax is the OID that accruedwhile you held the obligation minus theOID previously taken into account. Butthe tax on the OID cannot be more thanthe payment minus the tax on the inter-est payment on the obligation.

2) You sold or exchanged the obligation.The amount of OID subject to tax is theOID that accrued while you held the ob-ligation minus the amount already taxedin (1) above.

Report on your return the amount of OIDshown on Form 1042–S if you bought thedebt instrument at original issue. However,you must recompute your proper share of OIDshown on Form 1042–S if any of the followingapply:

1) You bought the obligation at a premiumor paid an acquisition premium.

2) The obligation is a stripped bond or astripped coupon (including zero couponinstruments backed by U.S. Treasurysecurities).

3) You receive a Form 1042–S as a nomi-nee recipient.

For the definition of premium and acquisi-tion premium and instructions on how to re-compute OID, get Publication 1212.

If you held a bond or other debt instrumentthat was issued at a discount before April 1,1972, write to the IRS for further information.See chapter 12.

Social Security Benefits A nonresident alien must include 85% of anyU.S. social security benefit (and the socialsecurity equivalent part of a tier 1 railroadretirement benefit) in U.S. source fixed ordeterminable annual or periodic income. Thisincome is subject to the 30% tax, unless ex-empt by treaty.

Sales or Exchangesof Capital Assets These rules apply only to those capital gainsand losses from sources in the United Statesthat are not effectively connected with a tradeor business in the United States. These rulesapply even if you are engaged in a trade orbusiness in the United States. These rulesdo not apply to the sale or exchange of a U.S.real property interest or to the sale of anyproperty that is effectively connected with atrade or business in the United States. SeeReal Property Gain or Loss earlier, under Ef-fectively Connected Income.

A capital asset is everything you ownexcept the following: inventory, business ac-counts or notes receivable, depreciableproperty used in a trade or business, realproperty used in a trade or business, certaincopyrights, literary or musical or artistic com-positions, letters or memoranda, or similarproperty, and certain U.S. Government publi-cations.

A capital gain is a gain on the sale orexchange of a capital asset. A capital lossis a loss on the sale or exchange of a capitalasset.

You may want to read Publication 544.However, use Publication 544 only to deter-mine what is a sale or exchange of a capitalasset, or what is treated as such. Specific taxtreatment that applies to U.S. citizens or res-idents generally does not apply to you.

The following gains are subject to the 30%(or lower treaty) rate without regard to the183-day rule.

1) Gains on the disposal of timber, coal, ordomestic iron ore with a retained eco-nomic interest.

2) Gains on contingent payments receivedfrom the sale or exchange of patents,copyrights, and similar property afterOctober 4, 1966.

3) Gains on certain transfers of all sub-stantial rights to, or an undivided interestin, patents if the transfers were madebefore October 5, 1966.

4) Gains on the sale or exchange of originalissue discount obligations.

183-day rule. If you have been in the UnitedStates for 183 days or more during the taxyear, your capital gains from U.S. sources(other than gains listed earlier) that are morethan your capital losses from U.S. sourcesare taxed at a 30% (or lower treaty) rate. Thisrule applies even if any of the transactionsoccur while you are not in the United States.

To determine the excess of gains overlosses, consider only the amount of yourgains and losses that would be recognizedand taken into account if effectively con-nected with your trade or business in the


United States during the tax year. Take intoaccount, in arriving at your net gain, all gainsand losses treated under U.S. tax laws asgains or losses from the sales or exchangesof properties that are capital assets.

To determine the excess of gains overlosses, you cannot take the deduction for acapital loss carryover into account.

Losses from sales or exchanges of capitalassets that exceed similar gains are not al-lowed.

If you are not engaged in a trade or busi-ness in the United States and have not es-tablished a tax year for a prior period, your taxyear will be the calendar year for purposesof the 183-day rule. Also, you must file yourtax return on a calendar-year basis.

If you have been in the United States forless than 183 days during the tax year,capital gains (other than gains listed earlier)are tax exempt unless they are effectivelyconnected with a trade or business in theUnited States during your tax year.

Reporting. You cannot offset losses that arenot effectively connected against effectivelyconnected gains. Report your gains andlosses from the sales or exchanges of capitalassets that are not connected with a trade orbusiness in the United States on page 4 ofForm 1040NR. Report gains and losses fromsales or exchanges of capital assets (includ-ing real property) that are connected with atrade or business in the United States on aseparate Schedule D (Form 1040), CapitalGains and Losses, and attach it to Form1040NR.

Income from Real PropertyIf you are a nonresident alien and during thetax year you have income from real propertylocated in the United States that you own orhave an interest in and hold for the productionof income, you can choose to treat all incomefrom that property as income effectively con-nected with a trade or business in the UnitedStates. The choice applies to all income fromreal property located in the United States andheld for the production of income and to allincome from any interest in such property.This includes income from rents, royaltiesfrom mines, oil or gas wells, or other naturalresources. It also includes gains from the saleor exchange of real property.

You can make this choice only for realproperty income that is not otherwise con-nected with your U.S. trade or business.

If you make the choice, you can claimdeductions attributable to the real propertyincome and only your net income from realproperty is taxed.

This choice does not treat a nonresidentalien, who is not otherwise engaged in a U.S.trade or business, as being engaged in atrade or business in the United States duringthe year.

Making the choice. Make the initial choiceby attaching a statement that you are makingthe choice to your return, or amended return,for the year of the choice. Include in yourstatement:

1) A complete list of all your real property,or any interest in real property, locatedin the United States,

2) The extent of your ownership in theproperty,

3) The location of the property,

4) A description of any major improvementsto the property, and

5) Details of any previous choices and re-vocations of the real property incomechoice.

This choice stays in effect for all later taxyears unless you revoke it with the consentof the Internal Revenue Service.

Transportation Tax If you have transportation income that is noteffectively connected (see Transportation in-come, earlier in this chapter), a 4% tax rateapplies. If you receive transportation incomesubject to the 4% tax, you should figure thetax and show it on line 49 of Form 1040NR.Attach a statement to your return that in-cludes the following information (if applica-ble):

1) Your name, taxpayer identification num-ber, and tax year,

2) A description of the types of servicesperformed (whether on or off board),

3) Names of vessels or registration num-bers of aircraft on which you performedthe services,

4) Amount of U.S. source transportationincome derived from each type of servicefor each vessel or aircraft for the calen-dar year, and

5) Total amount of U.S. source transporta-tion income derived from all types ofservices for the calendar year.

Expatriation Tax The expatriation tax provisions apply to U.S.citizens who have renounced their citizenshipand long-term residents who have ended theirresidency, if one of the principal purposes ofthe action is the avoidance of U.S. taxes. Theexpatriation tax applies to the 10-year periodfollowing the date of the action.

If you expatriated in 1997, you are pre-sumed to have tax avoidance as a principalpurpose if:

1) Your average annual net income tax forthe last five tax years ending before thedate of the action is more than $106,000,or

2) Your net worth on the date of the actionis $528,000 or more.

Ruling request. If you are presumed to havetax avoidance as a principal purpose becauseyou meet either of the previous tests, you maybe eligible to request a ruling from the IRSthat you did not expatriate to avoid U.S. taxes.You must request this ruling within one yearfrom the date of expatriation. For informationthat must be included in your ruling requestsee section IV of Notice 97–19 in InternalRevenue Bulletin 1997–10.

Former U.S. citizen. If you are a formerU.S. citizen, you are eligible to request a rul-ing if you are in one of the following catego-ries:

1) You became at birth a U.S. citizen anda citizen of another country and continueto be a citizen of that other country,

2) You become (within a reasonable periodafter loss of U.S. citizenship) a citizen

of the country in which you, your spouse,or one of your parents were born,

3) You were present in the United Statesfor no more than 30 days during eachyear of the 10-year period ending on thedate of expatriation, or

4) You lost your U.S. citizenship beforereaching age 18 1/2 .

Former long-term resident. If you are aformer long-term resident, you are eligible torequest a ruling if you are in one of the fol-lowing categories:

1) On the day of expatriation, you are acitizen of:

a) The country in which you wereborn,

b) The country where your spousewas born, or

c) The country where either of yourparents was born, and

d) you become (within a reasonableperiod after your expatriation) fullyliable to tax in that country becauseof your residence.

2) You were present in the United Statesfor no more than 30 days during eachyear of the 10-year period prior toexpatriation, or

3) You ceased to be a long-term residentbefore reaching age 18 1/2.

Long-term residents. You are a long-termresident if you were a lawful permanent resi-dent of the United States in at least 8 of thelast 15 tax years ending with the year yourresidency ends. In determining if you meetthe 8-year requirement, do not count any yearthat you are treated as a resident of a foreigncountry under a tax treaty and do not waivetreaty benefits.

Your U.S. residency is considered to haveended when you cease to be a lawful per-manent resident or you commence to betreated as a resident of another country undera tax treaty and do not waive treaty benefits.

Tax. If the expatriation tax applies to you, youare generally subject to tax on your U.S.source gross income and gains on a net basisat the graduated rates applicable to individ-uals (with allowable deductions), unless youwould be subject to a higher tax under the30% tax (discussed earlier) on income notconnected with a U.S. trade or business. Inmaking this determination, you may not claimthat an income tax treaty in effect on August21, 1996, reduces your tax liability under the30% tax on any items of U.S. source income.

For this purpose, U.S. source gross in-come (defined in chapter 2) includes gainsfrom the sale or exchange of (1) property(other than stock or debt obligations) locatedin the United States, and (2) stock issued bya U.S. domestic corporation, or debt obli-gations of U.S. persons or of the UnitedStates, a state or political subdivision thereof,or the District of Columbia.

It also includes any income or gain derivedfrom stock in certain controlled foreign cor-porations if you owned, or were consideredto own, at any time during the 2-year periodending on the date of expatriation, more than50% of (1) the total combined voting powerof all classes of that corporation's stock, or (2)the total value of the stock. Any exchange of


property is treated as a sale of the propertyat its fair market value on the date of the ex-change and any gain is treated as U.S.source gross income in that tax year unlessyou enter into a gain recognition agreementunder Notice 97–19.

Other information. For more information onthe expatriation tax provisions, including ex-ceptions to the tax and special U.S. sourcerules, see section 877 of the Internal RevenueCode.

Reporting RequirementsIf you lost your U.S. citizenship, you must fileForm 8854, Expatriation Information State-ment, with the Department of State, aconsular office, or a federal court at the timeof loss of citizenship. If you end your long-term residency, you must file Form 8854 withthe Internal Revenue Service when you fileyour tax return for the year your residencyends.

Penalties. If you fail to file Form 8854, youmay have to pay a penalty equal to thegreater of 5% of the expatriation tax or$1,000. The penalty will be assessed for eachyear during which such failure continues forthe 10-year period. The penalty will not beimposed if you can show that such failure isdue to reasonable cause and not willful neg-lect. Form 8854 may not be available at thebeginning of 1998. If you make a good faitheffort to obtain Form 8854 but are unable toobtain the form, no penalties will be assessedif you file a complete statement that sets forththe information contained in Section IX ofNotice 97–19.

Expatriation tax return. If you are subjectto the expatriation tax, you must file Form1040NR for each year of the 10-year periodfollowing expatriation. Complete line “P” onpage 5 of Form 1040NR. See Special RulesFor Former U.S. Citizens And Former Long-Term U.S. Residents in the instructions forForm 1040NR. You must attach a statementto Form 1040NR listing, by category (divi-dends, interest, etc.), all items of UnitedStates and foreign source income, whetheror not taxable in the United States. If you area former citizen and you have not filed Form8854 or a statement containing the informa-tion set forth in Section IX of Notice 97–19,you should attach Form 8854 to your firstForm 1040NR following expatriation.

If you fail to attach a complete statementin any year you are liable for any U.S. taxes,you will not be considered to have filed a trueand accurate return. You will not be entitledto any tax deductions or credits if your taxliability for that year is later adjusted.

Interrupted Period ofResidenceYou are subject to tax under a special rule ifyou interrupt your period of U.S. residencewith a period of nonresidence. This applies if:

1) You were a U.S. resident for a periodthat includes at least 3 consecutive cal-endar years,

2) You were a resident for at least 183 daysin each of those years,

3) You ceased to be treated as a U.S. res-ident, and

4) You then again became a U.S. residentbefore the end of the third calendar yearafter the period described in (1) above.

Under this special rule, you are subject totax on your U.S. source gross income andgains on a net basis at the graduated ratesapplicable to individuals (with allowable de-ductions), unless you would be subject to ahigher tax under the 30% tax (discussedearlier) on income not connected with a U.S.trade or business.

Example. John Willow, a citizen of NewZealand, entered the United States on April1, 1992, as a lawful permanent resident. OnAugust 1, 1994, John ceased to be a lawfulpermanent resident and returned to NewZealand. During his period of residence, hewas present in the United States for at least183 days in each of three consecutive years(1992, 1993, and 1994). He returned to theUnited States on October 5, 1997, as a lawfulpermanent resident. He became a residentbefore the close of the third calendar year(1997) beginning after the end of his first pe-riod of residence (August 1, 1994). Therefore,he is subject to tax under the special rule forthe period of nonresidence (August 2, 1994,through October 4, 1997) if it is more than thetax that would normally apply to him as anonresident alien.

Reporting requirements. If you are subjectto this tax for any year in the period you werea nonresident alien, you must file Form1040NR for that year. The return is due by thedue date (including extensions) for filing yourU.S. income tax return for the year that youagain become a U.S. resident. If you had filedreturns for that period, you must file amendedreturns. You must attach a statement to yourreturn that identifies the source of all of yourU.S. and foreign gross income and the itemsof income subject to this special rule.

5.Figuring YourTax

IntroductionThe information in this chapter is not ascomprehensive for resident aliens as it is fornonresident aliens. Resident aliens shouldget publications, forms, and instructions forU.S. citizens, because the information for fil-ing returns for resident aliens is generally thesame as for U.S. citizens.

If you are both a nonresident alien and aresident alien in the same tax year, seechapter 6 for a discussion of dual-status al-iens.


• Filing status

• Identification numbers

• Deductions

• Exemptions

• Tax payments and credits

• Special rules for bona fide residents ofAmerican Samoa and Puerto Rico


Publication

m 463 Travel, Entertainment, Gift, andCar Expenses

m 501 Exemptions, Standard Deduction,and Filing Information

m 521 Moving Expenses

m 526 Charitable Contributions

m 535 Business Expenses

m 597 Information on the UnitedStates–Canada Income TaxTreaty


m W–7 Application for IRS IndividualTaxpayer Identification Number



m 1040NR–EZ U.S. Income Tax Return forCertain Nonresident Aliens WithNo Dependents

m 2106 Employee Business Expenses

m 2106-EZ Unreimbursed Employee Busi-ness Expenses

m 3903 Moving Expenses

m 4563 Exclusion of Income for Bona FideResidents of American Samoa


Tax YearYou must figure your income and file a taxreturn on the basis of an annual accountingperiod called a tax year. If you have not pre-viously established a fiscal tax year, your taxyear is the calendar year. A calendar year is12 consecutive months ending on December31. If you have previously established a reg-ular fiscal year (12 consecutive months end-ing on the last day of a month other thanDecember or a 52-53 week year) and areconsidered to be a U.S. resident for any cal-endar year, you will be treated as a U.S.resident for any part of your fiscal year thatfalls within that calendar year.

Filing StatusThe rules for filing status are different forresident aliens and nonresident aliens.

Chapter 5 Figuring Your Tax

Resident AliensResident aliens can use the same filingstatuses available to U.S. citizens. See yourform instructions or Publication 501 for moreinformation on filing status.

Joint return. Generally, you can file a jointreturn only if both you and your spouse wereresident aliens for the entire tax year, or if youmake one of the choices discussed in chapter1 to treat your spouse as a resident alien forthe entire tax year.

Qualifying widow(er). If your spouse diedin 1995 or 1996, you have not remarried, andyou have a dependent child living with you,you may qualify to file as a qualifyingwidow(er) and use the joint return tax rates.This applies only if you could have filed a jointreturn with your spouse for the year yourspouse died.

Head of household. You can qualify as ahead of household if you are unmarried orconsidered unmarried on the last day of theyear and you pay more than half the cost ofkeeping up a home for you and a qualifyingperson. You must be a resident alien for theentire tax year.

You are considered unmarried for thispurpose if your spouse was a nonresidentalien at any time during the year and you donot make one of the choices discussed inchapter 1 to treat your spouse as a residentalien for the entire tax year.

Nonresident AliensIf you are a nonresident alien filing Form1040NR, you may be able to use one of thefiling statuses discussed below. If you are fil-ing Form 1040NR–EZ, you can only claim“Single nonresident alien” or “Married non-resident alien” as your filing status.

Joint return. Generally, you cannot file ajoint return if either spouse was a nonresidentalien at any time during the tax year.

However, nonresident aliens married toU.S. citizens or residents can choose to betreated as U.S. residents and file joint returns.For more information on these choices, seechapter 1.

Qualifying widow(er). You may be eligibleto file as a qualifying widow(er) and use thejoint return tax rates if:

1) You were a resident of Canada, Mexico,Japan, or South Korea, or a U.S. na-tional (defined below),

2) Your spouse died in 1995 or 1996 andyou have not remarried, and

3) You have a dependent child living withyou.

See the instructions for Form 1040NR for therules for filing as a qualifying widow(er) witha dependent child.

A U.S. national is an individual who, al-though not a U.S. citizen, owes his or her al-legiance to the United States. U.S. nationalsinclude American Samoans and NorthernMariana Islanders who chose to become U.S.nationals instead of U.S. citizens.

Head of household. You cannot file as headof household if you are a nonresident alienat any time during the tax year. However, ifyou are married, your spouse can qualify asa head of household if:

1) Your spouse is a resident alien or U.S.citizen for the entire tax year,

2) You do not choose to be treated as aresident alien, and

3) Your spouse meets the other require-ments for this filing status.

Married filing separately. Married nonresi-dent aliens who are not married to U.S. citi-zens or residents generally must use the TaxTable column or the Tax Rate Schedule formarried filing separate returns when deter-mining the tax on income effectively con-nected with a U.S. trade or business. Theynormally cannot use the Tax Table columnor the Tax Rate Schedule for single individ-uals. However, if you are a married residentof Canada, Mexico, Japan, or South Korea,or are a married U.S. national, you may beable to file as single if you lived apart fromyour spouse during the last 6 months of theyear. See the instructions for Form 1040NRto see if you qualify. U.S. national was de-fined earlier in this section under Qualifyingwidow(er).

Nonresident aliens who are married toU.S. citizens or residents can choose to betreated as a resident and file a joint return.For information on these choices, see chapter1. If you do not make the choice to file jointly,use the Tax Table column or the Tax RateSchedule for married individuals filing sepa-rately.

A nonresident alien estate or trust usingForm 1040NR must use Tax Rate ScheduleW in the Form 1040NR instructions whendetermining the tax on income effectivelyconnected with a U.S. trade or business.

Special rules for aliens from certain U.S.possessions. A nonresident alien who is abona fide resident of American Samoa orPuerto Rico for the entire tax year and whois temporarily working in the United Statesshould read Bona Fide Residents of AmericanSamoa or Puerto Rico, at the end of thischapter, for information about special rules.

Identification Number A taxpayer identification number must be fur-nished on returns, statements, and other tax-related documents. For an individual, this isa social security number (SSN). If you do nothave and are not eligible to get an SSN, theIRS will issue you an individual taxpayeridentification number (ITIN). An employeridentification number (EIN) is required if youare an employer or are engaged in a tradeor business as a sole proprietor.

You must furnish a taxpayer identificationnumber if you are:

1) An alien who has income effectivelyconnected with the conduct of a U.S.trade or business at any time during theyear,

2) An alien who has a U.S. office or placeof business at any time during the year,

3) A nonresident alien spouse treated as aresident, as discussed in chapter 1, or

4) Any other alien who files a tax return, anamended return, or a refund claim (butnot information returns).

Social security number. Generally, you canget an SSN if you have been lawfully admittedto the United States for permanent residenceor under other immigration categories thatauthorize U.S. employment.

To apply for this number, get Form SS–5from your local Social Security Administrationoffice or call the SSA at 1–800–772–1213.The completed form should be returned to theSSA. It usually takes about 2 weeks to getan SSN.

Individual taxpayer identification number.If you are not eligible to obtain an SSN, youmust get an ITIN. Enter your ITIN whereveran SSN is required on your tax return.

CAUTION!

You cannot claim the earned incomecredit, discussed later, using an ITIN.You, your spouse if married, and any

qualifying child must have SSNs.

ITINs are for tax use only. They do notaffect your immigration status or your right tobe legally employed in the United States.

To apply for an ITIN, file Form W–7 withthe IRS. It usually takes about 30 days to getan ITIN.

In addition to those aliens who are re-quired to furnish a taxpayer identificationnumber and are not eligible for an SSN, aForm W–7 should be filed for:

• Alien individuals who are claimed as de-pendents and are not eligible for an SSN,and

• Alien individual spouses who are claimedas exemptions and are not eligible for anSSN.

Employer identification number. An indi-vidual may use an SSN (or ITIN) for individualtaxes and an EIN for business taxes. To applyfor an EIN, file Form SS–4 with the IRS.

Reporting YourIncomeYou must report each item of income that istaxable according to the rules in chapters 2,3, and 4. For resident aliens, this includesincome from sources both within and outsidethe United States. For nonresident aliens, thisincludes both income that is effectively con-nected with a trade or business in the UnitedStates (subject to graduated tax rates) andincome from U.S. sources that is not effec-tively connected (subject to a flat 30% tax rateor lower tax treaty rate).

DeductionsResident and nonresident aliens can claimsimilar deductions on their U.S. tax returns.However, nonresident aliens generally canclaim only deductions related to income thatis effectively connected with their U.S. tradeor business.


Resident AliensYou can claim the same deductions allowedto U.S. citizens if you are a resident alien forthe entire tax year. While the discussion thatfollows contains some of the same generalrules and guidelines that apply to you, it isspecifically directed toward nonresident al-iens. You should get Form 1040 and in-structions for more information on how toclaim your allowable deductions.

Nonresident AliensYou can claim deductions to figure your ef-fectively connected taxable income. Yougenerally cannot claim deductions related toincome that is not connected with your U.S.business activities. Except for personal ex-emptions, and certain itemized deductions,discussed later, you can claim deductionsonly to the extent they are connected withyour effectively connected income.

Ordinary and necessary business ex-penses. You can deduct all ordinary andnecessary expenses in the operation of yourU.S. trade or business to the extent they re-late to income effectively connected with thattrade or business. The deduction for travelexpenses while in the United States is dis-cussed later under Itemized Deductions. Forinformation about other business expenses,see Publication 535.

Losses. You can deduct losses resultingfrom transactions that you entered into forprofit and that you were not reimbursed forby insurance, etc., to the extent that they re-late to income that is effectively connectedwith a trade or business in the United States.

Individual retirement arrangement (IRA). You may qualify to establish your own retire-ment arrangement whether or not you arecovered by a qualified retirement plan atwork. You can contribute the smaller of$2,000 or your taxable compensation effec-tively connected with your U.S. trade or busi-ness to an IRA each year. If you or yourspouse are covered by a plan at work, or youare self employed and had a Keogh or SEPretirement plan, you can only deduct thesecontributions subject to certain limits.

For more information, see Publication 590,Individual Retirement Arrangements (IRAs)(Including SEP-IRAs and SIMPLE IRAs).

Moving expenses. If you are a nonresidentalien temporarily in the United States earningtaxable income for performing personal ser-vices, you can deduct moving expenses tothe United States if:

1) You are a full-time employee for at least39 weeks during the 12 months right af-ter you move, or if you are self-employed, you work full time for at least39 weeks during the first 12 months and78 weeks during the first 24 months rightafter you move, and

2) Your new job location is at least 50 milesfarther (by the shortest commonly trav-eled route) from your former home thanyour former job location was. If you hadno former job location, the new job lo-cation must be at least 50 miles fromyour former home.

You cannot deduct the moving expenseyou have when returning to your home

abroad. A nonresident alien cannot deductexpenses of moving to a foreign job site.

Figure your deductible moving expensesto the United States on Form 3903, and de-duct them on line 26 of Form 1040NR.

For more information on the moving ex-pense deduction, see Publication 521.

Reimbursements. If you were reim-bursed by your employer for allowable movingexpenses, your employer should have ex-cluded these reimbursements from your in-come. You can only deduct allowable movingexpenses that were not reimbursed by youremployer or that were reimbursed but the re-imbursement was included in your income.For more information, see Publication 521.

Moving expense or travel expense. Ifyou deduct moving expenses to the UnitedStates, you cannot also deduct travel ex-penses (discussed later under Itemized De-ductions) while temporarily away from yourtax home in a foreign country. Moving ex-penses are based on a change in your prin-cipal place of business while travel expensesare based on your temporary absence fromyour principal place of business.

Keogh and self-employed SEP plans. Ifyou are self-employed, you may be able todeduct contributions to a qualified retirementplan that provides retirement benefits foryourself and your common-law employees, ifany. To make deductible contributions foryourself, you must have net earnings fromself-employment that are effectively con-nected with your U.S. trade or business.

Get Publication 560, Retirement Plans forSmall Business (SEP, Keogh, and SIMPLEPlans), for further information.

Penalty on early withdrawal of savings.You must include in income all effectivelyconnected interest income you receive or thatis credited to your account during the year.Do not reduce it by any penalty you must payon an early withdrawal from a time savingsaccount. However, if the interest income iseffectively connected with your U.S. trade orbusiness during the year, you can deduct online 29 of Form 1040NR the amount of theearly withdrawal penalty that the banking in-stitution charged.

Exemptions While resident aliens can claim personal ex-emptions and exemptions for dependents inthe same way as U.S. citizens, nonresidentaliens generally can claim only a personalexemption for themselves on their U.S. taxreturn.

Resident AliensYou can claim personal exemptions and ex-emptions for dependents according to thedependency rules for U.S. citizens. You canclaim an exemption for your spouse if yourspouse had no gross income for U.S. taxpurposes and was not the dependent of an-other taxpayer. You can claim this exemptioneven if you do not choose to file a joint return,and even if your spouse has not been a resi-dent alien for a full tax year or is an alien whohas not come to the United States.

You can claim an exemption for eachperson who qualifies as a dependent accord-ing to the rules for U.S. citizens. The de-

pendent must be a citizen or national (definedearlier) of the United States; or be a residentof the United States, Canada, or Mexico forsome part of the calendar year in which yourtax year begins. Get Publication 501, for moreinformation.

CAUTION!

Your spouse and each dependentmust have either an SSN or an ITIN.See Identification Number earlier.

Phase-out of exemptions. If the adjustedgross income shown on your tax return ismore than the amount shown for your filingstatus, your deduction for exemptions maybe reduced or eliminated. Use the worksheetin your income tax return instructions to figurethe amount, if any, you can deduct.

• $90,900 if married filing separately,

• $121,200 if single,

• $151,500 if head of household,

• $181,800 if married filing jointly or aqualifying widow(er) with dependentchild.

Nonresident AliensGenerally, if you are a nonresident alien en-gaged in a trade or business in the UnitedStates, you can claim only one personal ex-emption ($2,650 for 1997). You may be ableto claim an exemption for a spouse and adependent if you are described in any of thefollowing discussions.

CAUTION!

Your spouse and each dependentmust have either an SSN or an ITIN.See Identification Number earlier.

Residents of Mexico or Canada or U.S.nationals. If you are a resident of Mexico orCanada or a national of the United States(defined earlier), you can also claim a per-sonal exemption for your spouse if yourspouse had no gross income for U.S. taxpurposes and was not the dependent of an-other taxpayer. In addition, you can claimexemptions for your dependents who meetcertain tests. Residents of Mexico, Canada,or nationals of the United States must use thesame rules as U.S. citizens to determine whois a dependent and for which dependentsexemptions can be claimed. See Publication501 for these rules. For purposes of theserules, dependents who are U.S. nationalsmeet the citizenship test discussed in Publi-cation 501.

Residents of Japan or South Korea. Non-resident aliens who are residents of Japanor South Korea may be able to claim ex-emptions for a spouse and children. The taxtreaties with Japan and Korea impose twoadditional requirements on Japanese orKorean residents:

1) The spouse and all children claimedmust live with the alien in the UnitedStates at some time during the tax year,and

2) The additional deduction for the ex-emptions must be prorated based on theratio of the alien's U.S. source gross in-come effectively connected with a U.S.trade or business for the tax year to thealien's entire income from all sourcesduring the tax year.


Example. Mr. Sato, a nonresident alienwho is a resident of Japan, lives temporarilyin the United States with his wife and twochildren. During the tax year he receives U.S.compensation of $9,000. He also receives$3,000 of income from sources outside theUnited States that is not effectively connectedwith his U.S. trade or business. Thus, his totalincome for the year is $12,000. Mr. Satomeets all requirements for claiming ex-emptions for his spouse and two children. Theadditional deduction is $5,962.50 figured asfollows:

$9,000

$12,0003 $7,950* = $5,962.50

* 3 3 $2,650

Students and business apprentices fromIndia. Students and business apprenticeswho are eligible for the benefits of Article21(2) of the United States–India Income TaxTreaty may be able to claim exemptions fortheir spouse and dependents.

You can claim an exemption for yourspouse if he or she had no gross incomeduring the year and is not the dependent ofanother taxpayer.

You can claim exemptions for each of yourdependents not admitted to the United Stateson F–2, J–2, or M–2 visas if they meet thesame rules that apply to U.S. citizens. SeePublication 501 for these rules.

List your spouse and dependents on line7c of Form 1040NR. Also enter the total onthe appropriate line to the right of line 7c.

Phase-out of exemptions. If the adjustedgross income shown on line 32 of Form1040NR is more than the amount shown be-low for your filing status, your deduction forexemptions may be reduced or eliminated.Use the worksheet in the Form 1040NR in-structions to figure the amount, if any, you candeduct.

• $90,900 if married filing separately

• $121,200 if single

• $181,800 if a qualifying widow(er) withdependent child

Itemized Deductions Nonresident aliens can claim some of thesame itemized deductions that resident alienscan claim. However, nonresident aliens canclaim itemized deductions only if they haveincome effectively connected with their U.S.trade or business.

Resident and nonresident aliens may notbe able to claim all of their itemized de-ductions. If your adjusted gross income ismore than $121,200 ($60,600 if married filingseparately), use the worksheet in your incometax return instructions to figure the amountyou can deduct.

If you are filing Form 1040NR–EZ, youcan only claim a deduction for state or localincome taxes. If you are claiming any otherdeduction, you must file Form 1040NR.

Resident AliensYou can claim the same itemized deductionsas U.S. citizens, using Schedule A of Form1040. These deductions include certain med-ical and dental expenses, state and local in-come taxes and real estate taxes, interest youpaid on a home mortgage, charitable contri-butions, casualty and theft losses, and mis-cellaneous deductions.

If you do not itemize your deductions, youcan claim the standard deduction for yourparticular filing status. For further information,see Form 1040 and instructions.

Nonresident AliensYou can deduct certain itemized deductionsif you receive income effectively connectedwith your U.S. trade or business. These de-ductions include state and local income taxes,charitable contributions to U.S. organiza-tions, casualty and theft losses, and miscel-laneous deductions. Use Schedule A of Form1040NR to claim itemized deductions.

Standard deduction. Nonresident aliens cannot claim the standard deduction. How-ever, see Students and business apprenticesfrom India, next.

Students and business apprenticesfrom India. A special rule applies to studentsand business apprentices who are eligible forthe benefits of Article 21(2) of the UnitedStates–India Income Tax Treaty. You canclaim the standard deduction provided youdo not claim itemized deductions.

Use Table 7, 8, or 9 in Publication 501 tofigure your standard deduction. If you aremarried and your spouse files a return anditemizes deductions, you cannot take thestandard deduction even if you were age 65or older or blind.

If you are filing Form 1040NR, enter thestandard deduction on line 3 of Schedule A(Form 1040NR). In the space to the left of line3, write “Standard Deduction Allowed UnderU.S.–India Income Tax Treaty.” Also enter theamount on line 34 of Form 1040NR. If youare filing form 1040NR–EZ, enter the amounton line 10.

State and local income taxes. If during thetax year, you receive income that is con-nected with a trade or business in the UnitedStates, you can deduct state and local incometaxes you paid on that income.

Charitable contributions. You can deductyour charitable contributions or gifts to qual-ified organizations subject to certain limits.Qualified organizations include organizationsthat are religious, charitable, educational,scientific, or literary in nature, or that work toprevent cruelty to children or animals. Certainorganizations that promote national or inter-national amateur sports competition are alsoqualified organizations.

Foreign organizations. Contributionsmade directly to a foreign organization are notdeductible. However, you can deduct contri-butions to a U.S. organization that transfersfunds to a charitable foreign organization ifthe U.S. organization controls the use of thefunds or if the foreign organization is only anadministrative arm of the U.S. organization.

Gifts from which you benefit. If you re-ceive a benefit as a result of making a con-tribution to a qualified organization, you candeduct only the amount of your contribution

that is more than the value of the benefit youreceive.

If you pay more than the fair market valueto a qualified organization for merchandise,goods, or services, the amount you pay thatis more than the value of the item can be acharitable contribution. For the excessamount to qualify, you must pay it with theintent to make a charitable contribution.

Gifts of $250 or more. You may deducta gift of $250 or more only if you have awritten statement from the charitable organ-ization showing:

1) The amount of any money contributedand a description (but not value) of anyproperty donated, and

2) Whether the organization did or did notgive you any goods or services in returnfor your contribution.

If you did receive any goods or services, adescription and estimate of the value mustbe included. If you received only intangiblereligious benefits, the organization must statethis, but it does not have to describe or valuethe benefit.

Gifts of appreciated property. If youcontribute property with a fair market valuethat is more than your basis in it, you mayhave to reduce the fair market value by theamount of appreciation (increase in value)when you figure your deduction. Your basisin the property is generally what you paid forit. If you need more information about basis,get Publication 551.

Different rules apply to figuring your de-duction, depending on whether the propertyis:

1) Ordinary income property, or

2) Capital gain property.

Limit. The amount you can deduct in atax year is limited in the same way it is for acitizen or resident of the United States. For adiscussion of limits on charitable contributionsand other information, get Publication 526.

Casualty and theft losses. You can deductyour loss from fire, storm, shipwreck, or othercasualty, or theft of property even though yourproperty is not connected with a trade orbusiness. However, the property must be lo-cated in the United States at the time of thecasualty or theft. You can deduct theft lossesonly in the year in which you discover theloss.

You can deduct the fair market value ofthe property immediately before the casualtyor theft, less its fair market value immediatelyafter the casualty or theft (but not more thanits cost or adjusted basis), reduced by anyinsurance or other compensation. The fairmarket value of property immediately after atheft is considered zero, since you no longerhave the property. You cannot deduct the first$100 of each casualty or theft loss to propertyheld for personal use. You can deduct onlythe total of all casualty and theft losses for theyear to the extent it is more than 10% of ad-justed gross income (line 32, Form 1040NR)for the year.

If your property is covered by insurance,you should file a timely insurance claim forreimbursement. If you do not, you cannotdeduct this loss as a casualty or theft loss.

Figure your deductible casualty and theftlosses on Form 4684, Casualties and Thefts,and deduct them on line 8 of Schedule A,Form 1040NR.


Job expenses and other miscellaneousdeductions. You can deduct job expenses,such as allowable unreimbursed travel ex-penses (discussed next), and other miscella-neous deductions. Generally, the allowabledeductions must be related to effectivelyconnected income. Deductible expenses in-clude:

• Union dues,

• Safety equipment and small tools neededfor your job,

• Dues to professional organizations,

• Subscriptions to professional journals,and

• Tax return preparation fees.

Most miscellaneous deductions aredeductible only if they are more than 2% ofyour adjusted gross income (line 33, Form1040NR). For more information on miscella-neous deductions, see the instructions forForm 1040NR.

Travel expenses. You may be able to de-duct your ordinary and necessary travel ex-penses while you are temporarily performingpersonal services in the United States. Gen-erally, a temporary assignment is one that isrealistically expected to last (and does in factlast) for one year or less at a single location.You must be able to show you were presentin the United States on an activity that re-quired your temporary absence from yourregular place of work.

For example, if you have established a“tax home” through regular employment in aforeign country, and intend to return to similaremployment in the same country at the endof your temporary stay in the United States,you can deduct reasonable travel expensesyou paid. You cannot deduct travel expensesfor other members of your family or party.

Deductible travel expenses. If youqualify, you can deduct your expenses for:

1) Transportation—airfare, local transpor-tation, including train, bus, etc.,

2) Lodging—rent paid, utilities (do not in-clude telephone), hotel or motel roomexpenses, and

3) Meal expenses—actual expenses al-lowed if you keep records of theamounts, or, if you do not wish to keepdetailed records, you are generally al-lowed a standard meal allowanceamount depending on the date and areaof your travel. You can deduct only 50%of unreimbursed meal expenses. Thestandard meal allowances rates aregiven in Publication 463.

Use Form 2106, or Form 2106–EZ to fig-ure your allowable expenses that you claimon line 9 of Schedule A, Form 1040NR.

CAUTION!

You cannot deduct an expense, orpart of an expense, that is allocableto U.S. tax-exempt income, including

income exempt by tax treaty.

Example. Irina Oak, a citizen of Poland,resided in the United States for part of theyear to acquire business experience from aU.S. company. During her stay in the UnitedStates, she received a salary of $8,000 fromher Polish employer. She received no otherU.S. source income. She spent $3,000 ontravel expenses, of which $1,000 were formeals. None of these expenses were reim-

bursed. Under the tax treaty with Poland, sheexcludes $5,000 of her salary from U.S. in-come tax. In filling out Form 2106–EZ, shemust reduce her deductible meal expensesby half ($500). She must reduce the remain-ing $2,500 of travel expenses by 62.5%($1,563) because she excluded 62.5%($5,000 ÷ $8,000) of her salary. She entersthe remaining total of $937 on line 9 ofSchedule A (Form 1040NR). She completesthe remaining lines according to the in-structions for Schedule A.

More information. For more informationabout deductible expenses, reimbursements,and recordkeeping, get Publication 463.

Tax Paymentsand Credits This discussion covers tax payments andcredits for resident aliens, followed by a dis-cussion of the payments and credits for non-resident aliens.

Resident AliensResident aliens generally report tax withheldor other tax payments and claim tax creditsusing the same rules that apply to U.S. citi-zens. The following items are some of thecredits you may be able to claim.

Child care credit. You may qualify for thiscredit if you pay someone to care for yourdependent who is under age 13, or your dis-abled dependent or disabled spouse, so thatyou can work or look for work. Generally, youmust be able to claim an exemption for yourdependent.

For more information, get Publication 503,Child and Dependent Care Expenses, andForm 2441, Child and Dependent Care Ex-penses.

Credit for the elderly or the disabled. Youmay qualify for this credit if you are 65 or overor if you retired on permanent and total disa-bility. For more information on this credit, getPublication 524, Credit for the Elderly or theDisabled, and Schedule R (Form 1040).

Foreign tax credit. You can claim a credit,subject to certain limits, for income tax youpaid or accrued to a foreign country on foreignsource income. You cannot claim a credit fortaxes paid or accrued on excluded foreignearned income. To claim a credit for incometaxes paid or accrued to a foreign country, fileForm 1116, Foreign Tax Credit (Individual,Estate, Trust or Nonresident Alien Individual),with your Form 1040.

For more information, get Publication 514,Foreign Tax Credit for Individuals.

Earned income credit. You may qualify foran earned income credit of up to $2,210 ifyour child lived with you in the United Statesand your earned income and modified ad-justed gross income were each less than$25,760. If two or more children lived with youin the United States and your earned incomeand modified adjusted gross income wereeach less than $29,290, your credit could beas much as $3,656. If you do not have aqualifying child and your earned income andmodified adjusted gross income were eachless than $9,770, your credit could be asmuch as $332. If you are married, you must

file a joint return to qualify unless you livedapart from your spouse during the last 6months of the year and you are eligible to fileas head of household.

CAUTION!

You, your spouse, and any qualifyingchild must have SSNs. You cannotclaim this credit using an ITIN. See

Identification Number earlier.Advance earned income credit. You

may be able to get advance payments of partof the credit for one child in 1998 instead ofwaiting until you file your 1998 tax return. Fillout the 1998 Form W–5, Earned IncomeCredit Advance Payment Certificate. If youexpect to qualify for the credit in 1998, givethe bottom part of the form to your employer.Your employer will include part of the creditregularly in your pay during 1998.

If you received advance payments of theearned income credit in 1997, you must filea tax return to report the payments. YourForm W–2 will show the amount you re-ceived.

Other information. There are other el-igibility rules that are not discussed here. Formore information, get Publication 596, EarnedIncome Credit.

Adoption credit. You may qualify to take atax credit of up to $5,000 for qualifying ex-penses paid after December 31, 1996, toadopt an eligible child. The credit can be asmuch as $6,000 if the expenses are for theadoption of a child with special needs. Toclaim the adoption credit, file Form 8839,Qualified Adoption Expenses, with your Form1040 or Form 1040A. For more information,get Publication 968, Tax Benefits forAdoption.

Nonresident Aliens You can claim some of the same credits asresident aliens. You can also take credit forcertain taxes you paid, are considered tohave paid, or that were withheld from yourincome. However, these credits are allowedonly if you receive effectively connected in-come.

Child care credit. You may qualify for thiscredit if you pay someone to care for yourdependent who is under age 13, or your dis-abled dependent or disabled spouse, so thatyou can work or look for work. Generally, youmust be able to claim an exemption for yourdependent.

Married nonresident aliens can claim thecredit only if they choose to file a joint returnwith a U.S. citizen or resident spouse as dis-cussed in chapter 1, or if they qualify as cer-tain married individuals living apart (see Mar-ried Persons Who Live Apart under FilingStatus, in the Form 1040NR instructions).

The amount of your child and dependentcare expense that qualifies for the credit inany tax year cannot be more than yourearned income from the United States for thattax year. If you are married, the amount of theexpense cannot be more than the lesser ofyour earned income or the earned income ofyour spouse. Earned income generally meanswages, salaries, and professional fees forpersonal services performed.

For more information, get Publication 503.

Foreign tax credit. If you receive incomefrom sources outside the United States thatis effectively connected with a trade or busi-ness in the United States, you can claim a


credit for any income taxes paid or accruedto any foreign country or U.S. possession onthat income.

If you do not have foreign source incomeeffectively connected with a U.S. trade orbusiness, you cannot claim credits againstyour U.S. tax for taxes paid or accrued to aforeign country or U.S. possession.

You cannot take any credit for taxes im-posed by a foreign country or U.S. pos-session on your U.S. source income if thosetaxes were imposed because you are a citi-zen or resident of the foreign country or pos-session.

If you claim a foreign tax credit, attach toyour return a Form 1116 which contains ad-ditional information about the credit and limits.

Credit for prior year minimum tax. If youpaid alternative minimum tax in a prior year,get Form 8801, Credit for Prior Year MinimumTax—Individuals, Estates, and Trusts, to seeif you qualify for this credit.

Earned income credit. If you are a nonres-ident alien for any part of the tax year, yougenerally cannot get the earned incomecredit. However, if you are married and electto file a joint return with a U.S. citizen or res-ident spouse as discussed in chapter 1, youmay be eligible for the credit.

CAUTION!

You, your spouse, and any qualifyingchild must have SSNs. You cannotclaim this credit using an ITIN. See

Identification Number earlier.See Publication 596 for more information

on the credit.

Adoption credit. You may qualify to take atax credit of up to $5,000 for qualifying ex-penses paid after December 31, 1996, toadopt an eligible child. The credit can be asmuch as $6,000 if the expenses are for theadoption of a child with special needs. Toclaim the adoption credit, file Form 8839 withyour Form 1040NR. For more information, getPublication 968.

Married nonresident aliens can claim thecredit only if they choose to file a joint returnwith a U.S. citizen or resident spouse as dis-cussed in chapter 1, or if they qualify as cer-tain married individuals living apart (see Mar-ried Persons Who Live Apart under FilingStatus, in the Form 1040NR instructions).

Regulated investment company credit. Ifyou are a shareholder in a regulated invest-ment company or mutual fund, you can claima credit for your share of any taxes paid bythe company on its undistributed capitalgains. You will receive information on Form2439, Notice to Shareholder of UndistributedLong-Term Capital Gains, which you mustattach to your return.

Tax WithheldYou can claim certain amounts withheld dur-ing the year as a credit against your U.S. tax.

Withholding from wages. Any federal in-come tax withheld from your wages during thetax year while you were a nonresident alienis allowed as a credit against your U.S. in-come tax liability for the same year. You canclaim the credit for income tax withheldwhether or not you were engaged in trade orbusiness in the United States during the year,and whether or not the wage payment (or anyother payment) was connected with a tradeor business in the United States.

Excess social security tax withheld. If youhave two or more employers, you may beable to claim a credit against your U.S. in-come tax liability for social security tax with-held in excess of the maximum required. SeeSocial Security and Medicare Taxes in chap-ter 8 for more information.

Tax withheld at the source. You can claima credit for any tax withheld at the source oninvestment and other fixed or determinableannual or periodic income paid to you. Fixedor determinable income includes interest,dividend, rental, and royalty income that youdo not claim to be effectively connected in-come. Wage or salary payments can be fixedor determinable income to you, but usuallyare subject to withholding as discussedabove. Taxes on fixed or determinable in-come are withheld at a 30% rate or at a lowertreaty rate.

Tax withheld on partnership income. If youare a foreign partner in a partnership, thepartnership will withhold tax on your share ofeffectively connected taxable income from thepartnership. The partnership will give you astatement on Form 8805, Foreign Partner'sInformation Statement of Section 1446 With-holding Tax, showing the tax withheld. Apartnership that is publicly traded may with-hold on your actual distributions of effectivelyconnected income. In this case the partner-ship will give you a statement on Form1042–S, Foreign Person's U.S. Source In-come Subject to Withholding. In either case,claim the tax withheld as a credit on line 59bof Form 1040NR.

Claiming tax withheld on your return.When you fill out your tax return, take extracare to enter the correct amount of any taxwithheld shown on your information docu-ments. The following table lists some of themore common information documents andshows where to find the amount of tax with-held.

Bona Fide Residentsof American Samoaor Puerto Rico If you are a nonresident alien who is a bonafide resident of American Samoa or PuertoRico for the entire tax year, you generally aretaxed the same as resident aliens. Youshould file Form 1040 and report all incomefrom sources both in and outside the UnitedStates.

Residents of Puerto Rico. If you are a bonafide resident of Puerto Rico for the entire year,you can exclude from gross income all in-come from sources in Puerto Rico (other thanamounts for services performed as an em-ployee of the United States or any of itsagencies).

If you report income on a calendar yearbasis and you do not have wages subject towithholding, file your return and pay your taxby June 15. You must also make your firstpayment of estimated tax by June 15. Youcannot file a joint income tax return or makejoint payments of estimated tax. However, ifyou are married to a U.S. citizen or resident,see Nonresident Spouse Treated as a Resi-dent in chapter 1.

If you earn wages subject to the samewithholding rules as U.S. citizens, your U.S.income tax return is due on April 15. Your firstpayment of estimated tax is also due by April15. For information on withholding and esti-mated tax, see chapter 8.

You cannot claim exemptions for depen-dents who are residents of Puerto Rico unlessthe dependents are citizens of the UnitedStates.

Residents of American Samoa. If you area bona fide resident of American Samoa forthe entire year, you can exclude from grossincome all income from sources in AmericanSamoa, Guam, and the Commonwealth of theNorthern Mariana Islands (other thanamounts for services performed as an em-ployee of the United States or any of itsagencies). You do this by filing Form 1040and attaching Form 4563, to your return.

6.Dual-StatusTax Year

IntroductionYou have a dual-status tax year when youhave been both a resident alien and a non-resident alien in the same year. Dual statusdoes not refer to your citizenship, only to yourresident status in the United States. In deter-mining your U.S. income tax liability for adual-status tax year, different rules apply forthe part of the year you are a resident of theUnited States and the part of the year you area nonresident.

The most common dual-status tax yearsare the years of arrival and departure. SeeDual Status Aliens in chapter 1.

If you are married and choose to betreated as a U.S. resident for the entire year,as explained in chapter 1, the rules of thischapter do not apply to you for that year.


• Income subject to tax

• Restrictions for dual-status taxpayers

• Exemptions

• How to figure the tax

• Forms to file

• When and where to file

• How to fill out a dual-status return

Form NumberLocation ofTax Withheld

RRB–1042S ................... Box 12SSA–1042S .................... Box 9W–2 ................................ Box 2W–2c .............................. Line 21042–S ........................... Column (g)8805 ............................... Line 118288–A ........................... Box 2

Chapter 6 Dual-Status Tax Year


Publication

m 503 Child and Dependent Care Ex-penses

m 514 Foreign Tax Credit for Individuals

m 524 Credit for the Elderly or the Disa-bled

m 575 Pension and Annuity Income



m 1040–C U.S. Departing Alien IncomeTax Return

m 1040ES Estimated Tax for Individuals

m 1040–ES(NR) U.S. Estimated Tax forNonresident Alien Individuals


m 1116 Foreign Tax Credit


Tax YearYou must figure your income and file a taxreturn on the basis of an annual accountingperiod called a tax year. If you have not pre-viously established a fiscal tax year, your taxyear is the calendar year. A calendar year is12 consecutive months ending on December31. If you have previously established a reg-ular fiscal year (12 consecutive months end-ing on the last day of a month other thanDecember, or a 52-53 week year) and areconsidered to be a U.S. resident for any cal-endar year, you will be treated as a U.S.resident for any part of your fiscal year thatfalls within that calendar year.

Income Subject to Tax

For the part of the year you are a residentalien, you are taxed on income from allsources. Income from sources outside theUnited States is taxable if you receive it whileyou are a resident alien. The income is taxa-ble even if you earned it while you were anonresident alien or if you became a nonres-ident alien after receiving it and before theend of the year.

For the part of the year you are a non-resident alien, you are taxed on income fromU.S. sources and on certain foreign sourceincome treated as effectively connected witha U.S. trade or business. (The rules fortreating foreign source income as effectivelyconnected are discussed in chapter 4 underForeign Income.)

Income from sources outside the UnitedStates which is not effectively connected witha trade or business in the United States is nottaxable if you receive it while you are a non-resident alien. The income is not taxable evenif you earned it while you were a resident al-ien or if you became a resident alien or a U.S.

citizen after receiving it and before the endof the year.

Income from U.S. sources is taxablewhether you receive it while a nonresidentalien or a resident alien unless specificallyexempt under the Internal Revenue Code ora tax treaty provision. Generally, tax treatyprovisions apply only to the part of the yearyou were a nonresident.

When determining what income is taxedin the United States, you must consider ex-emptions under U.S. tax law as well as thereduced tax rates and exemptions providedby tax treaties between the United States andcertain foreign countries. For a further dis-cussion of tax treaties, see chapter 9.

Restrictions forDual-Status Taxpayers

The following restrictions apply if you are filinga tax return for a dual-status tax year.

1) Standard deduction. You cannot use thestandard deduction allowed on Form 1040.However, you can itemize any allowable de-ductions.

2) Exemptions. Your total deduction for theexemptions for your spouse and allowabledependents cannot be more than your taxa-ble income (figured without deducting per-sonal exemptions) for the period you are aresident alien.

3) Head of household. You cannot use thehead of household Tax Table column or TaxRate Schedule.

4) Joint return. You cannot file a joint re-turn.

5) Tax rates. If you are married and a non-resident of the United States for all or part ofthe tax year and you do not choose to filejointly as discussed in chapter 1, you mustuse the Tax Table column or Tax RateSchedule for married filing separately to figureyour tax on income effectively connected witha U.S. trade or business. You cannot use theTax Table column or Tax Rate Schedules formarried filing jointly or single. However, if youare a married resident of Canada, Mexico,Japan, or South Korea, or are a married U.S.national, you may be able to file as single ifyou lived apart from your spouse during thelast 6 months of the year. See the instructionsfor Form 1040NR to see if you qualify.

A U.S. national is an individual who, al-though not a U.S. citizen, owes his or her al-legiance to the United States. U.S. nationalsinclude American Samoans and NorthernMariana Islanders who chose to become U.S.nationals instead of U.S. citizens.

Exemptions As a dual-status taxpayer, you usually will beable to claim your own personal exemption.Subject to the general rules for qualification,you can claim exemptions for your spouseand dependents when you figure taxable in-come for the part of the year you are a resi-dent alien. The amount you can claim forthese exemptions is limited to your taxable

income (figured before subtracting ex-emptions) for the part of the year you are aresident alien. You cannot use exemptions(other than your own) to reduce taxable in-come to less than zero for that period.

Special rules apply to exemptions for thepart of the tax year a dual-status taxpayer isa nonresident alien if the taxpayer is a resi-dent of Canada, Mexico, Japan, or Korea, isa U.S. national, or is a student or businessapprentice from India. For more information,see Exemptions in chapter 5.

How To Figure Tax When you figure your U.S. tax for a dual-status year, you are subject to different rulesfor the part of the year you are a resident andthe part of the year you are a nonresident.

IncomeAll income for your period of residence andall income that is effectively connected witha trade or business in the United States foryour period of nonresidence, after allowabledeductions, is added and taxed at the ratesthat apply to U.S. citizens and residents. In-come that is not connected with a trade orbusiness in the United States for your periodof nonresidence is subject to the flat 30% rateor lower treaty rate. You cannot take any de-ductions against this income.

Social security and railroad retirementbenefits. During the part of the year you area nonresident alien, 85% of any U.S. socialsecurity benefits (and the equivalent portionof tier 1 railroad retirement benefits) you re-ceive is subject to the flat 30% tax, unlessexempt, or subject to a lower treaty rate. (SeeThe 30% Tax in chapter 4.)

During the part of the year you are a res-ident alien, part of the social security and theequivalent portion of tier 1 railroad retirementbenefits will be taxed at graduated rates ifyour modified adjusted gross income plus halfthese benefits is more than a certain baseamount.

Use the Social Security Benefits Work-sheet in the Form 1040 instructions to helpyou figure the taxable part of your social se-curity and equivalent tier 1 railroad retirementbenefits for the part of the year you were aresident alien.

If you received U.S. social security bene-fits while you were a nonresident alien, theSocial Security Administration will send youa copy of Form SSA–1042S, Social SecurityBenefit Statement, showing your combinedbenefits for the entire year and the amountof tax withheld. You will not receive separatestatements for the benefits received duringyour periods of U.S. residence and nonresi-dence. Therefore, it is important for you tokeep careful records of these amounts. Youwill need this information to properly completeyour return and determine your tax liability.

If you received railroad retirement benefitswhile you were a nonresident alien, the U.S.Railroad Retirement Board (RRB) will sendyou Form RRB–1042S, Statement for Non-resident Alien Recipients of Payments by theRailroad Retirement Board, and/or FormRRB–1099–R, Annuities or Pensions by theRailroad Retirement Board. If your country oflegal residence changed or your rate of taxchanged during the tax year, you may receivemore than one form.


CreditsYou can claim credit against your U.S. in-come tax liability for certain taxes you paid,are considered to have paid, or that werewithheld from your income. These include:

1) Tax withheld from wages earned in theUnited States,

2) Taxes withheld at the source from vari-ous items of income from U.S. sourcesother than wages,

3) Tax paid with Form 1040–ES or Form1040–ES(NR), and

4) Tax paid with Form 1040–C, at the timeof departure from the United States.

As a dual-status alien, you generally canclaim tax credits using the same rules thatapply to resident aliens. There are certainrestrictions that may apply. These restrictionsare discussed here, along with a brief expla-nation of credits often claimed by individuals.

Child care credit. You may qualify for thiscredit if you pay someone to care for yourdependent who is under age 13, or your dis-abled dependent or disabled spouse so thatyou can work or look for work. Generally, youmust be able to claim an exemption for yourdependent.

Married dual-status aliens can claim thecredit only if they choose to file a joint returnas discussed in chapter 1, or if they qualifyas certain married individuals living apart.

The amount of your child and dependentcare expense that qualifies for the credit inany tax year cannot be more than yourearned income for that tax year—if married,the lesser of your earned income or theearned income of your spouse.

For more information, get Publication 503and Form 2441.

Credit for the elderly or the disabled. Youmust be a U.S. citizen or resident to claim thiscredit. You cannot claim the credit if you werea nonresident alien at any time during yourtax year. However, the credit can be takenby a dual-status alien who is married to a U.S.citizen or resident and chooses to be treatedas a U.S. resident for the entire year. Forfurther information about this credit, get Pub-lication 524.

Foreign tax credit. If you have paid or areliable for the payment of income tax to a for-eign country on income from foreign sources,you may be able to claim a credit for the for-eign taxes.

If you claim the foreign tax credit, youmust file Form 1116, with your income taxreturn. If you need more information, see theinstructions for Form 1116 or get Publication514.

Adoption credit. You may qualify to take atax credit of up to $5,000 for qualifying ex-penses paid after December 31, 1996, toadopt an eligible child. The credit can be asmuch as $6,000 if the expenses are for theadoption of a child with special needs. Toclaim the adoption credit, file Form 8839 withthe U.S. income tax return that you file. Formore information, get Publication 968.

Married dual–status aliens can claim thecredit only if they choose to file a joint returnwith a U.S. citizen or resident spouse as dis-cussed in chapter 1, or if they qualify as cer-tain married individuals living apart.

Forms To File The U.S. income tax return you must file asa dual-status alien depends on whether youare a resident alien or a nonresident alien atthe end of the tax year.

Resident at end of year. You must file Form1040, U.S. Individual Income Tax Return, ifyou are a dual-status taxpayer who becomesa resident during the year and who is a U.S.resident on the last day of the tax year. Write“Dual-Status Return” across the top of thereturn. Attach a statement to your return toshow the income for the part of the year youare a nonresident. You can use Form1040NR or Form 1040NR–EZ as the state-ment, but be sure to mark “Dual-StatusStatement” across the top.

Nonresident at end of year. You must fileForm 1040NR or Form 1040NR–EZ if you area dual-status taxpayer who gives up resi-dence in the United States during the yearand who is not a U.S. resident on the last dayof the tax year. Write “Dual-Status Return”across the top of the return. Attach a state-ment to your return to show the income for thepart of the year you are a resident. You canuse Form 1040 as the statement, but be sureto mark “Dual-Status Statement” across thetop.

Statement. Any statement must have yourname, address, and taxpayer identificationnumber on it. You do not need to sign aseparate statement or schedule accompany-ing your return, since your signature on thereturn also applies to the supporting state-ments and schedules.

When andWhere To File If you are a resident alien on the last day ofyour tax year and report your income on acalendar year basis, you must file no laterthan April 15 of the year following the closeof your tax year. If you report your income onother than a calendar year basis, file yourreturn no later than the 15th day of the 4thmonth following the close of your tax year. Ineither case, file your return with the InternalRevenue Service Center, Philadelphia, PA19255.

If you are a nonresident alien on the lastday of your tax year and report your incomeon a calendar year basis, you must file nolater than June 15 following the close of yourtax year. If you report your income on otherthan a calendar year basis, file your returnno later than the 15th day of the 6th monthfollowing the close of your tax year. However,if you receive wages subject to the samewithholding rules as U.S. citizens, you mustfile by the 15th day of the 4th month followingthe close of your tax year. In any case, fileyour return with the Internal Revenue ServiceCenter, Philadelphia, PA 19255.

TIPIf the regular due date for filing fallson a Saturday, Sunday, or legal holi-day, the due date is the next day

which is not a Saturday, Sunday, or legalholiday.

Illustration ofDual-Status Return Sam R. Brown is single and a subject of theUnited Kingdom. He temporarily entered theUnited States with an H–1 visa to develop anew product line for the Major Product Co.He arrived in the United States March 18,1997, and left May 25, 1997, returning to hishome in England.

The Major Product Co. later offered Sama permanent job, and he returned to theUnited States with a permanent visa on Sep-tember 10, 1997.

During Sam's temporary assignment in theUnited States, the Major Product Co. paid him$6,500. He accounted to his employer for hisexpenses for travel, meals, and lodging whileon temporary assignment, and was reim-bursed for his expenses. This amount wasnot included on his wage statement, FormW–2, given to him when he left the UnitedStates.

After Sam became permanently em-ployed, his wages for the rest of the year were$21,800, including reimbursement of hismoving expenses. He received a separateForm W–2 for this period. His other incomereceived in 1997 was:

Interest income paid by the U.S. Bank (noteffectively connected):

Dividend income paid by Major ProductCo. (not effectively connected):

Interest income (in U.S. dollars) paid bythe U.K. Bank:

Sam paid the following expenses while hewas in the United States:

Before Sam left the United States in May,he filed Form 1040–C (see chapter 11). Heowed no tax when he left the United States.

Sam fills in Form 1040 and the statement,Form 1040NR, as follows.

Sam prints his name, social securitynumber, and address on page 1 of Form1040. He checks “Yes” for the PresidentialElection Campaign Fund and “Single” underfiling status. He also checks the exemptionblock for himself and prints “Dual-Status Re-turn” across the top of the form.

Sam prints his name, address, and socialsecurity number on page 1 of Form 1040NR.He prints “Dual-Status Statement” across thetop of the form.

Sam reports on Form 1040 all income re-ceived during the period he was a residentof the United States and the income receivedduring the period he was a nonresident alienthat was effectively connected with his U.S.trade or business. This income is taxed at thegraduated rates. For information purposes,

March 31 ........................................................... $45June 30 ............................................................. $48September 30 ................................................... $68December 31 .................................................... $89

April 3 .............................................................. $120July 3 .............................................................. $120October 2 ........................................................ $120

March 31 ......................................................... $90June 30 ........................................................... $110September 30 ................................................. $118December 31 .................................................. $120

Moving expenses incurred and paid in Sep-tember .......................................................... $8,300VA State income tax .................................... $612Contributions to U.S. charities ..................... $310


he also reports on Form 1040NR his salarywhile he was a nonresident.

Sam reports on Form 1040 the interestincome credited to his account by the U.S.Bank and the U.K. Bank in September andDecember, while he was a U.S. resident. Ifany of the interest income received while hewas a nonresident alien was effectively con-nected with his U.S. trade or business, hewould also report these amounts on Form1040. If he had paid foreign income tax on theinterest income received from the U.K. Bank,he would claim a foreign tax credit on Form1116.

The dividend income includes only theOctober dividend, which was received whileSam was a U.S. resident. The dividend in-come received during his period of nonresi-dence was not effectively connected with hisU.S. trade or business and, therefore, nottaxed at the graduated rates.

Sam reports on the attached statement,Form 1040NR, the not effectively connectedU.S. income received while he was a non-resident alien. He reports the April and Julydividends from the Major Product Co. on line66a, page 4. He figures the tax on his divi-dend income and carries it forward to line 46on Form 1040NR. (The rate of tax on this in-come is limited to 15% by Article 10 of theU.S.—U.K. income tax treaty. Treaty ratesvary from country to country, so be sure tocheck the provisions in the treaty you areclaiming.)

Sam also reports $36, the amount of taxwithheld at source by the Major Product Co.on line 66a, Form 1040NR, and carries it for-ward to line 58a. Later he will report theamount on Form 1040.

Sam is not required to report the interestcredited to his account by the U.S. Bankduring the period he was a nonresident alien.

Interest on deposits with U.S. banks that isnot effectively connected with a U.S. tradeor business generally is treated as incomefrom sources in the United States but is nottaxable to a nonresident alien. He checks the“Yes” box on page 5, item L, of Form1040NR, and explains why this income is notincluded on his return.

The interest income received from theU.K. Bank while Sam was a nonresident alienis foreign source income and not taxable onhis U.S. return.

Sam completes all applicable items onpage 5 of Form 1040NR. This provides thedates of arrival and departure, types of visas,and information concerning tax treaty benefitsthat he has claimed.

Sam completes Form 3903 (not illus-trated) to figure his moving expense de-duction and reports the total on line 25, Form1040.

Sam cannot claim the standard deductionbecause he has a dual-status tax year. Hereports his itemized deductions on ScheduleA (Form 1040). The only itemized deductionhe had while he was a nonresident alien wasthe state income tax withheld from his pay.For information purposes, he lists this amounton line 1, Schedule A, Form 1040NR, in ad-dition to including it on Schedule A, Form1040.

Sam totals his itemized deductions on line28, Schedule A (Form 1040). He reports theamount from line 28 of Schedule A (Form1040) on line 35, Form 1040.

Sam enters $2,650 for one personal ex-emption on line 37, Form 1040. He subtractsthe amount on line 37 from the amount on line36 to figure his taxable income, line 38.

Sam is now ready to figure the tax on hisincome taxed at the graduated rates. He uses

the column in the Tax Table for single indi-viduals. To this tax ($2,539), he must add thetax on the income not effectively connected($36), the income taxed at the 30% or lowertreaty rate. Since there is no line on Form1040 for this computation, he reports the twoamounts in the margin in the Tax Computa-tion area of Form 1040.

Sam reports the total amount of tax with-held ($2,700) from his wages on line 54, Form1040. He includes in this amount the taxwithheld at source ($36 from line 58a, Form1040NR) on dividends paid to him while hewas a nonresident alien. He also writes a briefexplanation.

For information purposes, Sam also re-ports on line 52, Form 1040NR, the amountof tax withheld ($345) from wages earnedwhile he was a nonresident alien.

Sam compares the total tax on line 53,Form 1040, to the total payments on line 60,to see if he has overpaid his tax or if he owesan additional amount. Since the amount of taxwithheld and the amount of tax paid at sourceare more than his total tax, he has overpaidhis tax. He subtracts the amount on line 53from the amount on line 60 to figure his re-fund.

Sam checks to be sure that he has com-pleted all parts of Form 1040 that apply tohim. He also checks to see if he has com-pleted the necessary parts of the Form1040NR that he is attaching as a statement.He then signs and dates the return and entershis occupation.

Sam mails the return to the:

Internal Revenue Service CenterPhiladelphia, PA 19255.


Sam R.

Brown

2617 Pewter Place

Anytown, VA

2200

0

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Last name

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Last name

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Do you w

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Exemptions

Sp

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b(4) No. of m

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Dep

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c(2) Dependent’s

social security number

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dTotal num

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1111

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1414

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15a15b

Total IRA

distrib

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Taxable amount (see page 13)

15a16b

16aTotal pensions and annuities

bTaxable am

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1717

Rental real estate, royalties, p

artnerships, S

corporations, trusts, etc. A

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18Farm

income or (loss). A

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212122

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23IR

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885325

25

One-half of self-em

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E26

Self-em

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2627

27

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28

Penalty on early w

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If you did

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age 12.

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Married filing separate return. Enter spouse’s social security no. above and full nam

e here.©

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o. 11320B

©

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Label

Form1040

(1997)

IRS

Use O

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amount—

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age 15

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enses. Attach Form

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2424

(99)

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on page 21.

No. of boxeschecked on6a and 6bNo. of yourchildren on 6cw

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Dependents on 6cnot entered above

Add numbers

entered onlines above

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did not live with

you due to divorceor separation(see page 11)

1997

32

30a

20,515

922

19,593

2,650

16,943

2,575

2,575

2,5752,736

Line 54

Includes$36

fromForm

1040

NR

2,736161

161

3-16-98

R&D Specialist

Sam R. Brown

Line 39Tax fromTable--$2,539;Tax fromForm

1040

NR$36

Ad

d lines 54, 55, 56a, 57, 58, and

59. These are your total p

ayments

©

Page

2Form

1040 (1997)

Am

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33

Check if:

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tation

34aA

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the numb

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above and

enter the total here©

If you want

the IRS

tofigure yourtax, seep

age 18.

If you are married

filing separately and

your spouse item

izes ded

uctions oryou w

ere a dual-status alien, see p

age 18 and check here

©

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age 19 for the amount to enter

37

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line 36. If line 37 is more than line 36, enter -0-

383939

4040

Credit for child and dependent care expenses. A

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42C

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43Foreign tax cred

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1116

42

Other. C

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45

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lines 40 through 44

44

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46

Other

Taxes49

Alternative m

inimum

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6251

47

61

48

Social security and M

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4137

51Tax on q

ualified retirem

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ing IRA

s) and M

SA

s. Attach Form

5329 if required

5052A

dd

lines 46 through 52. This is your total tax

©53

53

Federal incom

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from Form

s W-2 and

109954

54551997 estim

ated tax payments and am

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55Paym

ents

56a

56a

57A

mount p

aid w

ith Form 4868 (req

uest for extension)57

Attach

Forms W

-2,W

-2G, and

1099-R on

the front.

58E

xcess social security and R

RTA

tax withheld

(see page 27)

58

60O

ther payments. C

heck if from59

62a62a

6363

If line 60 is more than line 53, sub

tract line 53 from line 60. This is the am

ount you OV

ER

PA

ID

6464

Am

ount of line 61 you want R

EFU

ND

ED

TO

YO

U©

Refund

65

Amount of line 61 you w

ant APPLIED TO YOUR 1998 ESTIMATED TAX

©

Estim

ated tax p

enalty. Also includ

e on line 64U

nder penalties of perjury, I declare that I have examined this return and accom

panying schedules and statements, and to the best of m

y knowledge and

belief, they are true, correct, and complete. D

eclaration of preparer (other than taxpayer) is based on all information of w

hich preparer has any knowledge.

Stand

ard d

eductio

n shown b

elow for your filing status. B

ut seep

age 18 if you checked any b

ox on line 34a or 34b o

r someone

can claim you as a d

epend

ent.

Itemized

ded

uctions from

Sched

ule A, line 28, O

R

●H

ead of household

—$6,050

●M

arried filing sep

arately—$3,450

65

Yo

u were 65 or old

er,B

lind;

Sp

ouse w

as 65 or older,

Blind

.

aForm

3800b

Form 8396

cForm

8801d

Form (specify)

aForm

2439b

Form 4136

Earned income credit. Attach Schedule EIC

if you have a qualifying

child b Nontaxable earned incom

e: amount

©

and typ

e©

51H

ousehold em

ploym

ent taxes. Attach S

chedule H

52

59

Prin

ted on

recycled p

aper

Amount

You Owe

Sig

nH

ereD

ateY

our signature

Keep

a copy

of this returnfor yourrecord

s.D

ateS

pouse’s signature. If a joint return, B

OTH

must sign.

Prep

arer’s social security no.D

ateP

reparer’s

signatureC

heck ifself-em

ployed

PaidPreparer’sUse Only

Firm’s nam

e (or yoursif self-em

ployed

) andad

dress

EIN

ZIP

code

©©

©

Your occup

ation

Sp

ouse’s occupation

$%

Tax. See page 19. C

heck if any tax from


tract line 60 from line 53. This is the A

MO

UN

T Y

OU

OW

E.

For details on how

to pay, see p

age 27©

b

Have it

directlydeposited!S

ee page 27and fill in 62b,62c, and 62d.

Routing num

ber

Account num

ber

cC

heckingS

avingsTyp

e:

a Form

(s) 8814Form

4972©

bd

©©

60

4141

Adoption credit. A

ttach Form 8839

4950

Ad

vance earned incom

e credit p

ayments from

Form(s) W

-2

61

©


Sam R. Brown 000 00 0000

612

612

310

310

922

OMB No. 1545-0074SCHEDULES A&B Schedule A—Itemized Deductions(Form 1040)

(Schedule B is on back)Department of the TreasuryInternal Revenue Service © Attach to Form 1040. © See Instructions for Schedules A and B (Form 1040).

AttachmentSequence No. 07

Name(s) shown on Form 1040 Your social security number

Caution: Do not include expenses reimbursed or paid by others.Medicaland DentalExpenses

1Medical and dental expenses (see page A-1)122

3Multiply line 2 above by 7.5% (.075)3Subtract line 3 from line 1. If line 3 is more than line 1, enter -0-4 4

5State and local income taxes5Taxes You Paid 6Real estate taxes (see page A-2)6

Other taxes. List type and amount ©8(Seepage A-2.)

8Add lines 5 through 89 9

Home mortgage interest and points reported to you on Form 109810InterestYou Paid

10

Home mortgage interest not reported to you on Form 1098. If paidto the person from whom you bought the home, see page A-3and show that person’s name, identifying no., and address ©

11(Seepage A-2.)

11

12Points not reported to you on Form 1098. See page A-3for special rules

12

13 Investment interest. Attach Form 4952 if required. (Seepage A-3.) 13

14 14Add lines 10 through 13

Gifts to Charity 15

15 Gifts by cash or check. If you made any gift of $250 ormore, see page A-3

16Other than by cash or check. If any gift of $250 or more,see page A-3. You MUST attach Form 8283 if over $500

16

17Carryover from prior year1718 Add lines 15 through 17 18

Casualty or theft loss(es). Attach Form 4684. (See page A-4.)19Casualty and Theft Losses 19

Unreimbursed employee expenses—job travel, uniondues, job education, etc. You MUST attach Form 2106or 2106-EZ if required. (See page A-4.) ©

20Job Expensesand MostOtherMiscellaneousDeductions

22 Other expenses—investment, safe deposit box, etc. Listtype and amount ©

(Seepage A-5 forexpenses todeduct here.)

Add lines 20 through 2223Enter amount from Form 1040, line 3324Multiply line 24 above by 2% (.02)25Subtract line 25 from line 23. If line 25 is more than line 23, enter -0-26 26

Other—from list on page A-5. List type and amount © 27OtherMiscellaneousDeductions 27

28TotalItemizedDeductions 28

Schedule A (Form 1040) 1997For Paperwork Reduction Act Notice, see Form 1040 instructions.

24

20

2223

If you made agift and got abenefit for it,see page A-3.

25

Enter amount from Form 1040, line 33

NO. Your deduction is not limited. Add the amounts in the far right columnfor lines 4 through 27. Also, enter on Form 1040, line 35, the larger ofthis amount or your standard deduction.

YES. Your deduction may be limited. See page A-5 for the amount to enter.

Cat. No. 11330X

©

Note:Personalinterest isnotdeductible.

%

7Personal property taxes7

21Tax preparation fees21

Is Form 1040, line 33, over $121,200 (over $60,600 if married filing separately)?

(99)

1997

Sam R. Brown 000-00-0000

2617 Pewter Place

Anytown, VA 22000USA

United Kingdom

X

N/A Same

6,500

6,500

-0-

Dual Status STATEMENT

OMB No. 1545-0089U.S. Nonresident Alien Income Tax ReturnForm For the year January 1–December 31, 1997, or other tax yearDepartment of the TreasuryInternal Revenue Service beginning , 1997, and ending , 19

Identifying number (see page 6)Last nameYour first name and initial

Present home address (number, street, and apt. no., or rural route). If a P.O. box, see page 6 of instructions. Check if:Estate or TrustIndividual

City, town or post office, state, and ZIP code. If a foreign address, see page 6 of instructions. For Paperwork Reduction ActNotice, see page 17 of instructions.

Country ©

Of what country were you a citizen or national during the tax year? ©

Ple

ase

pri

nt o

r ty

pe

Give address in the country where you are a permanent resident.If same as above, write “Same.”

Give address outside the United States to which you want anyrefund check mailed. If same as above, write “Same.”

Filing Status and Exemptions for Individuals (See page 6 of the instructions.) 7b7aSpouseYourselfFiling status. Check only one box.

Single resident of Canada or Mexico, or a single U.S. national1Other single nonresident alien2Married resident of Canada or Mexico, or a married U.S. national3 If you check box 7b, enter your spouse’s

identifying number ©Married resident of Japan or the Republic of Korea4Other married nonresident alien5Qualifying widow(er) with dependent child (year spouse died © 19 ). (See page 6 of inst.)6

No. of boxeschecked on7a and 7b

Caution: Do not check box 7a if your parent (or someone else) can claim you as a dependent.Do not check box 7b if your spouse had any U.S. gross income.

(4) No. of monthslived in your

home in 1997

(3) Dependent’srelationship

to you

Dependents:*7c No. of yourchildren on 7cwho:

(2) Dependent’s identifying number

*lived with you

**did not livewith you dueto divorce orseparation**Dependentson 7c notentered above*Applies generally only to residents of Canada, Mexico, Japan, and the Republic of Korea and to U.S. nationals. (See page 6 of instructions.)

**Applies generally only to residents of Canada and Mexico and to U.S. nationals. (See page 6 of instructions.) Add numbersentered onlines above

Att

ach

Co

py

B o

f yo

ur F

orm

s W

-2,

W-2

G,

and

109

9-R

her

e

d Total number of exemptions claimed8Wages, salaries, tips, etc. Attach Form(s) W-28

9aTaxable interest income9a9bTax-exempt interest. DO NOT include on line 9ab

10Dividend income1011Taxable refunds, credits, or offsets of state and local income taxes (see page 7)1112Scholarship and fellowship grants. Attach explanation (see page 7)1213Business income or (loss). Attach Schedule C or C-EZ (Form 1040)1314Capital gain or (loss). If required, attach Schedule D (Form 1040)141515 Other gains or (losses). Attach Form 4797

16b16aTotal IRA distributions Taxable amount (see page 8)16b16a17b17aTotal pensions and annuities Taxable amount (see page 8)17b17a18Rental real estate, royalties, partnerships, trusts, etc. Attach Schedule E (Form 1040)

19 19Farm income or (loss). Attach Schedule F (Form 1040)20 20Unemployment compensation21 Other income. List type and amount—see page 922

21

Inco

me

Eff

ectiv

ely

Con

nect

ed W

ith U

.S. T

rade

/Bus

ines

s

Add lines 8, 9a, 10–15, 16b, and 17b–21. This is your total effectively connected income ©23 2324IRA deduction (see page 9)24

2625

Self-employed health insurance deduction 27

Keogh and self-employed SEP and SIMPLE plans

26

28

Penalty on early withdrawal of savings

27

Enc

lose

, b

ut d

o n

ot

atta

ch,

any

pay

men

t w

ith

your

ret

urn.

30Scholarship and fellowship grants excluded

28

Ad

just

men

ts

Add lines 24 through 30. These are your total adjustments

29

31Subtract line 31 from line 23. Enter here and on line 33. This is your adjusted gross income ©

3132

1040NR

©

©

©

©

©

......

......

......

......

......

Cat. No. 11364D

$%

(1) First name

Form 1040NR (1997)

Total income exempt by a treaty from page 5, Item M 22

30

Moving expenses. Attach Form 3903

25

18

Last name

1997

29

Medical savings account deduction. Attach Form 8853

32

Cha

pter

6 D

ual-S

tatu

s T

ax Y

ear

Pag

e 29

195

36

345

36

381

Form 1040N

R (1997)

Page

2

Am

ount from line 32 (ad

justed gross incom

e)Item

ized d

eductio

ns from p

age 3, Sched

ule A, line 17

3333

Sub


ore than line 33, enter -0-

3434

3635

Taxable inco

me. S


line 35. If line 36 is more than line 35, enter -0-

3736

Tax Computation

37

Cred

it for child and

dep

endent care exp

enses. Attach Form

244140

Foreign tax credit. A

ttach Form 1116

41O

ther. Check if from

40

Form 8396

Credits

42

43A

dd

lines 39 through 4243

Sub


ore than line 38, enter -0-©

444445

45A

lternative minim

um tax (see p

age 11). Attach Form

6251

4747

Tax on income not effectively connected w

ith a U.S

. trade or business from page 4, line 79

4848

Social security and M

edicare tax on tip income not reported to em

ployer. Attach Form

4137

4949

Tax on

qualified

retirem

ent p

lans (includ

ing IR

As)

and

MS

As.

Attach

Form

5329 if

required

Other Taxes

50Transp

ortation tax (see page 12)

53

Ad

d lines 44 through 50. This is your to

tal tax©

52

54

Federal income tax w

ithheld from Form

s W-2, 1099, 1042-S

, etc.5354

1997 estimated tax paym

ents and amount applied from

1996 return

5555

Am

ount paid

with Form

4868 (extension request)

Excess social security and

RR

TA tax w

ithheld (see p

age 13)56

65 63

5758C

redit for am

ount paid

with Form

1040-C

61 U.S

. tax withheld

at source:

62a

Payments

58aFrom

page 4, line 76

a58b

By p

artnerships und

er section 1446 (from Form

(s) 8805 or 1042-S)

bU

.S. tax w

ithheld on d

ispositions of U

.S. real p

roperty interests:

59aFrom

Form(s) 8288-A

a59b

From Form

(s) 1042-Sb

Ad

d lines 52 through 59b

. These are your total p

ayments

©

62a

64


tract line 51 from line 60. This is the am

ount youO

VE

RP

AID

64

Am

ount of line 61 you want R

EFU

ND

ED

TO

YO

U. If you w

ant it directly d

eposited

, seep

age 13 and fill in 62b

, c, and d

©

Am

ount of line 61 you want A

PP

LIED

TO

YO

UR

1998E

ST

IMA

TE

D TA

X©

If line 51 is more than line 60, subtract line 60 from

line 51. This is the AM

OU

NT

YO

UO

WE

. For details on how to pay, including w

hat to write on your paym

ent, see page 13©

Estim

ated tax p

enalty (see page 13). A

lso include on line 64

Under penalties of perjury, I declare that I have exam

ined this return and accompanying schedules and statem

ents, and to the best of my know

ledge andbelief, they are true, correct, and com

plete. Declaration of preparer (other than taxpayer) is based on all inform

ation of which preparer has any know

ledge.S

ign

Here

Your occup

ation in the United

States

Date

Your signature

Prep

arer’s social security no.D

ateP

reparer’s

signatureC

heck ifself-em

ployed

Paid

Pre-

parer’s

Use O

nlyFirm

’s name (or

yours if self-emp

loyed)

and ad

dress

EIN

ZIP

code

Exem

ptions (see p

age 10)

Refund

Other paym

ents. Check if from

©

©©

63

35

65

Keep

a copy

of thisreturn foryour record

s.

Form 3800

Form 8801

Form (sp

ecify)

51H

ousehold em

ploym

ent taxes. Attach S

chedule H

(Form 1040)

bd

cC

heckingS

avingsTyp

e:

Tax. See instructions. C

heck if total includes any tax from

Form(s) 8814

Form 4972

©

ab

5251 5061 60

384646

Routing num

ber

Account num

ber

ac

bd

ab

Form 2439

Form 4136

AmountYou Owe

39

Ad

option cred

it. Attach Form

8839395960

38

4142

5657

195

195

195

Page

3Form

1040NR

(1997)

07S

chedule A

—Item

izedD

eductio

ns (See p

ages 14 and 15.)

State and

Local

Incom

eTaxes

1S

tate income taxes

1

2Local incom

e taxes2

Ad

d lines 1 and

23

3

Gifts to

U.S

.C

harities

Caution: If you m

ade a gift and received a benefit in return,see page 14.

4G

ifts by cash or check. If you m

ade any gift of $250 or

more, see p

age 144

5

Other than cash or check. If you m

ade any gift of $250or m

ore, see page 14. If over $500, you MU

ST

attachForm

8283

5

6C

arryover from p

rior year6

Ad

d lines 4 through 6

77

Casualty or theft loss(es). A

ttach Form 4684

88

JobExpensesand M

ostO

therM

iscellaneousD

eductions

Unreim

bursed

em

ployee

expenses—

jobtravel,

uniond

ues, job ed

ucation, etc. You MU

ST

attach Form 2106

or Form 2106-E

Z, if req

uired. S

ee page 15

©

9

9

Other exp

enses. See p

age 15 for expenses to d

educt

here. List type and

amount

©

11

1112A

dd

lines 9 through 1112

13E

nter the

amount

from

Form1040N

R, line 33

13

1414

Multip

ly line 13 by 2%

(.02)

1515

Sub


ore than line 12, enter -0-

Other

Miscellaneous

Deductions

Other—

certain expenses of d

isabled

emp

loyees, estate tax on income of d

ecedent,

etc. List type and

amount

©

16

17To

talItem

izedD

eductio

ns17

Is Form 1040N

R, line 33, over $121,200 (over $60,600 if you checked

filing statusb

ox 3, 4, or 5 on page 1 of Form

1040NR

)?

Yes. Y

our deduction may be lim

ited. See page 15 for the am

ount to enterhere and on Form

1040NR

, line 34.

©N

o. Your deduction is not lim

ited. Add the am

ounts in the far right column

for lines 3 through 16. Enter the total here and on Form 1040N

R, line 34.%

Casualty and

Theft Losses

1010

Tax prep

aration fees

16


United Kingdom

X

Temporary assignm

ent

H-13-18

-97

Entered -- March 18

, 1997Departed -- M

ay 25, 1997Entered -- S

ept. 10, 1997

00

182

N/AN/A

X

N/A

Permanent

X

$93 U.S. bank interest not effectively connected with

a U.S. trade or business

United Kingdom

Additional incom

e of $240 taxed at 15% under A

rticle 10

N/A

X

X

N/A

N/A

Page

5Form

1040NR

(1997)

Other Info

rmatio

n (If an item d

oes not app

ly to you, enter “N/A

.”)

To which Internal R

evenue office did

you pay any am

ountsclaim

ed on Form

1040NR

, lines 53, 54, and 57?

K

What country issued

your passp

ort?A

Were you ever a U

.S. citizen?

BN

oYes

Give the p

urpose of your visit to the U

nited S

tates©

C

LH

ave you excluded any gross income other

than foreign source income not effectively

connected with a U

.S. trade or business?

If “Yes,” show the am

ount, nature, and source of the

excluded

income. A

lso, give the reason it was exclud

ed.

(Do not includ

e amounts show

n in item M

.) ©

Type of entry visa and

visa numb

er©

and typ

e of current visa©

DM

FD

id

you give

up

your p

ermanent

residence as an im

migrant in the U

nitedS

tates this year?

●C

ountry©

Dates you entered

and left the U

nited S

tates during the

year. Resid

ents of Canad

a or Mexico entering and

leavingthe U

nited S

tates at frequent intervals, give nam

e of countryonly.

©

G

● Type

and am

ount of effectively connected incom

e exemp

tfrom

tax. Also, id

entify the app

licable tax treaty article. D

onot enter exem

pt incom

e on lines 8–15,16b

, and 17b

–21of Form

1040NR

:

For 1996©

Give num

ber of d

ays (including vacation and

nonwork

days) you w

ere present in the U

nited S

tates during:

1995, 1996

, and 1997

.

H

● Were

you subject to tax in that country

on any of the income you claim

is entitledto the treaty b

enefits?

If you are a resident of C

anada, M

exico,Jap

an, or the Rep

ublic of K

orea, or a U.S

.national, d

id your sp

ouse contribute to the

supp

ort of any child claim

ed on Form

1040NR

, line 7c?

I

● Did

you have a perm

anent establishm

entor fixed

base (as d

efined b

y the tax treaty)in the U

nited S

tates at any time d

uring1997?

If “Yes,”enter

amount

© $

If you were a resid

ent of Japan or the R

epub

lic of Korea

for any part of the tax year, enter in the sp

ace below

yourtotal foreign source incom

e not effectively connected w

itha U

.S. trad

e or business. This inform

ation is needed

so thatthe exem

ption for your sp

ouse and d

epend

ents residing in

the U

nited

States

(if ap

plicab

le) m

ay b

e allow

ed

inaccord

ance w

ith A

rticle 4

of the

income

tax treaties

betw

een the United

States and

Japan or the U

nited S

tatesand

the Rep

ublic of K

orea.

If you file this return to report com

munity incom

e, give yoursp

ouse’s name, ad

dress, and

identifying num

ber.

N

Total foreign source income not effectively connected

with a U

.S. trad

e or business

© $

Did

you file a U.S

. income tax return for

any year before 1997?

JIf you file this return for a trust, d

oes thetrust have a U

.S. b

usiness?O

If “Yes,” give the latest year and form

numb

er©

If “Yes,” give name and

add

ress©

No

Yes

No

Yes

No

YesN

oYes

No

Yes

No

Yes

No

Yes

If you are claiming the b

enefits of a U.S

. income tax treaty

with a foreign country, give the follow

ing information. S

eep

age 16 for add

itional information.

● Type

and am

ount of income not effectively connected

thatis exem

pt from

or subject to a red

uced rate of tax. A

lso,id

entify the app

licable tax treaty article:

For 1996©

Date you first entered

the United

States

©

E

For 1997©

For 1997

(also, includ

e this

exemp

t incom

e on

line 22 of Form 1040N

R)

©

Is this

an“exp

atriationreturn”

(seep

age 16)?P

No

Yes

If “Yes,”

areyou

attaching the

annualinform

ation statement (see p

age 16)?N

oYes

If you are not attaching the annual information

statement, attach exp

lanation.

X36 240

36240

36

36

Dividends paid by:

Other (specify) ©

Gains (include capital gain from line 82 below)Social security benefitsPensions and annuitiesReal property income and natural resources royaltiesOther royalties (copyrights, recording, publishing, etc.)Motion picture or T.V. copyright royaltiesIndustrial royalties (patents, trademarks, etc.)

Form 1040NR (1997)

Paid by foreign corporationsMortgage

Foreign corporationsU.S. corporations

Report property sales orexchanges that are effectivelyconnected with a U.S.business on Schedule D (Form1040), Form 4797, or both.

Enter only the capital gainsand losses from property salesor exchanges that are fromsources within the UnitedStates and not effectivelyconnected with a U.S.business. Do not include a gainor loss on disposing of a U.S.real property interest. Reportthese gains and losses onSchedule D (Form 1040).

Multiply line 77 by rate of tax at top of each column

Nature of income

Tax on income not effectively connected with a U.S. trade or business. Add columns (b)–(e) of line 78. Enter the total here and on Form1040NR, line 46 ©

81 Add columns (f) and (g) of line 80

Capital gain. Combine columns (f) and (g) of line 81. Enter the net gain here and on line 74 above (if a loss, enter -0-) ©

80

Attach Forms 1042-S, SSA-1042S, RRB-1042S, 1001 or similar form.

Capital Gains and Losses From Sales or Exchanges of Property

(a) U.S. taxwithheldat source

(b) Dateacquired

(mo., day, yr.)

Enter amount of income under the appropriate rate of tax (see page 15)

(c) Datesold

(mo., day, yr.)

(b) 10%

(d) Sales price

(c) 15%

(e) Cost or otherbasis

(d) 30%

(f) LOSSIf (e) is more

than (d), subtract (d)from (e)

(e) Other (specify)

%

(g) GAINIf (d) is more

than (e), subtract (e)from (d)

Page 4

Tax on Income Not Effectively Connected With a U.S. Trade or Business

ab

69

abc

707172737475

77

66

Total U.S. tax withheld at source. Add column (a) oflines 66a through 75. Enter the total here and on Form1040NR, line 58a ©

Add lines 66a through 75 in columns (b)–(e)

66a66b

67a67b67c

697071727374

78

79

82

81

82

Other

%

Interest:

( )

67

68

(a) Kind of property and description(if necessary, attach statement of

descriptive details not shown below)

76

77

68

7879

75

76


7.What, When, andWhere To File

IntroductionWhat return you must file, as well as whenand where you file that return, depends onyour status at the end of the tax year as aresident or a nonresident alien.


• Forms aliens must file

• When and where to file

• Amended returns and claims for refund

• Transportation of currency or monetaryinstruments


Forms (and Instructions)


m 1040A U.S. Individual Income Tax Return

m 1040EZ Income Tax Return for Singleand Joint Filers With No Depen-dents



m 4868 Application for Automatic Exten-sion of Time To File U.S. Individ-ual Income Tax Return

See chapter 12 for information about get-ting these forms.

Resident AliensResident aliens should file Form 1040EZ,1040A, or 1040 at the address shown in theinstructions for that form. The due date forfiling the return and paying any tax due isApril 15 of the year following the year forwhich you are filing a return.

You are allowed an automatic extensionto June 15 to file if your main place of busi-ness and the home you live in are outside theUnited States and Puerto Rico on April 15.You can get an extension of time to August15 to file your return if you file Form 4868 byApril 15 (June 15 if you qualify for the June15 extension). See the instructions for theform you are filing for more information.

TIPIf the due date for filing falls on aSaturday, Sunday, or legal holiday,the due date is the next day which is

not a Saturday, Sunday, or legal holiday.

Nonresident Aliens Nonresident aliens who are required to filean income tax return should use Form1040NR or, if qualified, Form 1040NR-EZ.

You must file a return if you are:

1) A nonresident alien individual engagedor considered to be engaged in a tradeor business in the United States during1997.

You must file even if:

a) Your income did not come from atrade or business conducted in theUnited States,

b) You have no income from U.S.sources, or

c) Your income is exempt from tax.

2) A nonresident alien individual not en-gaged in a trade or business in theUnited States with U.S. income on whichthe tax liability was not satisfied by thewithholding of tax at the source,

3) A representative or agent responsible forfiling the return of an individual describedin (1) or (2), or

4) A fiduciary for a nonresident alien estateor trust.

Note. If you were a nonresident alien stu-dent or trainee who was temporarily presentin the United States under an “F,” “J,” “M,” or“Q” visa, you are considered engaged in atrade or business in the United States. Youmust file Form 1040NR (or Form1040NR–EZ) only if you have income that issubject to tax under Section 871.

You must also file if you want to:

1) Claim a refund of overwithheld or over-paid tax, or

2) Claim the benefit of any deductions orcredits. For example, if you have no U.S.business activities but have income fromreal property that you choose to treat aseffectively connected income (discussedin chapter 4), you must timely file a trueand accurate return to take any allow-able deductions against that income. Forinformation on what is timely, see Whento file for deductions and credits, laterunder When and Where To File.

CAUTION!

Even if you have left the United Statesand filed a Form 1040–C on depar-ture, you still must file an annual U.S.

income tax return. If you are married and bothyou and your spouse are required to file, youmust each file a separate form.

Form 1040NR–EZ You can use Form 1040NR–EZ if all of thefollowing conditions are met.

1) You do not claim any dependents.

2) You cannot be claimed as a dependenton someone else's return.

3) If you were married, you cannot claiman exemption for your spouse.

4) You were under age 65 on January 1,1998, and not blind at the end of 1997.

5) Your taxable income is less than$50,000.

6) You do not claim any itemized de-ductions (other than for state and localincome taxes).

7) You had only wages, salaries, tips, tax-able refunds of state and local incometaxes, and scholarship or fellowshipgrants. (If you had taxable interest ordividend income, you cannot use thisform.)

8) You are not claiming any adjustments toincome other than scholarship and fel-lowship grants excluded.

9) You are not claiming any credits.

10) You do not have any “other taxes” (otherthan social security and Medicare tax ontip income not reported to employer orhousehold employment taxes).

If you do not qualify to file Form1040NR–EZ, you must file Form 1040NR.

When and Where To FileIf you are an employee and you receivewages subject to U.S. income tax withholding,file by the 15th day of the 4th month after yourtax year ends. If you file for the 1997 calendaryear, your return is due April 15, 1998.

If you are not an employee who receiveswages subject to U.S. income tax withholding,you must file by the 15th day of the 6th monthafter your tax year ends. For the 1997 calen-dar year, file your return by June 15, 1998.For information on when and where to makeestimated tax payments, see chapter 8.

File Form 1040NR–EZ and Form1040NR with the:

Internal Revenue Service CenterPhiladelphia, PA 19255.

When to file for deductions and credits.To get the benefit of any allowable deductionsor credits, you must timely file a true and ac-curate return. For this purpose, a return istimely if it is filed within 16 months of the duedate just discussed. However, if you did notfile a 1996 tax return and 1997 is not the firstyear for which you are required to file one,your 1997 return is timely for this purpose ifit is filed by the earlier of:

1) The date that is 16 months after the duedate for filing your 1997 return, or

2) The date the IRS notifies you that your1997 return has not been filed and thatyou cannot claim certain deductions andcredits.

The allowance of the following credits is notaffected by this time requirement:

1) Credit for withheld taxes,

2) Credit for excise tax on certain uses ofgasoline and special fuels, and

3) Credit for tax paid by a regulated in-vestment company on capital gains.

Protective return. If your activities in theUnited States were limited and you do notbelieve that you had any gross income effec-tively connected with a U.S. trade or businessduring the year, you can file a protective re-

Chapter 7 What, When, and Where To File

turn (Form 1040NR) by the deadline ex-plained above. By filing a protective return,you protect your right to receive the benefitof deductions and credits in the event it islater determined that some or all of your in-come is effectively connected. You are notrequired to report any effectively connectedincome or any deductions on the protectivereturn, but you must give the reason the re-turn is being filed.

If you believe some of your activities re-sulted in effectively connected income, fileyour return reporting that income and relateddeductions by the regular due date. To pro-tect your right to claim deductions or creditsresulting from other activities, attach a state-ment to that return explaining that you wishto protect your right to claim deductions andcredits if it is later determined that the otheractivities produced effectively connected in-come.

You can follow the same procedure if youbelieve you have no U.S. tax liability becauseof a U.S. tax treaty. Be sure to also completeitems L and M on page 5 of Form 1040NR.

Aliens from the Virgin Islands.

If you are a bona fide resident of theVirgin Islands and work temporarily inthe United States, you must pay your

income taxes to the Virgin Islands and fileyour income tax returns with the:

Virgin Islands Bureau of Internal Revenue9601 Estate ThomasCharlotte Amalie, St. ThomasU.S. Virgin Islands 00802.

Report all income from U.S. sources, aswell as income from other sources, on yourreturn. For information on filing Virgin Islandsreturns, contact the Virgin Islands Bureau ofInternal Revenue.

Chapter 8 discusses withholding from U.S.wages of Virgin Islanders.

Aliens from Guam or the Commonwealthof the Northern Mariana Islands. If you area resident of Guam or the Commonwealth ofthe Northern Mariana Islands (CNMI) on thelast day of your tax year, you must file yourreturn and pay any tax due to Guam or theCNMI. Report all income, including incomefrom U.S. sources, on your return. It is notnecessary to file a separate U.S. income taxreturn.

Guam residents should file theirGuam returns with the:

Department of Revenue and Taxation Government of GuamP.O. Box 23607GMF, GU 96921.

Residents of the CNMI should filetheir CNMI income tax returns with the:

Division of Revenue and TaxationCommonwealth of the Northern MarianaIslandsP.O. Box 5234 CHRBSaipan, MP 96950.

If you are a resident of the United Stateson the last day of your tax year, you shouldfile your return with, and pay any balance ofyour tax due on income derived from all

sources to the Internal Revenue ServiceCenter, Philadelphia, PA 19255.

Penalties. The law imposes penalties for fil-ing your tax return late or for late payment ofany tax due. However, a penalty is notcharged if you can show that there was rea-sonable cause for your filing or paying late.

You may be subject to additional penaltiesfor:

1) Not supplying a taxpayer identificationnumber when required,

2) Filing a frivolous income tax return, or

3) Not including a tax shelter identificationnumber on a return when required.

Amended Returnsand Claims for Refund If you find changes in your income, de-ductions, or credits after you mail your return,file Form 1040X, Amended U.S. IndividualIncome Tax Return. Attach Form 1040NRshowing the changes to your original returnand write “Amended” across the top. Ordi-narily, an amended return claiming a refundmust be filed within 3 years from the date yourreturn was filed or within 2 years from the timethe tax was paid, whichever is later. A returnfiled before the final due date is consideredto have been filed on the due date.

Transportation of Currencyor Monetary InstrumentsForm 4790, Report of International Transpor-tation of Currency or Monetary Instruments,must be filed by each person who physicallytransports, mails, or ships, or causes to bephysically transported, mailed, or shipped,currency or other monetary instruments in atotal amount of more than $10,000 at onetime from the United States to any place out-side the United States, or into the UnitedStates from any place outside the UnitedStates. The filing requirement also applies toeach person who attempts to transport, mail,or ship the currency or monetary instrumentsor attempts to cause them to be transported,mailed, or shipped.

The term “monetary instruments” meanscoin or currency of the United States or of anyother country, travelers' checks in any form,money orders, investment securities in bearerform or otherwise in such form that title tothem passes upon delivery, and negotiableinstruments (except warehouse receipts orbills of lading) in bearer form or other in suchform that title to them passes upon delivery.The term includes bank checks and moneyorders which are signed but on which thename of the payee has been omitted, butdoes not include bank checks, travelers'checks, or money orders made payable to theorder of a named person which have not beenendorsed or which contain restrictiveendorsements.

A transfer of funds through normal bank-ing procedures (wire transfer) that does notinvolve the physical transportation of currencyor bearer monetary instruments is not re-quired to be reported on Customs Form 4790.

Filing requirements for Customs Form 4790are the following.

Recipients. Each person who receivescurrency or other monetary instruments froma place outside the United States must file

Customs Form 4790 within 15 days after re-ceipt, with the Customs officer in charge atany port of entry or departure, or by mail withthe:

Commissioner of CustomsAttention: Currency TransportationReports1301 Constitution Ave., N.W.Washington, DC 20229.

Shippers or mailers. If the currency orother monetary instrument does not accom-pany the person entering or departing theUnited States, Customs Form 4790 can befiled by mail with the Commissioner of Cus-toms at the above address, on or before thedate of entry, departure, mailing, or shipping.

Travelers. Travelers must file CustomsForm 4790 with the Customs officer in chargeat any Customs port of entry or departure,when entering or departing the United States.

Penalties. Civil and criminal penalties areprovided for failure to file a report, or if thereport contains material omissions or mis-statements and for structuring the transpor-tation of currency or monetary instruments toavoid filing a report. Also, the entire amountof the currency or monetary instrument maybe subject to seizure and forfeiture.

More information regarding the filing ofCustoms Form 4790 can be found in the in-structions on the back of the form.

8.Paying TaxThroughWithholding orEstimated Tax

IntroductionThis chapter discusses how to pay your U.S.income tax as you earn or receive incomeduring the year. In general, the federal in-come tax is a pay as you go tax. There aretwo ways to pay as you go:

• Withholding. If you are an employee,your employer probably withholds incometax from your pay. Tax may also bewithheld from certain otherincome—including pensions, bonuses,commissions, and gambling winnings. Ineach case, the amount withheld is paidto the Internal Revenue Service (IRS) inyour name, and

• Estimated tax. If you do not pay your taxthrough withholding, or do not payenough tax that way, you might have topay estimated tax. People who are inbusiness for themselves generally willhave to pay their tax this way. You mayhave to pay estimated tax if you receiveincome such as dividends, interest, rent,and royalties. Estimated tax is used topay not only income tax, but self-

Chapter 8 Paying Tax Through Withholding or Estimated Tax

employment tax and alternative minimumtax as well.


• How to notify your employer of your alienstatus

• Income subject to withholding of incometax

• Exemptions from withholding

• Social security and Medicare taxes

• Estimated tax rules


Publication

m 515 Withholding of Tax on Nonresi-dent Aliens and Foreign Corpo-rations

m 533 Self-Employment Tax

m 901 U.S. Tax Treaties


m W–4 Employee's Withholding Allow-ance Certificate

m W–4P Withholding Certificate for Pen-sion or Annuity Payments

m W–8 Certificate of Foreign Status

m 1040–ES(NR) U.S. Estimated Tax forNonresident Alien Individuals

m 1078 Certificate of Alien Claiming Resi-dence in the United States

m 4224 Exemption From Withholding ofTax on Income Effectively Con-nected With the Conduct of aTrade or Business in the UnitedStates

m 8233 Exemption From Withholding onCompensation for IndependentPersonal Services of a Nonresi-dent Alien Individual

m 8288-B Application for Withholding Cer-tificate for Dispositions by ForeignPersons of U.S. Real PropertyInterests


Notification of AlienStatus You must let your employer know whetheryou are a resident or a nonresident alien soyour employer can withhold the correctamount of tax from your wages.

If you are a resident alien under the rulesdiscussed in chapter 1, you should file Form1078 with your employer. If you are a non-resident alien under those rules, you do nothave to file a form, but it would be helpful ifyou told your employer that you are a non-resident alien.

If you are a resident alien and you receiveincome other than wages (such as dividendsand royalties) from sources within the United

States, you should file Form 1078 with thewithholding agent (generally, the payer of theincome) so the agent will not withhold tax onthe income at the 30% (or lower treaty) rate.If you receive such income as a nonresidentalien it is usually subject to withholding at the30% (or lower treaty) rate.

Withholdingfrom Compensation The following discussion generally appliesonly to nonresident aliens. Tax is withheldfrom resident aliens in the same manner asU.S. citizens.

Wages and other compensation paid to anonresident alien for services performed asan employee are usually subject to graduatedwithholding at the same rates as resident al-iens and U.S. citizens. Therefore, your com-pensation, unless it is specifically excludedfrom the term “wages” by law, or is exemptfrom tax by treaty, is subject to graduatedwithholding.

Withholding on Wages If you are an employee and you receivewages subject to graduated withholding, youwill be required to fill out a Form W–4, Em-ployee's Withholding Allowance Certificate.Nonresident aliens should use the followinginstructions instead of the instructions on theForm W–4.

Because of the restrictions on a nonresi-dent alien's filing status, the limited numberof personal exemptions a nonresident alien isallowed, and the fact that a nonresident aliencannot claim the standard deduction, youshould fill out Form W–4 following these in-structions.

1) Check only “Single” marital status (re-gardless of your actual marital status).

2) Claim only one allowance, unless youare a resident of Canada, Mexico,Japan, or South Korea, or a U.S. na-tional.

3) Request that your employer withhold anadditional amount of $4.00 per week. Ifyour wages are paid based on a two-week pay period, the additional amountwill be $8.00.

4) Do not claim “Exempt” withholding sta-tus.

A U.S. national is an individual who, al-though not a U.S. citizen, owes his or her al-legiance to the United States. U.S. nationalsinclude American Samoans, and NorthernMariana Islanders who chose to become U.S.nationals instead of U.S. citizens.

See Reduced Withholding on Scholar-ships and Fellowship Grants later, for how tofill out Form W–4 if you receive a U.S. sourcescholarship or fellowship grant.

Students and business apprentices fromIndia. If you are eligible for the benefits ofArticle 21(2) of the United States–India In-come Tax Treaty, you may claim additionalwithholding allowances for the standard de-duction and your spouse. You may also claiman additional withholding allowance for eachof your dependents not admitted to the UnitedStates on F–2, J–2, or M–2 visas. You do nothave to request additional withholding.

Withholding on Pensions If you receive a pension as a result of per-sonal services performed in the UnitedStates, the pension income is treated as ef-fectively connected with a U.S. trade or busi-ness. This income will be subject to gradu-ated withholding under the pensionwithholding rules that apply to U.S. citizensand resident aliens.

You must fill out a Form W–4P, Withhold-ing Certificate for Pension or Annuity Pay-ments, using the following guidelines. Checkonly “Single” marital status, and claim onlyone withholding allowance unless you are aresident of Canada, Mexico, Japan, or SouthKorea, or a U.S. national.

A nonresident alien who receives periodicpension payments or nonperiodic pensiondistributions outside of the United States canchoose to not have tax withheld under thegraduated withholding rules. However, if youmake this choice, the 30% (or lower treatyrate) withholding tax will apply.

Withholding on Tip Income Tips you receive during the year for servicesperformed in the United States are subject toU.S. income tax. Include them in taxable in-come. In addition, tips received while workingfor one employer, amounting to $20 or morein a month, are subject to graduated with-holding.

Independent ContractorsIf there is no employee-employer relationshipbetween you and the person for whom youperform services, your compensation is sub-ject to the 30% (or lower treaty) rate of with-holding. However, if you are engaged in atrade or business in the United States duringthe tax year, your compensation for personalservices as an independent contractor (inde-pendent personal services) may be entirelyor partly exempt from withholding if you reachan agreement with the Internal RevenueService on the amount of withholding re-quired. Also, the final payment to you duringthe tax year for independent personal ser-vices may be entirely or partly exempt fromwithholding if you are engaged in a trade orbusiness in the United States during the yearand you file the forms and provide the infor-mation required by the IRS.

Withholding Agreement An agreement that you reach with the IRSregarding withholding from your compen-sation for independent personal services iseffective for payments covered by the agree-ment after it is agreed to by all parties. Youmust agree to timely file an income tax returnfor the current tax year.

Central withholding agreements. If you area nonresident alien entertainer or athleteperforming or participating in athletic eventsin the United States, you may be able to enterinto a withholding agreement with the IRS forreduced withholding provided certain require-ments are met. Under no circumstances willsuch a withholding agreement reduce taxeswithheld to less than the anticipated amountof income tax liability.

Nonresident alien entertainers or athletesrequesting a central withholding agreementmust submit the following information.


1) A list of the names and addresses of thenonresident aliens to be covered by theagreement.

2) Copies of all contracts that the aliens ortheir agents and representatives haveentered into regarding the time periodand performances or events to be cov-ered by the agreement including, but notlimited to, contracts with:

a) Employers, agents, and promoters,

b) Exhibition halls,

c) Persons providing lodging, trans-portation, and advertising, and

d) Accompanying personnel, such asband members or trainers.

3) An itinerary of dates and locations of allevents or performances scheduled dur-ing the period to be covered by theagreement.

4) A proposed budget containing itemizedestimates of all gross income and ex-penses for the period covered by theagreement, including any documents tosupport these estimates.

5) The name, address, and telephonenumber of the person the IRS shouldcontact if additional information or doc-umentation is needed.

6) The name, address, and employer iden-tification number of the agent or agentswho will be the central withholdingagents for the aliens and who will enterinto a contract with the IRS. A centralwithholding agent ordinarily receivescontract payments, keeps books of ac-count for the aliens covered by theagreement, and pays expenses (includ-ing tax liabilities) for the aliens during theperiod covered by the agreement.

When the IRS approves the estimatedbudget and the designated central withhold-ing agents, the Associate Chief Counsel(International) will prepare a withholdingagreement. The agreement must be signedby each withholding agent, each nonresidentalien covered by the agreement, and the As-sistant Commissioner (International).

Generally, each withholding agent mustagree to withhold income tax from paymentsmade to the nonresident alien; to pay over thewithheld tax to the IRS on the dates and in theamounts specified in the agreement; and tohave the IRS apply the payments of withheldtax to the withholding agent's Form 1042 ac-count. Each withholding agent will be requiredto file Form 1042 and Form 1042–S for eachtax year in which income is paid to a nonres-ident alien covered by the withholding agree-ment. The IRS will credit the withheld taxpayments, posted to the withholding agent'sForm 1042 account, in accordance with theForm 1042–S. Each nonresident alien cov-ered by the withholding agreement mustagree to file Form 1040NR or Form1040NR-EZ.

A request for a central withholdingagreement should be sent to the fol-lowing address at least 90 days be-

fore the agreement is to take effect:

Internal Revenue ServiceChief, Special Procedures SectionCP:IN:D:C:SS:TSRoom 4417950 L'Enfant Plaza South, S.W.Washington, DC 20024

Final payment exemption. Your final pay-ment of compensation during the tax year forindependent personal services may be en-tirely or partly exempt from withholding. Thisexemption is available only once during yourtax year and applies to a maximum of $5,000of compensation. To obtain this exemption,you or your agent must give the followingstatements and information to the IRS districtdirector.

1) A statement by each withholding agentfrom whom you have received gross in-come effectively connected with a tradeor business in the United States duringthe tax year, showing the amount of in-come paid and the tax withheld. Eachstatement must be signed by the with-holding agent and verified by a declara-tion that it is made under penalties ofperjury.

2) A statement by the withholding agentfrom whom you expect to receive thefinal payment of compensation, showingthe amount of the payment and theamount of tax that would be withheld ifa final payment exemption were notgranted. This statement must also besigned by the withholding agent andverified by a declaration that it is madeunder penalties of perjury.

3) A statement by you that you do not in-tend to receive any other income effec-tively connected with a trade or businessin the United States during the currenttax year.

4) The amount of tax that has been with-held or paid under any other provisionof the Internal Revenue Code or regu-lations for any income effectively con-nected with your trade or business in theUnited States during the current taxyear.

5) The amount of your outstanding tax li-abilities, if any, including interest andpenalties, from the current tax year orprior tax periods.

6) Any provision of an income tax treatyunder which a partial or complete ex-emption from withholding may beclaimed, the country of your residence,and a statement of sufficient facts tojustify an exemption under the treaty.

7) A statement signed by you, and verifiedby a declaration that it is made underpenalties of perjury, that all the informa-tion given is true and that to yourknowledge no relevant information hasbeen omitted.

If satisfied with the information, the IRSwill determine the amount of your tentativeincome tax for the tax year on gross incomeeffectively connected with your trade or busi-ness in the United States. Ordinary and nec-essary business expenses can be taken intoaccount if proven to the satisfaction of theAssistant Commissioner (International).

The IRS will send you a letter, directed tothe withholding agent, showing the amountof the final payment of compensation that is

exempt from withholding and the amount thatcan be paid to you because of the exemption.You must give two copies of the letter to thewithholding agent and must also attach acopy of the letter to your income tax return forthe tax year for which the exemption is ef-fective.

Allowancefor Personal Exemption Withholding on payments for independentpersonal services is generally based on theamount of your compensation payment minusthe value of one exemption ($2,700 for 1998).

To determine the income for independentpersonal services performed in the UnitedStates to which the 30% (or lower treaty) ratewill apply, one personal exemption is alloweda nonresident alien who is not a U.S. nationaland is not a resident of Canada, Mexico,Japan, or South Korea. For purposes of 30%withholding, the exemption is prorated at$7.40 a day in 1998 for the period that laboror personal services are performed in theUnited States. To claim an exemption fromwithholding on the personal exemptionamount, fill out the applicable parts of Form8233 and give it to the withholding agent.

Example. Eric Schmidt, who is a residentof Germany, worked under a contract with aU.S. firm (not as an employee) in the UnitedStates for 100 days during 1998 before re-turning to his country. He earned $6,000 forthe services performed (not consideredwages) in the United States. Eric is marriedand has three dependent children. His wife isnot employed and has no income subject toU.S. tax. The deduction to be allowed againstthe income for his personal services per-formed within the United States in 1998 is$740 (100 days × $7.40), and withholding at30% is applied against the balance. Thus,$1,578 in tax is withheld from Eric's earnings(30% of $5,260).

Residents of Canada, Mexico, Japan, orSouth Korea, or U.S. nationals. If you area nonresident alien who is a resident ofCanada, Mexico, Japan, or South Korea, orwho is a national of the United States, youare subject to the same 30% withholding onyour compensation for independent personalservices performed in the United States.However, if you are a U.S. national or a resi-dent of Canada or Mexico, you are allowedthe same personal exemptions as U.S. citi-zens. For the 30% (or lower treaty rate) with-holding, you can take $7.40 per day for eachallowable exemption in 1998. If you are aresident of Japan or Korea, you are allowedpersonal exemptions for yourself and for yourspouse and children who live with you in theUnited States at any time during the tax year.However, the additional exemptions for yourspouse and children must be further proratedas explained in chapter 5 under Exemptions.

Students and business apprentices fromIndia. If you are eligible for the benefits ofArticle 21(2) of the United States–India In-come Tax Treaty, you are allowed an ex-emption for your spouse. You are also al-lowed an exemption for each dependent notadmitted to the United States on F–2, J–2,or M–2 visas. For the 30% (or lower treatyrate) withholding on compensation for inde-pendent personal services performed in the


United States, you are allowed $7.40 per dayfor each allowable exemption in 1998.

Residents of Canada orMexico Engaged inTransportation-RelatedEmploymentCertain residents of Canada or Mexico whoenter or leave the United States at frequentintervals are not subject to withholding ontheir wages. These persons either:

1) Perform duties in transportation servicebetween the United States and Canadaor Mexico, or

2) Perform duties connected to the con-struction, maintenance, or operation ofa waterway, viaduct, dam, or bridgecrossed by, or crossing, the boundarybetween the United States and Canadaor the boundary between the UnitedStates and Mexico.

CAUTION!

This employment is subject to with-holding of social security and Medi-care taxes unless the services are

performed for a railroad.To qualify for the exemption from with-

holding during a tax year, a Canadian orMexican resident must give the employer astatement in duplicate with name, address,and identification number, and certifying thatthe resident:

1) Is not a U.S. citizen or resident,

2) Is a resident of Canada or Mexico,whichever applies, and

3) Expects to perform duties previouslydescribed during the tax year in ques-tion.

The statement can be in any form, but itmust be dated and signed by the employee,and must include a written declaration that itis made under the penalties of perjury.

Certain Residentsof Puerto Rico If you are a nonresident alien employee whois a resident of Puerto Rico, wages for ser-vices performed in Puerto Rico are generallynot subject to withholding unless you are anemployee of the United States or any of itsagencies in Puerto Rico.

Residents ofthe U.S. Virgin Islands Nonresident aliens who are bona fide resi-dents of the Virgin Islands are not subject towithholding of U.S. tax on income earnedwhile temporarily employed in the UnitedStates. This is because those persons paytheir income tax to the Virgin Islands. Toavoid having tax withheld on income earnedin the United States, bona fide residents ofthe Virgin Islands should write a letter, in du-plicate, to their employers, stating that theyare bona fide residents of the Virgin Islandsand expect to pay tax on all income to theVirgin Islands.

Withholdingfrom Other IncomeOther income subject to 30% withholdinggenerally includes fixed or determinable in-come such as interest (other than portfoliointerest), dividends, pensions and annuities,and gains from certain sales and exchanges,discussed in chapter 4. It also includes 85%of social security benefits paid to nonresidentaliens.

Income (other than compensation) that iseffectively connected with your U.S. trade orbusiness is not subject to withholding at the30% (or lower treaty) rate. You must file Form4224 with the payer of the income.

Special rules for withholding on partner-ship income, scholarships, and fellowshipsare explained next.

Tax Withheldon Partnership IncomeIf you are a foreign partner in a U.S. or foreignpartnership, the partnership will withhold taxon your share of effectively connected taxableincome from the partnership. The partnershipwill give you a statement on Form 8805, For-eign Partner's Information Statement of Sec-tion 1446 Withholding Tax, showing the taxwithheld. A partnership that is publicly tradedmay withhold on your actual distributions ofeffectively connected income. In this case thepartnership will give you a statement on Form1042–S, Foreign Person's U.S. Source In-come Subject to Withholding. In either case,the withholding rate is 39.6%. Claim the taxwithheld as a credit on line 58b of Form1040NR.

If you are a foreign partner responsible forwithholding, see Partnership Withholding onEffectively Connected Income in Publication515.

Reduced Withholdingon Scholarshipsand Fellowship Grants There is no withholding on a qualifiedscholarship received by a candidate for adegree. See chapter 3.

If you are a nonresident alien student orgrantee with an “F,” “J,” “M,” or “Q ” visa, andyou receive a U.S. source grant or scholar-ship that is not fully exempt, the withholdingagent (usually the payer of the scholarship)withholds tax at 14% (or lower treaty rate) ofthe taxable part of the grant or scholarship.However, if you are not a candidate for a de-gree and the grant does not meet certain re-quirements, tax will be withheld at the 30%(or lower treaty) rate.

To reduce the amount subject to the 14%rate, you should fill out Form W–4 and thePersonal Allowances Worksheet (attached toForm W–4) every year and give it to thewithholding agent. Use the following proce-dures to complete the worksheet.

Line A. Enter the total of the followingamounts on line A.

Include the prorated part of your allowablepersonal exemption. Figure the amount bymultiplying the number of days you expect tobe in the United States in 1998 by the dailyexemption amount (7.40).

Include expenses that will be deductibleon your return. These include away-from-home expenses (meals, lodging, and trans-portation), certain state and local incometaxes, charitable contributions, and casualtylosses, discussed earlier under Itemized De-ductions in chapter 5. They also includebusiness expenses, moving expenses, andthe IRA deduction discussed under De-ductions in chapter 5.

Include the part of your grant or scholar-ship that is not taxable under U.S. law or un-der a tax treaty.

Line B. Enter –0–, unless the following ap-plies.

If you are a student who qualifies underArticle 21(2) of the United States–India in-come tax treaty, and you are not claimingdeductions for away-from-home expenses orother itemized deductions (discussed earlier),enter the standard deduction on line B. Thestandard deduction amount for 1998 is $4,250if you are single or $3,550 if you are married.

Lines C and D. Enter –0– on both lines un-less the following applies.

If you are a resident of Canada, Mexico,Japan, South Korea, or a U.S. national, anadditional daily exemption amount may beallowed for your spouse and each of yourdependents.

If you are a resident of India who is eligiblefor the benefits of Article 21(2) of the UnitedStates–India income tax treaty, you can claiman additional daily exemption amount for yourspouse. You can also claim an additionalamount for each of your dependents not ad-mitted to the United States on F–2, J–2, orM–2 visas.

Enter any additional amount for yourspouse on line C. Enter any additionalamount for your dependents on line D.

Line G. No entries should be made on linesE and F. Add the amounts on lines A throughD and enter the total on line G.

Form W–4. Complete lines 1 through 4 ofForm W–4. Sign and date the form and giveit with the Personal Allowances Worksheet toyour withholding agent.

If you file a Form W–4 to reduce or elimi-nate the withholding on your scholarship orgrant, you must file an annual U.S. income taxreturn to be allowed the exemptions and de-ductions you claimed on that form. If you arein the United States during more than one taxyear, you must attach a statement to youryearly Form W–4 indicating that you havefiled a U.S. income tax return for the previousyear. If you have not been in the UnitedStates long enough to be required to file areturn, you must attach a statement to yourForm W–4 saying you will file a U.S. incometax return when required.

After the withholding agent has acceptedyour Form W–4, tax will be withheld on yourscholarship or grant as if it were wages. Thegross amount of the income is reduced by theamount on line G of the worksheet and thewithholding tax is figured on the remainder.

You will receive a Form 1042-S from thewithholding agent (usually the payer of yourgrant) showing the gross amount of yourscholarship or fellowship grant less the with-holding allowance amount, the tax rate, andthe amount of tax withheld. Use this form tofile your annual U.S. income tax return.


Income Entitledto Tax TreatyBenefits If a tax treaty between the United States andyour country provides an exemption from, ora reduced rate of, withholding for certainitems of income, you should notify the payerof the income (the withholding agent) of yourforeign status to claim the benefits of thetreaty. Generally, you do this by filing Form1001, Ownership, Exemption, or ReducedRate Certificate, with the withholding agent.However, do not use Form 1001 for dividendsor compensation for personal services. Fordividends, the payor can rely on your addressof record as the basis for allowing you thebenefit of the treaty. The rules that apply tocompensation for personal services are dis-cussed next.

Independent contractors. If you performpersonal services as an independent con-tractor (rather than an employee) and you canclaim an exemption from withholding on thatpersonal service income because of a taxtreaty, submit Form 8233 to each withholdingagent from whom amounts will be received.

Students, teachers, and researchers. Alienstudents, teachers, and researchers whoperform dependent personal services (asemployees) can also use Form 8233 to claimexemption from withholding of tax on com-pensation for services that is exempt fromU.S. tax under a U.S. tax treaty.

Attach the appropriate statement shownin Appendix A (for students) or Appendix B(for teachers and researchers) at the end ofthis publication to the Form 8233 and give itto the withholding agent. For newly ratifiedtreaties not listed in the appendices, attach astatement in a format similar to those for othertreaties.

Employees. If you are not a student,teacher, or researcher, but you perform ser-vices as an employee and your pay is exemptfrom U.S. income tax under a tax treaty, youcan avoid having tax withheld from yourwages. Give a statement to your employer, induplicate, for the tax year giving your name,address, taxpayer identification number, andcountry of which you are a resident, and cer-tifying that:

1) You are not a citizen or resident of theUnited States, and

2) Your compensation is exempt from U.S.income tax and why it is exempt.

The statement should indicate the taxtreaty and provision under which you claimthe exemption and should show the facts yourely on to prove you meet the requirementsof a treaty provision. These can be found inthe applicable tax treaty article.

Date and sign the statement. Identify thetax year to which it applies and the compen-sation to which it relates. Include a declara-tion that you make the statement under thepenalties of perjury.

Special events and promotions. Withhold-ing at the full 30% rate is required for pay-ments made to a nonresident alien or foreigncorporation for gate receipts (or television or

other receipts) from rock music festivals,boxing promotions, and other entertainmentor sporting events, unless the withholdingagent has been specifically advised otherwiseby letter from the IRS. This is true even if theincome may be exempt from taxation by pro-visions of a tax treaty. One reason for this isthat the partial or complete exemption isusually based on factors that cannot be de-termined until after the close of the tax year.

The required letter should be re-quested from the:

Internal Revenue Service Assistant Commissioner (International)Attn: CP:IN:D:C:SS:TS 950 L'Enfant Plaza South, S.W.Washington, DC 20024.

Entertainers and athletes can also applyfor reduced withholding on the basis of theirnet income after expenses. See Centralwithholding agreements earlier under With-holding from Compensation.

CAUTION!

You will be required to pay U.S. tax,at the time of your departure from theUnited States, on any income for

which you incorrectly claimed a treaty ex-emption. For more details on treaty provisionsthat apply to compensation, see Publication901.

Tax Withheldon Real PropertySales If you are a nonresident alien and you disposeof a U.S. real property interest, the transferee(buyer) of the property generally must with-hold a tax equal to 10% of the amount real-ized on the disposition. Withholding is alsorequired on certain distributions and othertransactions by domestic or foreign corpo-rations, partnerships, trusts, and estates.These rules are covered in Publication 515under U.S. Real Property Interest.

If you are a partner in a domestic part-nership, and the partnership disposes of aU.S. real property interest at a gain, tax willbe withheld by the partnership on the amountof gain allocable to its foreign partners. Yourshare of the income and tax withheld will bereported to you on Form 8805, Foreign Part-ner's Information Statement of Section 1446Withholding Tax, or Form 1042-S, ForeignPerson's U.S. Source Income Subject toWithholding (in the case of a publicly tradedpartnership).

Withholding is not required in the followingsituations.

1) The property is acquired by the buyer foruse as a residence and the amount re-alized (purchase price) is not more than$300,000.

2) The property disposed of is an interestin a domestic corporation if any class ofstock of the corporation is regularlytraded on an established securities mar-ket.

3) The property disposed of is an interestin a corporation that is not regularlytraded on an established market, if you

give the buyer a copy of a statement is-sued by the corporation certifying thatthe interest is not a U.S. real propertyinterest.

4) You (the seller) give the buyer a certif-ication stating, under penalties of per-jury, that you are not a foreign person,and containing your name, U.S. taxpayeridentification number, and home address(or office address, in the case of an en-tity).

5) The buyer receives a withholding certif-icate from the Internal Revenue Service.

6) You give the buyer written notice thatyou are not required to recognize anygain or loss on the transfer because ofa nonrecognition provision in the InternalRevenue Code or a provision in a U.S.tax treaty. The buyer must file a copyof the notice with the: Director, Philadel-phia Service Center, 11601 RooseveltBlvd., Philadelphia, PA 19255 Attn: DropPoint 543X.

7) The amount you realize on the transferof a U.S. real property interest is zero.

8) The property is acquired by the UnitedStates, a U.S. state or possession, apolitical subdivision, or the District ofColumbia.

The certifications in (3) and (4) must bedisregarded by the buyer if the buyer hasactual knowledge, or receives notice from aseller's or buyer's agent, that they are false.

The tax required to be withheld on a dis-position can be reduced or eliminated undera withholding certificate issued by the IRS.Either you or the buyer can request a with-holding certificate.

A withholding certificate can be issued dueto:

1) A determination by the IRS that reducedwithholding is appropriate because ei-ther:

a) The amount required to be withheldwould be more than the transferor'smaximum tax liability, or

b) Withholding of the reduced amountwould not jeopardize collection ofthe tax,

2) The exemption from U.S. tax of all gainrealized by the transferor, or

3) An agreement for the payment of taxproviding security for the tax liability,entered into by the transferee ortransferor.

Get Publication 515 and Form 8288–B forinformation on procedures to request a with-holding certificate.

Credit for tax withheld. The buyer mustreport and pay over the withheld tax within20 days after the transfer using Form 8288,U.S. Withholding Tax Return for Dispositionsby Foreign Persons of U.S. Real Property In-terests. This form is filed with the IRS withtwo copies of Form 8288–A, Statement ofWithholding on Dispositions by Foreign Per-sons of U.S. Real Property Interests. Copy Bof this statement will be stamped received bythe IRS and returned to you (the seller). Youmust file Copy B with your tax return to takecredit for the tax withheld.


Social Securityand Medicare Taxes If you work as an employee in the UnitedStates, you must pay social security andMedicare taxes in most cases. Your pay-ments of these taxes contribute to your cov-erage under the U.S. social security system.Social security coverage provides retirementbenefits and medical insurance (Medicare)benefits to individuals who meet certain eligi-bility requirements.

In most cases, the first $65,400 of taxablewages received in 1997 for services per-formed in the United States is subject to so-cial security tax. All taxable wages are subjectto Medicare tax. Your employer deducts thesetaxes from each wage payment. Your em-ployer must deduct these taxes even if youdo not expect to qualify for social security orMedicare benefits. You can claim a credit forexcess social security tax on your income taxreturn if you have more than one employerand the amount deducted from your com-bined wages for 1997 is more than $4,054.80.Use the worksheet in chapter 3 of Publication505 to figure your credit.

If any one employer deducted more than$4,054.80, you cannot claim a credit for thatamount. Ask your employer to refund the ex-cess.

In general, U.S. social security and Medi-care taxes apply to payments of wages forservices performed as an employee in theUnited States, regardless of the citizenshipor residence of either the employee or theemployer. In limited situations, these taxesapply to wages for services performed outsidethe United States. Your employer should beable to tell you if social security and Medicaretaxes apply to your wages. You cannot makevoluntary payments if no taxes are due.

Studentsand Exchange Visitors Generally, services performed by you as anonresident alien temporarily in the UnitedStates as a nonimmigrant under subpara-graph “F,” “J,” “M,” or “Q” of section101(a)(15) of the Immigration and NationalityAct are not covered under the social securityprogram if the services are performed to carryout the purpose for which you were admittedto the United States. This means that therewill be no withholding of social security orMedicare taxes from the pay you receive forthese services. These types of services arevery limited, and generally include only on-campus work, practical training, and eco-nomic hardship employment.

However, you are covered under the so-cial security program for these services if youare considered a resident alien as discussedin chapter 1, even though your nonimmigrantclassification (F, J, M, or Q) remains thesame. Social security and Medicare taxes willbe withheld from your pay.

Nonresident Alien StudentsIf you are a nonresident alien admitted to theUnited States as a student, you generally arenot permitted to work for a wage or salary orto engage in business while you are in theUnited States. In some cases, a student isgranted permission to work and it is so noted

on the student's copy of Immigration FormI–20, Certificate of Eligibility for NonimmigrantStudent Status, or Form I–688B, EmploymentAuthorization Document. Social security andMedicare taxes are not withheld from pay forthe work unless the student is considered aresident alien.

TIPAny student who is enrolled and reg-ularly attending classes at a schoolmay be exempt from social security

and Medicare taxes on pay for services per-formed for that school.

The Immigration and Naturalization Ser-vice (INS) permits on-campus work for stu-dents in “F-1” status if it does not displace aU.S. resident. On-campus work means workperformed on the school's premises. On-campus employment includes work per-formed at an off-campus location that is edu-cationally affiliated with the school.On-campus work under the terms of a schol-arship, fellowship, or assistantship is consid-ered part of the academic program of a stu-dent taking a full course of study and ispermitted by the INS. In this case, there willbe no notation on Form I–20 concerning thework and no Form I–688B will be issued.Social security and Medicare taxes are notwithheld from pay for this work unless thestudent is considered a resident alien.

Employment due to severe economic ne-cessity is sometimes permitted for studentsin “F-1” status. This requires approval by adesignated school official. Students grantedpermission to work due to severe economicnecessity will be issued Form I-688B by INS.Social security and Medicare taxes are notwithheld from pay for this work unless thestudent is considered a resident alien.

Students who have been in “F-1” status(except students in English language pro-grams) for at least one academic year (or nineconsecutive months) can accept employmentfor practical training related to the course ofstudy upon approval of the designated schoolofficial and after authorization by the INS. Ifthe training is required or for credit or is partof a work-study or cooperative educationprogram, it can be authorized by the schoolwith a notation on Form I-20. Otherwise, suchtraining is considered optional and requiresapproval by the school and the issuance ofForm I-688B by INS and is limited to 12months. Students in “M-1” status who havecompleted a course of study can accept em-ployment or practical training for up to sixmonths and must have a Form I-688B issuedby INS. Social security and Medicare taxesare not withheld from “F-1” or “M-1” students'pay for these services unless the student isconsidered a resident alien.

In all other cases, any services performedby a nonresident alien student are not con-sidered as performed to carry out the purposefor which the student was admitted to theUnited States. Social security and Medicaretaxes will be withheld from pay for the ser-vices unless the pay is exempt under theInternal Revenue Code.

Exchange VisitorsNonresident aliens are admitted to the UnitedStates as nonimmigrant exchange visitorsunder section 101(a)(15)(J) of the Immi-gration and Nationality Act through the spon-sorship of approved organizations and insti-tutions that are responsible for establishing aprogram for the exchange visitor and for any

later modification of that program. Generally,an exchange visitor who has the permissionof the sponsor can work for the same reasonsas the students discussed above. In thesecases, permission is granted by a letter fromthe exchange visitor's sponsor or byendorsement from the program sponsor onForm IAP–66, Certificate of Eligibility.

Social security and Medicare taxes are notwithheld on pay for services of an exchangevisitor who has been given permission to workand who possesses or obtains a letter of au-thorization from the sponsor unless the ex-change visitor is considered a resident alien.

In all other cases, services performed byan exchange visitor are not considered asperformed to carry out the purpose for whichthe visitor was admitted to the United States.Social security and Medicare taxes are with-held from pay for the services unless the payis exempt under the Internal Revenue Code.

Your spouse or child may be permitted towork in the United States with the prior ap-proval of the INS and issuance of FormI–688B.

Nonresident aliens admitted to the UnitedStates as participants in cultural exchangeprograms under section 101(a)(15)(Q) of theImmigration and Nationality Act may be ex-empt from social security and Medicare taxes.Aliens with “Q” visas are aliens whose em-ployment or training affords the opportunityfor culture-sharing with the American public.They are allowed to work in the United Statesfor a specific employer in an approved culturalexchange program. The employer must bethe petitioner through whom the alien ob-tained the “Q” visa. Social security and Med-icare taxes are not withheld from pay for thiswork unless the alien is considered a residentalien. Aliens with “Q” visas are not permittedto engage in employment outside the ex-change program activities.

Refund of Taxes Withheld in ErrorIf social security or Medicare taxes werewithheld in error from pay you receive that isnot subject to these taxes, contact the em-ployer who withheld the taxes for reimburse-ment. If you are unable to get a full refund ofthe amount from your employer, file a claimfor refund with the Internal Revenue Serviceon Form 843, Claim for Refund and Requestfor Abatement, and attach a copy of yourForm W–2, Wage and Tax Statement, toprove the amount of social security andMedicare taxes withheld. Also attach a copyof your visa (if not stamped on Form I–94),INS Form I–94, Arrival/Departure Record, andINS Form I–538, Application by NonimmigrantStudent (FI) for Extension to Stay, SchoolTransfer or Permission to Accept or ContinueEmployment. You must also attach a state-ment from your employer indicating theamount of the reimbursement your employerprovided and the amount of the credit or re-fund your employer claimed or you authorizedyour employer to claim. If you cannot obtainthis statement from your employer, you mustprovide this information on your own state-ment and explain why you are not attachinga statement from your employer.

File the claim for refund (with attachments)with the IRS office where your employer'sreturns were filed. If you do not know whereyour employer's returns were filed, file yourclaim with the Internal Revenue ServiceCenter, Philadelphia, PA 19255.


Binational SocialSecurity Agreements The United States has entered into bilateralsocial security agreements with foreigncountries to coordinate social security cover-age and taxation of workers employed for partor all of their working careers in one of thecountries. These agreements are commonlyreferred to as totalization agreements.Agreements with Austria, Belgium, Canada,Finland, France, Germany, Greece, Ireland,Italy, Luxembourg, the Netherlands, Norway,Portugal, Spain, Sweden, Switzerland, andthe United Kingdom are in effect. Otheragreements are also expected to enter intoforce in the future. Under these agreementsdual coverage and dual contributions (taxes)for the same work are eliminated. Theagreements will generally make sure that so-cial security taxes are paid only to one coun-try.

Generally, under these agreements, youwill be subject to social security taxes only inthe country where you are working. However,if you are temporarily sent to work in anothercountry and your pay would normally besubject to social security taxes in both coun-tries, the agreement may provide that you canremain covered only by the social securitysystem of the country from which you weresent. More information on any specificagreement can be obtained by contacting theU.S. Social Security Administration.

To establish that your pay is subject onlyto foreign social security taxes and is exemptfrom U.S. social security taxes (including theMedicare tax) as a result of an agreement,you or your employer should request a state-ment from the appropriate agency of the for-eign country. This will usually be the sameagency to which you or your employer payyour foreign social security taxes. The foreignagency will be able to tell you what informa-tion is needed for them to issue the state-ment. Your employer should keep a copy ofthe statement because it may be needed toshow why you are exempt from U.S. socialsecurity taxes.

You or your employer will need to requesta statement from the foreign agency if youare working in a foreign country and wouldnormally be subject to U.S. social securitytaxes, but are exempt as a result of anagreement. However, some of the countrieswith which the United States has agreementswill not issue statements in these cases.

If the foreign agency refuses to issuethe necessary statement, either youor your employer should request a

statement that your wages are not coveredby the U.S. social security system from the:

U.S. Social Security AdministrationOffice of International PolicyP.O. Box 17741Baltimore, MD 21235.

CAUTION!

Only wages paid on or after the ef-fective date of the agreement can beexempt from U.S. social security

taxes.

Self-Employment Tax Nonresident aliens are not subject to self-employment tax. Self-employment tax is thesocial security and Medicare taxes for indi-viduals who are self-employed. Residents ofthe Virgin Islands, Puerto Rico, Guam, theCommonwealth of the Northern Mariana Is-lands, or American Samoa are consideredU.S. residents for this purpose and are sub-ject to the self-employment tax.

Resident aliens must pay self-employmenttax under the same rules that apply to U.S.citizens. However, although a U.S. citizenemployed by an international organization, aforeign government, or a wholly-owned in-strumentality of a foreign government is sub-ject to the self-employment tax on incomeearned in the United States, a resident alienemployed by such an organization or gov-ernment does not have to pay self-employment tax.

If you are self-employed in both the UnitedStates and in a country with which the UnitedStates has a social security agreement (asdiscussed above), or you temporarily transferyour business activity to or from one of thesecountries, you may be exempt from self-employment tax as a result of the agreement.To establish your exemption, you should writeto the foreign agency to which you pay yourforeign social security tax if you are in theforeign country. If you are in the UnitedStates, write to the Social Security Adminis-tration, Office of International Policy, P.O. Box17741, Baltimore, MD 21235, for a determi-nation of your social security tax liability underthe agreement.

Self-employment income you receivewhile you are a resident alien is subject toself-employment tax even if it was paid forservices you performed as a nonresident al-ien.

Example. Bill Jones is an author engagedin the business of writing books. Bill hadseveral books published in a foreign countrywhile he was a citizen and resident of thatcountry. During 1997, Bill entered the UnitedStates as a resident alien. After becoming aU.S. resident, he continued to receive royal-ties from his foreign publisher. Bill reports hisincome and expenses on the cash basis (hereports income on his tax return when re-ceived and deducts expenses when paid).Bill's 1997 self-employment income includesthe royalties received after he became a U.S.resident even though the books were pub-lished while he was a nonresident alien.

Deduction for one-half of self-employmenttax. If you must pay self-employment tax, youcan deduct one-half of the self-employmenttax paid in figuring your adjusted gross in-come. Get Publication 533 for more informa-tion.

Estimated TaxForm 1040–ES(NR) You may have income from which no U.S.income tax is withheld. Or the amount of taxwithheld may not equal the income tax youestimate you will owe at the end of the year.If so, you may have to pay estimated tax.

Generally, you must make estimated taxpayments for 1998 if you expect to owe atleast $1,000 in tax and you expect your with-

holding and credits to be less than the smallerof:

1) 90% of the tax to be shown on your 1998income tax return, or

2) 100% of the tax shown on your 1997income tax return (if your 1997 returncovered all 12 months of the year).

A nonresident alien should use Form1040–ES(NR) to figure and pay estimatedtax.

How to estimate your tax for 1998. If youfiled a 1997 return on Form 1040NR or Form1040NR–EZ and expect your income, numberof exemptions, and total deductions for 1997to be nearly the same, you should use your1997 return as a guide to complete the Esti-mated Tax Worksheet in the Form1040–ES(NR) instructions. If you did not filea return for 1997, or if your income, ex-emptions, deductions, or credits will be dif-ferent for 1998, you must estimate theseamounts. Figure your estimated tax liabilityusing the Tax Rate Schedule in the 1998Form 1040–ES(NR) instructions for your filingstatus.

Note. If you expect to be a resident ofPuerto Rico during the entire year, use Form1040–ES.

When to pay estimated tax. Make your firstestimated tax payment by the due date forfiling the previous year's Form 1040NR orForm 1040NR–EZ. If you have wages subjectto the same withholding rules that apply toU.S. citizens, you must file Form 1040NR orForm 1040NR–EZ and make your first esti-mated tax payment by April 15, 1998. If youdo not have wages subject to withholding, fileyour income tax return and make your firstestimated tax payment by June 15, 1998.

If your first estimated tax payment is dueApril 15, 1998, you can pay your estimatedtax in full at that time, or in equal installmentsby April 15, 1998, June 15, 1998, September15, 1998, and January 15, 1999. If your firstpayment is not due until June 15, 1998, youcan pay your estimated tax in full at that time,or 1 / 2 of your estimated tax by June 15,1998, 1 / 4 of the tax by September 15, 1998,and 1 / 4 by January 15, 1999.

Fiscal year. If your return is not on acalendar year basis, your due dates are the15th day of the 4th, 6th, and 9th months ofyour fiscal year, and the 1st month of the fol-lowing fiscal year. If any date falls on a Sat-urday, Sunday, or legal holiday, use the nextday that is not a Saturday, Sunday, or legalholiday.

Changes in income, deductions, or ex-emptions. Even if you are not required tomake an estimated tax payment in April orJune, your circumstances may change suchthat you will have to make estimated taxpayments later. This can happen if you re-ceive additional income or if any of your de-ductions are reduced or eliminated. If so, seethe instructions for Form 1040–ES(NR) andPublication 505 for information on figuringyour estimated tax.

Amended estimated tax. If, after you havemade estimated tax payments, you find yourestimated tax is substantially increased ordecreased because of a change in your in-come or exemptions, you should adjust yourremaining estimated tax payments. To do


this, see the instructions for Form1040–ES(NR) and Publication 505.

Addition to tax for failure to pay estimatedincome tax. You will be subject to an addi-tion to tax (penalty) for underpayment of in-stallments of estimated tax except in certainsituations. These exceptions are explainedon Form 2210, Underpayment of EstimatedTax by Individuals, Estates, and Trusts.

9.Tax TreatyBenefits

IntroductionIf you are a nonresident alien from a countrywith which the United States has an incometax treaty, you may qualify for certain benefits.Most treaties require that the alien be a resi-dent of the treaty country to qualify. However,some treaties require that the alien be a na-tional or a citizen of the treaty country.

You can generally arrange to have with-holding tax reduced or eliminated on wagesand other income that is eligible for tax treatybenefits. See Income Entitled to Tax TreatyBenefits in chapter 8.


• Typical tax treaty benefits

• How to obtain copies of tax treaties

• How to claim tax treaty benefits on yourtax return


Publication

m 901 U.S. Tax Treaties




m 8833 Treaty-Based Return PositionDisclosure Under Section 6114or 7701(b)


Treaty Income A nonresident alien's treaty income is thegross income on which the tax is limited bya tax treaty. Treaty income includes, for ex-ample, dividends from sources in the UnitedStates that are subject to tax at a tax treatyrate not to exceed 15%. Nontreaty income is

the gross income other than treaty income ofa nonresident alien.

Figure the tax on treaty income on eachseparate item of income at the reduced ratethat applies to that item under the terms of thetreaty.

To determine tax on nontreaty income,figure a partial tax on nontreaty income eitherat the flat 30% rate or the graduated rate,depending upon whether or not the income iseffectively connected with your trade or busi-ness in the United States.

Your tax liability is the sum of the tax ontreaty income plus the partial tax on nontreatyincome, but cannot be more than the tax li-ability figured as if the tax treaty had not comeinto effect.

Example. Arthur Banks is a nonresidentalien who is single and a resident of a foreigncountry that has a tax treaty with the UnitedStates. He received gross income of $25,500during the tax year from sources within theUnited States, consisting of the followingitems:

Arthur was engaged in business in theUnited States during the tax year. His divi-dends are not effectively connected with thatbusiness. He has no deductions other thanhis own personal exemption.

His tax liability, figured as though the taxtreaty had not come into effect, is $3,641,determined as follows:

Arthur's tax liability, figured by taking intoaccount the reduced rate on dividend incomeas provided by the tax treaty, is $3,431, de-termined as follows:

His tax liability, therefore, is limited to$3,431, the tax liability figured using the taxtreaty rate on the dividends.

Some Typical TaxTreaty Benefits Some general information follows concerningpossible tax treaty benefits for income fromcertain activities in the United States. How-ever, tax treaty benefits also cover such in-come as dividends, interest, rentals, royalties,pensions, and annuities. If you are a resident

of a treaty country and receive this type ofincome, you should consult the applicabletreaty. Get Publication 901, U.S. Tax Treaties,for more information on tax treaties.

The following provisions give a generalexplanation of some benefits found in manytax treaties. Table 9–1, Tax Treaty Articles,on the following page, shows where to findthe provision in each treaty.

Provision A—PersonalServices Nonresident aliens from treaty countries whoare in the United States for a short stay andalso meet certain other requirements may beexempt from tax on their compensation re-ceived for personal services performed in theUnited States. Many tax treaties require thatthe nonresident alien claiming this exemptionbe present in the United States for a total ofnot more than 183 days during the tax year.Other tax treaties specify different periods ofmaximum presence in the United States, suchas 180 days or 90 days. Spending part of aday in the United States counts as a day ofpresence.

Tax treaties may also require that:

1) The compensation cannot be more thana specific amount (frequently $3,000),and

2) The individual have a foreign employer;that is, an individual, corporation, or en-tity of a foreign country.

Provision B—For Teachersand Professors Nonresident alien teachers or professors whoare residents of certain treaty countries andwho temporarily visit the United States for theprimary purpose of teaching at a universityor other accredited educational institution arenot subject to U.S. income tax on compen-sation received for such teaching for the first2 and sometimes 3 years after their arrival inthe United States. Many treaties also provideexemption for engaging in research.

Generally, it must be the primary purposeof the teacher or professor to teach, lecture,instruct, or engage in research. A substantialpart of that person's time must be devoted tothose duties. The normal duties of a teacherinclude not only formal classroom work in-volving regularly scheduled lectures, demon-strations, or other student-participation activ-ities, but also the less formal method ofpresenting ideas in seminars or other informalgroups and in joint efforts in the laboratory.

Provision C—ForEmployees of ForeignGovernments All treaties have provisions for the exemptionof income earned by certain employees offoreign governments. However, a differenceexists among treaties as to who qualifies forthis benefit. Under many treaties, aliens ad-mitted to the United States for permanentresidence do not qualify. Under most treaties,aliens who are not nationals or subjects of theforeign country do not qualify. Employees offoreign governments should read the perti-nent treaty carefully to determine whetherthey qualify for benefits. Chapter 10 of thispublication also has advice for employees offoreign governments.

Dividends on which the tax is limited to a15% rate by the tax treaty ......................... $1,400

Compensation for personal services on which the tax is not limitedby the tax treaty ......................................... 24,100

Total gross income $25,500

Total compensation ................................... $24,100

Less: Personal exemption ......................... 2,650

Taxable income ....................................... $21,450

Tax determined by graduated rate ( TaxTable column for single taxpayers) ........... $3,221

Plus: Tax on gross dividends ($1,400 ×30%) ........................................................... 420

Tax determined as though treaty hadnot come into effect ............................... $3,641

Tax determined by graduated rate (sameas figured above) ....................................... $3,221

Plus: Tax on gross dividends ($1,400 ×15%) ........................................................... 210

Tax on compensation and dividends ... $3,431

Chapter 9 Tax Treaty Benefits

Table 9-1. Tax Treaty Articles

Country A B C D E

AustraliaAustriaBarbadosBelgiumCanada

China, People’s Rep. of1

Commonwealth ofIndependent States2

CyprusCzech RepublicDenmark

EgyptFinlandFranceGermanyGreece

HungaryIcelandIndiaIndonesiaIreland

IsraelItalyJamaicaJapanKazakstan

LuxembourgMexicoMoroccoNetherlands

New ZealandNorwayPakistanPhilippinesPoland

PortugalRomaniaRussiaSlovak RepublicSpain

SwedenSwitzerlandTrinidad and TobagoTunisiaUnited Kingdom

14,15X

XIV,XV

13,14

VI17,18

XI

15,16

18,19

16,17

XII

XI

17X

14,1514,15

14,15

14,1514,1514,15X

13,14

15,1615,16XI

14,1514,1517,18

18,19

14,1514,1515,16

14,1513,14

15,1615,16

15,1614,1513,1414,1515,16

14,15

14,1514,15

XII

20

19

VI

21XIV

22

2020XII

17212220XVIII

23202219

20

XIII

21

15XII2117

2219

21

XII18

20

19XI1919XIX

18

VI2220X

21191919XI

16231918X

22192021

22

XI201720

1917IX2019

2118162021

20XI201919

20XIII2021XX

20

VI2121XIII

23202120XIII

18222119XIX

24212120

21

XIV211822

2026XIII2218

2320182122

21XIII192021

1313XIII

12

III1613

14131313

12161314

15131316

16

131314

1312

1414

1413191313

13

1313

2 The U.S.–U.S.S.R income tax treaty applies to the following countries: Armenia, Azerbaijan, Belarus,Georgia, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan.

1 The U.S.–China tax treaty does not apply to Hong Kong.

Korea14,15 17 19 13

Tax TreatyArticles Table Table 9–1 shows where to find the provisionin each treaty. The columns are lettered A toE, representing the five provisions. The nu-merals represent the number of the tax treatyarticle.

Example. Giovanni Azari, a teacher fromItaly, sees that provision B might cover hissituation. He finds column B of Table 9–1 andgoing down to the line for Italy he finds thathe should read Article 20 of the UnitedStates—Italy income tax treaty, as he mayqualify to exempt from U.S. tax the incomehe receives for teaching in the United States.

Obtaining Copiesof Tax Treaties Use Table 9–1 to see which countries havetax treaties with the United States. The taxtreaties are published in the Internal RevenueBulletins (I.R.B.) or Cumulative Bulletins(C.B.), which contain official matters of theInternal Revenue Service.

Regulations implementing some treatieswere issued as Treasury Decisions (T.D.).Other treaties are explained by Treasury ex-planation. Publication 901 contains a list oftax treaties showing where the applicableT.D. or Treasury explanations are printed.

You can subscribe to the I.R.B. and buyvolumes of the C.B. from the GovernmentPrinting Office. Copies are also available inmost IRS offices and you are welcome to readthem there. Many public libraries and busi-ness organizations subscribe to commercialtax services that publish the treaties andregulations or explanations. You may find itconvenient to use those sources.

Reporting TreatyBenefits Claimed If you claim treaty benefits that override ormodify any provision of the Internal RevenueCode, and by claiming these benefits your taxis, or might be, reduced, you must attach afully completed Form 8833 to your tax return.See Exceptions, below, for the situationswhere you are not required to file Form 8833.

You must file a U.S. tax return and Form8833 if you claim the following treaty benefits.

1) A reduction or modification in the taxa-tion of gain or loss from the dispositionof a U.S. real property interest based ona treaty.

2) A change to the source of an item of in-come or a deduction based on a treaty.

3) A credit for a specific foreign tax forwhich foreign tax credit would not be al-lowed by the Internal Revenue Code.

You must also file Form 8833 if you re-ceive payments or income items totaling morethan $100,000 and you determine yourcountry of residence under a treaty and notunder the rules for residency discussed ear-lier in this publication.

These are the more common situations forwhich Form 8833 is required.

Provision D—For Students,Apprentices, and Trainees Students, apprentices, and trainees generallyare exempt from tax on remittances (includingscholarship and fellowship grants) receivedfrom abroad for study and maintenance. Also,under certain circumstances, a limitedamount of compensation received by stu-dents, apprentices, and trainees may be ex-empt from tax.

Provision E—Capital Gains Most treaties provide for the exemption ofgains from the sale or exchange of personalproperty. Generally, gains from the sale orexchange of real property located in theUnited States is taxable.

The conditions for claiming the ex-emptions vary under each tax treaty. Youshould read the treaty for your country ofresidence to find out what the conditions are.

Chapter 9 Tax Treaty Benefits

Exceptions. You do not have to file Form8833 for any of the following situations.

1) You claim a reduced rate of withholdingtax under a treaty on interest, dividends,rent, royalties, or other fixed or determi-nable annual or periodic income ordi-narily subject to the 30% rate.

2) You claim a treaty reduces or modifiesthe taxation of income from dependentpersonal services, pensions, annuities,social security and other public pen-sions, or income of artists, athletes, stu-dents, trainees, or teachers. This in-cludes taxable scholarship andfellowship grants.

3) You claim a reduction or modification oftaxation of income under an InternationalSocial Security Agreement or a Diplo-matic or Consular Agreement.

4) You are a partner in a partnership or abeneficiary of an estate or trust and thepartnership, estate, or trust reports therequired information on its return.

5) The payments or items of income thatare otherwise required to be disclosedtotal no more than $10,000.

Penalty for failure to provide required in-formation on Form 8833. If you are requiredto report the treaty benefits but do not, youare subject to a penalty of $1,000 for eachfailure.

10.Employeesof ForeignGovernmentsandInternationalOrganizations

Employees of foreign governments (in-cluding foreign municipalities) have two waysto get exemption of their governmental wagesfrom U.S. income tax:

1) By a provision in a tax treaty or consularconvention between the United Statesand their country, or

2) By meeting the requirements of U.S. taxlaw.

Employees of international organizationscan only exempt their wages by meeting therequirements of U.S. tax law.

The exemption discussed in this chapterapplies only to pay received for services per-

formed for a foreign government or interna-tional organization. Other U.S. income re-ceived by persons who qualify for thisexemption may be fully taxable or given fa-vorable treatment under an applicable taxtreaty provision. The proper treatment of thiskind of income (interest, dividends, etc.) isdiscussed earlier in this publication.

ExemptionUnder Tax TreatyIf you are from a country that has a tax treatywith the United States, you should first lookat the treaty to see if there is a provision thatexempts your income. To locate the specificprovisions, see column C of Table 9–1, whichlists tax treaty articles for employees of for-eign governments. The income of U.S. citi-zens and resident aliens working for foreigngovernments usually is not exempt. However,in a few instances, the income of a U.S. citi-zen with dual citizenship may qualify. Oftenthe exemption is limited to the income ofpersons who also are nationals of the foreigncountry involved.

Resident aliens from France. The UnitedStates and France have come to an agree-ment to relieve double taxation of U.S. per-manent residents who receive wages andpensions for governmental services per-formed for the government of France. Gen-erally, if you received income of this type in1997, the income is taxable only in the UnitedStates. If you receive income of this type in1998 and subsequent years, the income istaxable in the United States and France.However, the United States will allow a creditfor taxes paid to France on this income.

ExemptionUnder U.S. Tax LawEmployees of foreign countries who do notqualify under a tax treaty provision and em-ployees of international organizations shouldsee if they can qualify for exemption bymeeting the following requirements of U.S.tax law.

If you are not a citizen of the UnitedStates, or if you are a citizen of the UnitedStates but also a citizen of the Philippines,and you work for a foreign government in theUnited States, your foreign government salaryis exempt from U.S. tax if you perform ser-vices similar to those performed by U.S.Government employees in that foreign coun-try and that foreign government grants anequivalent exemption. If you work for aninternational organization in the UnitedStates, your salary from that source is exemptfrom U.S. tax.

Certification. To qualify for the exemptionunder U.S. tax law, the foreign governmentfor which you work must certify to the De-

partment of State that you are their employeeand that you perform services similar to thoseperformed by employees of the United Statesin your country. However, see the followingdiscussion that may affect your qualifying forthis exemption.

Aliens who file the waiver provided by sec-tion 247(b) of the Immigration and NationalityAct to keep their immigrant status no longerqualify for the exemption from U.S. tax underU.S. tax law from the date of filing the waiverwith the Attorney Genera.

However, aliens who are exempt fromU.S. tax by an income tax treaty, consularagreement, or international agreement be-tween the United States and their country donot lose the exemption if they sign the waiver.

If the international agreement creating theinternational organization for which you workprovides that alien employees are exemptfrom U.S. income tax, your exemption is notaffected by the filing of a section 247(b)waiver. Two international organizations thathave such a provision are the InternationalMonetary Fund (IMF) and the InternationalBank for Reconstruction and Development(World Bank).

CAUTION!

Only employees of international or-ganizations and foreign governmentswho are not U.S. citizens qualify for

the exemption of wages under U.S. tax law.The one exception to this rule is a U.S. citizenwho is also a citizen of the Philippines. Inaddition, the statutory exception applies onlyto current employees and not to former em-ployees. Pensions received by former em-ployees living in this country do not qualify forexemption.

An international organization is an organ-ization designated by the President of theUnited States through Executive Order toqualify for the privileges, exemptions, andimmunities provided in the International Or-ganizations Immunities Act.

Aliens should find out if they have beenmade known to, and have been accepted by,the Secretary of State as officers or employ-ees of that organization, or if they have beendesignated by the Secretary of State, beforeformal notification and acceptance, as pro-spective officers or employees.

Employees of an international organiza-tion claiming exemption should know thenumber of the Executive Order covering theirorganization and should have some writtenevidence of their acceptance or designationby the Secretary of State.

The exemption is denied when, becausethe Secretary of State determines the alien'spresence in the United States is no longerdesirable, an employee leaves the UnitedStates (or after a reasonable time allowed forleaving the United States). The exemption isalso denied when a foreign country does notallow similar exemptions to U.S. citizens.Then the Secretary of State can withdraw theprivileges, exemptions, and immunities fromthe nationals of that foreign country.

Chapter 10 Employees of Foreign Governments and International Organizations

11.Departing Aliensand the Sailingor DeparturePermit

IntroductionBefore leaving the United States, all aliens(except those listed under Aliens Not Re-quired To Obtain Sailing or Departure Per-mits) must obtain a certificate of compliance.This document, also popularly known as thesailing permit or departure permit, is partof the income tax form you must file beforeleaving. You will receive a sailing or departurepermit after filing a Form 1040–C or Form2063. These forms are discussed in thischapter.


• Who needs a sailing permit

• How to get a sailing permit

• Forms you file to get a sailing permit



m 1040–C U.S. Departing Alien IncomeTax Return

m 2063 U.S. Departing Alien Income TaxStatement

See chapter 12 for information about get-ting these forms.

Aliens Required ToObtain Sailing orDeparture PermitsYou generally must pay all U.S. income taxdue on your income subject to U.S. tax duringthe tax year up to the date you leave whenyou file for your sailing or departure permit.Any taxes due for past years will also haveto be paid. However, in some situations, if youcan demonstrate to the Internal RevenueService that your departure does not endan-ger the collection of tax, you can receive asailing or departure permit without paying taxat that time.

If you try to leave the United States with-out a sailing or departure permit, and cannotshow that you qualify to leave without it, youmay be subject to an income tax examinationby an IRS employee at the point of departure.You must then complete the necessary in-come tax returns and statements and, ordi-narily, pay any taxes due.

Aliens Not RequiredTo Obtain Sailingor Departure Permits If you are included in one of the followingcategories, you do not have to get a sailingor departure permit before leaving the UnitedStates.

(1) Representatives of foreign govern-ments with diplomatic passports, whether ac-credited to the United States or other coun-tries, members of their households, andservants accompanying them.

Servants who are leaving, but not with aperson with a diplomatic passport, must geta sailing or departure permit. However, theycan get a sailing or departure permit on Form2063 without examination of their income taxliability by presenting a letter from the chiefof their diplomatic mission certifying that:

1) Their name appears on the “White List”(a list of employees of diplomaticmissions), and

2) They do not owe to the United Statesany income tax, and will not owe any taxup to and including the intended date ofdeparture.

The statement must be presented to anIRS office.

(2) Employees of international organiza-tions and foreign governments (other thandiplomatic representatives exempt under cat-egory (1) and members of their households:

1) Whose compensation for official servicesis exempt from U.S. tax under U.S. taxlaws (described in chapter 10), and

2) Who receive no other income from U.S.sources.

(3) Alien students, industrial trainees, andexchange visitors, including their spousesand children, who enter on an F–1, F–2, H–3,H–4, J–1, J–2, or Q visa only and who receiveno income from U.S. sources while in theUnited States under those visas other than:

1) Allowances to cover expenses incidentto study or training in the United States,such as expenses for travel, mainte-nance, and tuition,

2) The value of any services or food andlodging connected with this study ortraining,

3) Income from employment authorized bythe Immigration and Naturalization Ser-vice (INS), or

4) Certain interest income that is not effec-tively connected with a U.S. trade orbusiness. (See Interest in chapter 3.)

(4) Alien students, including their spousesand children, who enter on an M–1 or M–2visa only and who receive no income fromU.S. sources while in the United States onthose visas, other than—

1) Income from employment authorized bythe Immigration and Naturalization Ser-vice (INS), or

2) Certain interest income that is not effec-tively connected with a U.S. trade orbusiness. (See Interest in chapter 3.)

(5) Certain other aliens temporarily in theUnited States who have received no taxableincome during the tax year up to and includingthe date of departure or during the precedingtax year. If the IRS has reason to believe thatan alien has received income subject to taxand that the collection of income tax is jeop-ardized by departure, it may then require thealien to obtain a sailing or departure permit.Aliens covered by this paragraph are:

1) Alien military trainees who enter theUnited States for training under thesponsorship of the Department of De-fense and who leave the United Stateson official military travel orders,

2) Alien visitors for business on a B–1 visa,or both a B–1 visa and a B–2 visa, whodo not remain in the United States or aU.S. possession for more than 90 daysduring the tax year,

3) Alien visitors for pleasure on a B–2 visa,

4) Aliens in transit through the UnitedStates or any of its possessions on aC–1 visa, or under a contract, such asa bond agreement, between a transpor-tation line and the Attorney General, and

5) Aliens who enter the United States on aborder-crossing identification card; or forwhom passports, visas, and border-crossing identification cards are not re-quired, if they are visitors for pleasure,or visitors for business who do not re-main in the United States or a U.S. pos-session for more than 90 days during thetax year; or if they are in transit throughthe United States or any of its pos-sessions.

(6) Alien residents of Canada or Mexicowho frequently commute between that coun-try and the United States for employment, andwhose wages are subject to the withholdingof U.S. tax.

If you are in one of these categories anddo not have to get a sailing or departure per-mit, you must be able to support your claimfor exemption with proper identification or givethe authority for the exemption.

Exceptions. If you are an alien in category(1) or (2) above, who filed the waiver undersection 247(b) of the Immigration andNationality Act, you must get a sailing or de-parture permit.

If you are an alien in category (1) or (2),whose income is exempt from U.S. tax be-cause of an income tax treaty or internationalagreement, you do not lose this tax ex-emption by signing the section 247(b) waiver.But you must get a sailing or departure permiteven though your income is exempt.

Getting a Sailingor Departure PermitThe following discussion covers when andwhere to get your sailing permit.

Where to get a sailing or departure permit.It is advisable for aliens who have beenworking in the United States to get the permitfrom an IRS office in the area of their em-ployment, but it also can be obtained from anIRS office in the area of their departure.

Chapter 11 Departing Aliens and the Sailing or Departure Permit

When to get a sailing or departure permit.You should get your sailing or departure per-mit at least 2 weeks before you plan to leave.You cannot apply earlier than 30 days beforeyour planned departure date. Do not wait untilthe last minute in case there are unexpectedproblems.

Papers to submit. Getting your sailing ordeparture permit will go faster if you bring tothe IRS office papers and documents relatedto your income and your stay in the UnitedStates. Bring the following records with youif they apply.

1) Your passport and alien registration cardor visa.

2) Copies of your U.S. income tax returnsfiled for the past 2 years. If you were inthe United States for less than 2 years,bring the income tax returns you filed forthat period.

3) Receipts for income taxes paid on thesereturns.

4) Receipts, bank records, canceledchecks, and other documents that proveyour deductions, business expenses,and dependents claimed on your returns.

5) A statement from each employer show-ing wages paid and tax withheld fromJanuary 1 of the current year to the dateof departure if you were an employee. Ifyou were self-employed, you must bringa statement of income and expenses upto the date you plan to leave.

6) Proof of estimated tax payments for thepast year and this year.

7) Documents showing any gain or lossfrom the sale of personal property, in-cluding capital assets and merchandise.

8) Documents relating to scholarship orfellowship grants including verification ofthe grantor, source, and purpose of thegrant.

9) Documents indicating you qualify for anyspecial tax treaty benefits claimed.

Forms To File If you must get a sailing or departure permit,you must file Form 2063 or Form 1040–C.Employees in the IRS office can assist in filingthese forms. Both forms have a “certificateof compliance” section. When the certificateof compliance is signed by an agent of theDistrict Director, it certifies that your U.S. taxobligations have been satisfied according toavailable information. Your Form 1040–Ccopy of the signed certificate, or the one de-tached from Form 2063, is your sailing ordeparture permit.

Form 2063. This is a short form that asksfor certain information but does not include atax computation. The following departing al-iens can get their sailing or departure permitsby filing Form 2063.

1) Aliens, whether resident or nonresident,who have had no taxable income for thetax year up to and including the date ofdeparture and for the preceding year, ifthe period for filing the income tax returnfor that year has not expired.

2) Resident aliens who have received tax-able income during the tax year or pre-ceding year and whose departure will nothinder the collection of any tax. How-ever, if the IRS has information indicatingthat the aliens are leaving to avoid pay-ing their income tax, they must file aForm 1040–C.

Aliens in either of these categories whohave not filed an income tax return or paidincome tax for any tax year must file the re-turn and pay the income tax before they canbe issued a sailing or departure permit onForm 2063.

The sailing or departure permit detachedfrom Form 2063 can be used for all depar-tures during the current year. However, theIRS may cancel the sailing or departure per-mit for any later departure if they believe thecollection of income tax is jeopardized by thatlater departure.

Form 1040–C. If you must get a sailing ordeparture permit and you do not qualify to fileForm 2063, you must file Form 1040–C.

Ordinarily, all income received or reason-ably expected to be received during the taxyear up to and including the date of departuremust be reported on Form 1040–C and thetax on it must be paid. When you pay any taxshown as due on the Form 1040–C, and youfile all returns and pay all tax due for previousyears, you will receive a sailing or departurepermit. However, the IRS may permit you tofurnish a bond or an employer letter guaran-teeing payment instead of paying the taxesfor certain years. See Bond or Employer Let-ter To Ensure Payment, discussed later. Thesailing or departure permit issued under theconditions in this paragraph is only for thespecific departure for which it is issued.

If you submit an employer letter guaran-teeing payment of tax with your Form1040–C, you do not need to fill out the formin detail. Just fill out the identifying informationon the form, sign it, and attach the letter. TheIRS office where you submit the form will thenissue your sailing or departure permit.

Returning to the United States. If you fur-nish the IRS with information showing, to thesatisfaction of the IRS, that you intend to re-turn to the United States and that your de-parture does not jeopardize the collection ofincome tax, you can get a sailing or departurepermit by filing Form 1040–C without havingto pay the tax shown on it. You must, how-ever, file all income tax returns that have notyet been filed as required, and pay all incometax that is due on these returns.

Your Form 1040–C must include all in-come received and reasonably expected tobe received during the entire year of depar-ture. The sailing or departure permit issuedwith this Form 1040–C can be used for alldepartures during the current year. However,the Service may cancel the sailing or depar-

ture permit for any later departure if the pay-ment of income tax appears to be in jeopardy.

Joint return on Form 1040–C. Departinghusbands and wives who are nonresident al-iens cannot file joint returns. However, if bothspouses are resident aliens, they can file ajoint return on Form 1040–C if:

1) Both spouses can reasonably be ex-pected to qualify to file a joint return atthe normal close of their tax year, and

2) The tax years of the spouses end at thesame time.

Bond or EmployerLetterTo Ensure Payment Usually, you must pay the tax shown as dueon Form 1040–C when you file it. However,if you pay all taxes due that you owe for prioryears, you can furnish a bond or an employerletter guaranteeing payment instead of payingthe income taxes shown as due on the Form1040–C or the tax return for the precedingyear if the period for filing that return has notexpired.

The bond must equal the tax due plus in-terest to the date of payment as figured by theIRS. Information about the form of bond andsecurity on it can be obtained from your IRSoffice.

Paying Taxesand ObtainingRefundsExcept when a bond or an employer letter isfurnished, or the IRS is satisfied that yourdeparture does not jeopardize the collectionof income tax, you must pay all tax shown asdue on the Form 1040–C at the time of filingit. If the tax computation on Form 1040–Cresults in an overpayment, there is no tax topay at the time you file that return. However,the IRS cannot provide a refund at the timeof departure. If you are due a refund, youmust file either Form 1040NR or Form1040NR–EZ at the end of the tax year.

Filing Annual U.S.Income Tax ReturnsForm 1040–C is not an annual U.S. incometax return. If an income tax return is requiredby law, that return must be filed even thougha Form 1040–C has already been filed.Chapters 5 and 7 discuss filing an annualU.S. income tax return. The tax paid withForm 1040–C should be taken as a creditagainst the tax liability for the entire tax yearon your annual U.S. income tax return.

Chapter 11 Departing Aliens and the Sailing or Departure Permit

12.How To GetMoreInformation

You can get help from the IRS in severalways.

Free publications and forms. To order freepublications and forms, call 1–800–TAX-FORM (1–800–829–3676). You can alsowrite to the IRS Forms Distribution Centernearest you. Check your income tax packagefor the address. Your local library or post of-fice also may have the items you need.

For a list of free tax publications, orderPublication 910, Guide to Free Tax Services.It also contains an index of tax topics andrelated publications and describes other freetax information services available from IRS,including tax education and assistance pro-grams.

If you have access to a personal computerand modem, you also can get many formsand publications electronically. See Quickand Easy Access to Tax Help and Forms inyour income tax package for details.

Tax questions. You can call the IRS withyour tax questions. Check your income taxpackage or telephone book for the localnumber, or you can call 1–800–829–1040.

You can write to the IRS with your taxquestions. The address for assistance is:

Internal Revenue ServiceAssistant Commissioner (International)Attn: CP:IN:D:CS950 L'Enfant Plaza South, S.W.Washington, DC 20024.

TTY/TDD equipment. If you have access toTTY/TDD equipment, you can call1–800–829–4059 to ask tax questions or toorder forms and publications. See your in-come tax package for the hours of operation.

Evaluating the quality of our telephoneservices. To ensure that IRS representativesgive accurate, courteous, and professionalanswers, we evaluate the quality of our “800number” telephone services in several ways.

• A second IRS representative sometimesmonitors live telephone calls. That persononly evaluates the IRS assistor and doesnot keep a record of any taxpayer's nameor tax identification number.

• We sometimes record telephone calls toevaluate IRS assistors objectively. Wehold these recordings no longer than oneweek and use them only to measure thequality of assistance.

• We value our customers' opinions.Throughout this year, we will be survey-ing our customers for their opinions onour service.

Chapter 12 How To Get More Information

Appendix A

This appendix contains thestatements nonresident alienstudents must file with Form8233, Exemption From With-holding on Compensation for In-dependent (and Certain De-pendent) Personal Services of aNonresident Alien Individual, toclaim a tax treaty exemption fromwithholding of tax on compen-sation for dependent personalservices. See chapter 8 for moreinformation on withholding.

Belgium, Iceland,Japan, Korea,Norway, Poland,and RomaniaI was a resident of [insertthe name of the country underwhose treaty you claimexemption] on the date of myarrival in the United States. I amnot a U.S. citizen. I have notbeen lawfully accorded the privi-lege of residing permanently inthe United States as an immi-grant.

I am temporarily present inthe United States for the primarypurpose of studying at[insert the name of the universityor other recognized educationalinstitution at which you study].

I will receive compensationfor personal services performedin the United States. This com-pensation qualifies for exemptionfrom withholding of federal in-come tax under the tax treatybetween the United Statesand [insert the name ofthe country under whose treatyyou claim exemption] in anamount not in excess of $2,000for any tax year. I have not pre-viously claimed an income taxexemption under this treaty forincome received as a teacher,researcher, or student before thedate of my arrival in the UnitedStates.

I will be present in the UnitedStates only for such period oftime as may be reasonably orcustomarily required toeffectuate the purpose of thisvisit.

I arrived in the United Stateson [insert the date ofyour last arrival in the UnitedStates before beginning study atthe U.S. educational institution].The treaty exemption is availableonly for compensation paid dur-ing a period of five tax years be-ginning with the tax year that in-cludes my arrival date.

People's Republicof ChinaI was a resident of the People'sRepublic of China on the date ofmy arrival in the United States. Iam not a U.S. citizen. I have notbeen lawfully accorded the privi-lege of residing permanently inthe United States as an immi-grant.

I am present in the UnitedStates solely for the purpose ofmy education or training.

I will receive compensationfor personal services performedin the United States. This com-pensation qualifies for exemptionfrom withholding of federal in-come tax under the tax treatybetween the United States andthe People's Republic of Chinain an amount not in excess of$5,000 for any tax year.

I arrived in the United Stateson [insert the date ofyour last arrival in the UnitedStates before beginning study ortraining]. I am claiming this ex-emption only for such period oftime as is reasonably necessaryto complete the education ortraining.

CyprusI was a resident of Cyprus on thedate of my arrival in the UnitedStates. I am not a U.S. citizen. Ihave not been lawfully accordedthe privilege of residing perma-nently in the United States as animmigrant.

I am temporarily present inthe United States for the primarypurpose of studying at [insert the name of the universityor other recognized educationalinstitution at which you study].

I will receive compensationfor personal services performedin the United States. This com-pensation qualifies for exemptionfrom withholding of federal in-come tax under the tax treatybetween the United States andCyprus in an amount not in ex-cess of $2,000 for any tax year.I have not previously claimed anincome tax exemption under thattreaty for income received as astudent before the date of myarrival in the United States.

I arrived in the United Stateson [insert the date ofyour last arrival in the UnitedStates before beginning study atthe U.S. educational institution].The treaty exemption is availableonly for compensation paid dur-ing a period of five tax years be-ginning with the tax year that in-cludes my arrival date, and forsuch additional period of time asis necessary to complete, as afull-time student, educational re-quirements as a candidate for a

postgraduate or professional de-gree from a recognized educa-tional institution.

EgyptI was a resident of Egypt on thedate of my arrival in the UnitedStates. I am not a U.S. citizen. Ihave not been lawfully accordedthe privilege of residing perma-nently in the United States as animmigrant.


I will receive compensationfor personal services performedin the United States. This com-pensation qualifies for exemptionfrom withholding of federal in-come tax under the tax treatybetween the United States andEgypt in an amount not in excessof $3,000 for any tax year. I havenot previously claimed an in-come tax exemption under thattreaty for income received as ateacher, researcher, or studentbefore the date of my arrival inthe United States.


I arrived in the United Stateson [insert the date ofyour last arrival in the UnitedStates before beginning study atthe U.S. educational institution].The treaty exemption is availableonly for compensation paid dur-ing a period of five tax years be-ginning with the tax year that in-cludes my arrival date, and forsuch period of time as is neces-sary to complete, as a full-timestudent, educational require-ments as a candidate for a post-graduate or professional degreefrom a recognized educationalinstitution.

GermanyI was a resident of the FederalRepublic of Germany on the dateof my arrival in the United States.I am not a U.S. citizen. I havenot been lawfully accorded theprivilege of residing permanentlyin the United States as an immi-grant.

I am temporarily present inthe United States as a studentor business apprentice for thepurpose of full-time study ortraining at [insert thename of the accredited univer-sity, college, school or other ed-ucational institution]; or, I amtemporarily present in the United

States as a recipient of a grant,allowance, or award from

[insert the name of thenonprofit organization or govern-ment institution providing thegrant, allowance, or award].

I will receive compensationfor dependent personal servicesperformed in the United States.This compensation qualifies forexemption from withholding offederal income tax under the taxtreaty between the United Statesand the Federal Republic ofGermany in an amount not inexcess of $5,000 for any taxyear, provided that such servicesare performed for the purposeof supplementing funds other-wise available for my mainte-nance, education, or training.

I arrived in the United Stateson [insert the date ofyour last arrival in the UnitedStates before beginning study atthe U.S. educational institution].The treaty exemption is availableonly for compensation paid dur-ing a period of four tax yearsbeginning with the tax year thatincludes my arrival date.

IndonesiaI was a resident of Indonesia onthe date of my arrival in theUnited States. I am not a UnitedStates citizen. I have not beenlawfully accorded the privilegeof residing permanently in theUnited States as an immigrant.

I am temporarily present inthe United States solely for thepurpose of study at [insert the name of the universityor other accredited educationalinstitution at which you study];or, I am temporarily present inthe United States as a recipientof a grant, allowance or awardfrom [insert the name ofthe nonprofit organization orgovernment institution providingthe grant, allowance, or award]for the primary purpose of study,research, or training.

I will receive compensationfor services performed in theUnited States. This compen-sation qualifies for exemptionfrom withholding of federal in-come tax under the tax treatybetween the United States andIndonesia in an amount not inexcess of $2,000 for my tax year,provided such services are per-formed in connection with mystudies or are necessary for mymaintenance.

I arrived in the United Stateson [insert the date ofyour last arrival in the UnitedStates before beginning study atthe U.S. educational institution].The treaty exemption is availableonly for compensation paid dur-ing a period of five tax years be-

ginning with the tax year that in-cludes my arrival date.

MoroccoI was a resident of Morocco onthe date of my arrival in theUnited States. I am not a U.S.citizen. I have not been lawfullyaccorded the privilege of residingpermanently in the United Statesas an immigrant.


I will receive compensationfor personal services performedin the United States. This com-pensation qualifies for exemptionfrom withholding of federal in-come tax under the tax treatybetween the United States andMorocco in an amount not in ex-cess of $2,000 for any tax year.I have not previously claimed anincome tax exemption under thattreaty for income received as astudent before the date of myarrival in the United States.

I arrived in the United Stateson [insert the date ofyour last arrival in the UnitedStates before beginning study atthe U.S. educational institution].The treaty exemption is availableonly for compensation paid dur-ing a period of five tax years,beginning with the tax year thatincludes my arrival date.

PakistanI am a resident of Pakistan. I amnot a U.S. citizen. I have notbeen lawfully accorded the privi-lege of residing permanently inthe United States as an immi-grant.

I am temporarily present inthe United States solely as astudent at [insert thename of the recognized univer-sity, college or school in theUnited States at which youstudy].

I will receive compensationfor personal services performedin the United States. This com-pensation qualifies for exemption

from withholding of federal in-come tax under the tax treatybetween the United States andPakistan in an amount not in ex-cess of $5,000 for any tax year.

PhilippinesI was a resident of thePhilippines on the date of myarrival in the United States. I amnot a U.S. citizen. I have notbeen lawfully accorded the privi-lege of residing permanently inthe United States as an immi-grant.


I will receive compensationfor personal services performedin the United States. This com-pensation qualifies for exemptionfrom withholding of federal in-come tax under the tax treatybetween the United States andPhilippines in an amount not inexcess of $3,000 for any taxyear. I have not previouslyclaimed an income tax ex-emption under that treaty for in-come received as a teacher, re-searcher, or student before thedate of my arrival in the UnitedStates.


I arrived in the United Stateson [insert the date ofyour last arrival in the UnitedStates before beginning study atthe U.S. educational institution].The treaty exemption is availableonly for compensation paid dur-ing a period of five tax years be-ginning with the tax year that in-cludes my arrival date.

SpainI was a resident of Spain on thedate of my arrival in the UnitedStates. I am not a U.S. citizen. Ihave not been lawfully accordedthe privilege of residing perma-nently in the United States as animmigrant.

I am temporarily present inthe United States for the primarypurpose of studying or trainingat [insert the name of theuniversity or other accreditededucational institution at whichyou study or train]; or, I am tem-porarily present in the UnitedStates as a recipient of a grant,allowance, or award from

[insert the name of thenonprofit organization or govern-ment institution providing thegrant, allowance or award].

I will receive compensationfor services performed in theUnited States. This compen-sation qualifies for exemptionfrom withholding of federal in-come tax under the tax treatybetween the United States andSpain in an amount not in excessof $5,000 for any tax year.

I arrived in the United Stateson [insert the date ofyour last arrival in the UnitedStates before beginning study atthe United States educationalinstitution]. The treaty exemptionis available only for compen-sation paid during a period of fivetax years beginning with the taxyear that includes my arrivaldate.

Trinidad andTobagoI was a resident of Trinidad andTobago on the date of my arrivalin the United States. I am not aU.S. citizen. I have not beenlawfully accorded the privilegeof residing permanently in theUnited States as an immigrant.

I am temporarily present inthe United States for the primarypurpose of studying at [insert the name of the universityor other accredited educationalinstitution at which you study].

I will receive compensationfor personal services performedin the United States. This com-pensation qualifies for exemptionfrom withholding of federal in-come tax under the tax treatybetween the United States andTrinidad and Tobago in anamount not in excess of $2,000

for any tax year. I have not pre-viously claimed an income taxexemption under this treaty forincome received as a teacher,researcher, or student before thedate of my arrival in the UnitedStates.


I arrived in the United Stateson [insert the date ofyour last arrival in the UnitedStates before beginning study atthe U.S. educational institution].The treaty exemption is availableonly for compensation paid dur-ing a period of five tax years.

TunisiaI was a resident of Tunisia on thedate of my arrival in the UnitedStates. I am not a U.S. citizen. Ihave not been lawfully accordedthe privilege of residing perma-nently in the United States as animmigrant.

I am temporarily present inthe United States for the purposeof full-time study, training, or re-search at [insert thename of the university or otheraccredited educational institutionat which you study, train, or per-form research].

I will receive compensationfor services performed in theUnited States. This compen-sation qualifies for exemptionfrom withholding of federal in-come tax under the tax treatybetween the United States andTunisia in an amount not in ex-cess of $4,000 for any tax year.

I arrived in the United Stateson [insert the date ofyour last arrival in the UnitedStates before beginning study atthe United States educationalinstitution]. The treaty exemptionis available only for compen-sation paid during a period of fivetax years beginning with the taxyear that includes my arrivaldate.

Appendix B

This appendix contains thestatements nonresident alienteachers and researchers mustfile with Form 8233, ExemptionFrom Withholding on Compen-sation for Independent (andCertain Dependent) PersonalServices of a Nonresident AlienIndividual, to claim a tax treatyexemption from withholding oftax on compensation for de-pendent personal services. Seechapter 8 for more informationon withholding.

Austria, Denmark,Ireland, Pakistan,and SwitzerlandI am a resident of [insertthe name of the country underwhose treaty you claimexemption]. I am not a U.S. citi-zen. I have not been lawfully ac-corded the privilege of residingpermanently in the United Statesas an immigrant.

I am a professor or teachervisiting the United States for thepurpose of teaching at [insert the name of the educa-tional institution at which youteach], which is a recognizededucational institution. I will re-ceive compensation for myteaching activities.

The teaching compensationreceived during the entire taxyear (or during the period from

to ) qualifies for ex-emption from withholding of fed-eral tax under the tax treaty be-tween the United Statesand [insert the name ofthe country under whose treatyyou claim exemption]. I have notpreviously claimed an income taxexemption under this treaty forincome received as a teacher orstudent before the date of myarrival in the United States.

I arrived in the United Stateson [insert the date ofyour last arrival into the UnitedStates before beginning theteaching services for which ex-emption is claimed]. The treatyexemption is available only forcompensation paid during a pe-riod of two years beginning onthat date.

Belgium and JapanI was a resident of [insertthe name of the country underwhose treaty you claim theexemption] on the date of myarrival in the United States. I amnot a U.S. citizen. I have notbeen lawfully accorded the privi-lege of residing permanently inthe United States as an immi-grant.

I have accepted an invitationby the U.S. government, or by a

university or other recognizededucational institution in theUnited States, to come to theUnited States for the purpose ofteaching or engaging in researchat [insert the name of theeducational institution], which isa recognized educational institu-tion. I will receive compensationfor my teaching or research ac-tivities.

The teaching or researchcompensation received duringthe entire tax year (or during theportion of the year from to ) qualifies for exemptionfrom withholding of federal taxunder the tax treaty between theUnited States and [insertthe name of the country underwhose treaty you claimexemption]. I have not previouslyclaimed an income tax ex-emption under this treaty for in-come received as a teacher, re-searcher, or student before thedate of my arrival in the UnitedStates.

Any research I perform willbe undertaken in the public in-terest and not primarily for theprivate benefit of a specific per-son or persons.

I arrived in the United Stateson [insert the date ofyour last arrival in the UnitedStates before beginning theteaching or research services forwhich the exemption is claimed].The treaty exemption is availableonly for compensation receivedduring a period of two years be-ginning on that date.

People's Republicof ChinaI was a resident of the People'sRepublic of China on the date ofmy arrival in the United States. Iam not a U.S. citizen. I have notbeen lawfully accorded the privi-lege of residing permanently inthe United States as an immi-grant.

I am visiting the United Statesfor the purpose of teaching, giv-ing lectures, or conducting re-search at [insert thename of the educational institu-tion or scientific research institu-tion at which you teach, lecture,or conduct research], which isan accredited educational insti-tution or scientific research insti-tution. I will receive compen-sation for my teaching, lecturing,or research activities.

The teaching, lecturing, orresearch compensation receivedduring the entire tax year (orduring the period from to ) qualifies for exemptionfrom withholding of federal taxunder the tax treaty between theUnited States and the People's

Republic of China. I have notpreviously claimed an income taxexemption under that treaty forincome received as a teacher,lecturer, researcher, or studentbefore the date of my arrival inthe United States.


I arrived in the United States [insert the date of your

last arrival in the United Statesbefore beginning your teaching,lecturing, or research activities].The treaty exemption is availableonly for compensation receivedduring a maximum aggregateperiod of three years.

Commonwealth ofIndependent StatesI am a resident of [insertname of C.I.S member]. I am nota U.S. citizen. I have not beenlawfully accorded the privilegeof residing permanently in theUnited States as an immigrant.

I have accepted an invitationby a governmental agency or in-stitution in the United States, orby an educational or scientificresearch institution in the UnitedStates, to come to the UnitedStates for the purpose of teach-ing, engaging in research, orparticipating in scientific, techni-cal, or professional conferencesat [insert the name of thegovernmental agency or institu-tion, educational or scientific in-stitution, or organization spon-soring a professionalconference], which is a govern-mental agency or institution, aneducational or scientific institu-tion, or an organization sponsor-ing a professional conference. Iwill receive compensation for myteaching, research, or confer-ence activities.

The teaching, research, orconference compensation re-ceived during the entire tax year(or during the period from to ) qualifies for exemptionfrom withholding of federal taxunder the tax treaty between theUnited States and the formerUnion of Soviet Socialist Repub-lics. I have not previouslyclaimed an income tax ex-emption under that treaty for in-come received as a teacher, re-searcher, conference participant,or student before the date of myarrival in the United States.

Any research I perform willnot be undertaken primarily forthe benefit of a private personor commercial enterprise of theUnited States or a foreign tradeorganization of [insert

name of C.I.S. member], unlessthe research is conducted on thebasis of intergovernmentalagreements on cooperation.

I arrived in the United Stateson [insert the date ofyour last arrival in the UnitedStates before beginning theteaching, research, or confer-ence services for which ex-emption is claimed]. The treatyexemption is available only forcompensation received during aperiod of two years beginning onthat date.

Egypt, Hungary,Korea,Philippines, Poland,and RomaniaI was a resident of [insertthe name of the country underwhose treaty you claimexemption] on the date of myarrival in the United States. I amnot a U.S. citizen. I have notbeen lawfully accorded the privi-lege of residing permanently inthe United States as an immi-grant.

I have accepted an invitationby the U.S. government (or by apolitical subdivision or local au-thority thereof), or by a universityor other recognized educationalinstitution in the United States fora period not expected to exceedtwo years for the purpose ofteaching or engaging in researchat [insert the name of theeducational institution], which isa recognized educational institu-tion. I will receive compensationfor my teaching or research ac-tivities.

The teaching or researchcompensation received duringthe entire tax year (or for theportion of the year from to ) qualifies for exemptionfrom withholding of federal taxunder the tax treaty between theUnited States and [insertthe name of the country underwhose treaty you claimexemption]. I have not previouslyclaimed an income tax ex-emption under this treaty for in-come received as a teacher, re-searcher, or student before thedate of my arrival in the UnitedStates.


I arrived in the United Stateson [insert the date ofyour last arrival in the UnitedStates before beginning theteaching or research services forwhich exemption is claimed]. Thetreaty exemption is available only

for compensation received dur-ing a period of two years begin-ning on that date.

GermanyI am a resident of the FederalRepublic of Germany. I am nota United States citizen. I havenot been lawfully accorded theprivilege of residing permanentlyin the United States as an immi-grant.

I am a professor or teachervisiting the United States for thepurpose of advanced study,teaching, or research at [insert the name of the accred-ited university, college, school,or other educational institution,or a public research institutionor other institution engaged inresearch for the public benefit]. Iwill receive compensation for myteaching, research, or study ac-tivities.

The compensation receivedduring the entire tax year (orduring the period from to ) for these activitiesqualifies for exemption fromwithholding of federal tax underthe tax treaty between the UnitedStates and the Federal Republicof Germany. I have not previ-ously claimed an income tax ex-emption under that treaty for in-come received as a student,apprentice, or trainee during theimmediately preceding period.(If, however, following the periodin which the alien claimed bene-fits as a student, apprentice, ortrainee, that person returned tothe Federal Republic of Germanyand resumed residence andphysical presence before return-ing to the United States as ateacher or researcher, that per-son may claim the benefits of thistreaty.)


I arrived in the United Stateson [insert the date ofyour last arrival into the UnitedStates before beginning the ser-vices for which the exemption isclaimed]. The treaty exemptionis available only for compen-sation paid during a period of twoyears beginning on that date.

GreeceI am a resident of Greece. I amnot a U.S. citizen. I have notbeen lawfully accorded the privi-lege of residing permanently inthe United States as an immi-grant.

I am a professor or teachervisiting the United States for thepurpose of teaching at [insert the name of the other ed-ucational institution at which youteach], which is an educational

institution. I will receive compen-sation for my teaching activities.

The teaching compensationreceived during the entire taxyear (or during the period from

to ) qualifies for ex-emption from withholding of fed-eral tax under the tax treaty be-tween the United States andGreece. I have not previouslyclaimed an income tax ex-emption under that treaty for in-come received as a teacher orstudent before the date of myarrival in the United States.

I arrived in the United Stateson [insert the date ofyour last arrival in the UnitedStates before beginning theteaching services for which ex-emption is claimed]. The treatyexemption is available only forcompensation received during aperiod of three years beginningon that date.

Iceland and NorwayI was a resident of [insertthe name of the country underwhose treaty you claimexemption] on the date of myarrival in the United States. I amnot a U.S. citizen. I have notbeen lawfully accorded the privi-lege of residing permanently inthe United States as an immi-grant.

I have accepted an invitationby the U.S. government, or by auniversity or other recognizededucational institution in theUnited States for a period notexpected to exceed two years forthe purpose of teaching or en-gaging in research at [insert the name of the educa-tional institution], which is a rec-ognized educational institution. Iwill receive compensation for myteaching or research activities.

The teaching or researchcompensation qualifies for ex-emption from withholding of fed-eral tax under the tax treaty be-tween the United States and

[insert the name of thecountry under whose treaty youclaim exemption]. I have notpreviously claimed an income taxexemption under this treaty forincome received as a teacher,researcher, or student before thedate of my arrival in the UnitedStates.

Any research I perform willnot be undertaken primarily forthe private benefit of a specificperson or persons.

I arrived in the United Stateson [insert the date ofyour last arrival in the UnitedStates before beginning theteaching or research services forwhich exemption is claimed]. Thetreaty exemption is available onlyfor compensation received dur-ing a period of two years begin-ning on that date.

IndiaI was a resident of India on thedate of my arrival in the UnitedStates. I am not a United Statescitizen. I have not been lawfullyaccorded the privilege of residingpermanently in the United Statesas an immigrant.

I am visiting the United Statesfor the purpose of teaching orconducting research at [insert the name of the university,college, or other recognized ed-ucational institution]. I will re-ceive compensation for myteaching or study activities.

The teaching or researchcompensation received duringthe entire tax year (or during theperiod from to )for these activities qualifies forexemption from withholding offederal tax under the tax treatybetween the United States andIndia.


I arrived in the United Stateson [insert the date ofyour last arrival into the UnitedStates before beginning the ser-vices for which the exemption isclaimed]. The treaty exemptionis available only for compen-sation paid during a period of twoyears beginning on that date.

IndonesiaI was a resident of Indonesia onthe date of my arrival in theUnited States. I am not a U.S.citizen. I have not been lawfullyaccorded the privilege of residingpermanently in the United Statesas an immigrant.

I have accepted an invitationby [insert the name ofthe university, college, school,or other similar educationalinstitution] to come to the UnitedStates solely for the purpose ofteaching or engaging in researchat that educational institution. Iwill receive compensation for myteaching or research activities.

The teaching or researchcompensation received duringthe entire tax year (or during theperiod from to )qualifies for exemption fromwithholding of federal tax underthe tax treaty between the UnitedStates and Indonesia. I have notpreviously claimed an income taxexemption under that treaty forincome received as a teacher orresearcher before the datespecified in the next paragraph.

I arrived in the United Stateson [insert the date ofyour arrival into the UnitedStates before beginning theteaching or research services forwhich the exemption is claimed].The treaty exemption is availableonly for compensation paid dur-

ing a period of two years begin-ning on that date.


ItalyI was a resident of Italy on thedate of my arrival in the UnitedStates. I am not a U.S. citizen. Ihave not been accorded theprivilege of residing permanentlyin the United States as an immi-grant.

I am a professor or teachervisiting the United States for thepurpose of teaching or perform-ing research at [insertthe name of the educational in-stitution or medical facility atwhich you teach or performresearch], which is an educa-tional institution or a medical fa-cility primarily funded from gov-ernmental sources. I will receivecompensation for my teachingor research activities.

The compensation receivedduring the entire tax year (orduring the period from to ) qualifies for exemptionfrom withholding of federal taxunder the tax treaty between theUnited States and Italy. I havenot previously claimed an in-come tax exemption under thattreaty for income received as ateacher, researcher, or studentbefore the date of my arrival inthe United States.

Any research I perform willbe undertaken in the general in-terest and not primarily for theprivate benefit of a specific per-son or persons.


JamaicaI was a resident of Jamaica onthe date of my arrival in theUnited States. I am not a U.S.citizen. I have not been lawfullyaccorded the privilege of residingpermanently in the United Statesas an immigrant.

I am visiting the United Statesfor the purpose of teaching orconducting research for a periodnot expected to exceed twoyears at [insert the nameof the educational institution atwhich you teach or conductresearch], which is a recognizededucational institution. I will re-ceive compensation for myteaching or research activities.

The teaching or researchcompensation received during

the entire tax year (or during theperiod from to ) qual-ifies for exemption from with-holding of federal tax under thetax treaty between the UnitedStates and Jamaica. I have notpreviously claimed an income taxexemption under that treaty forincome received as a teacher,researcher, or student before thedate of my arrival in the UnitedStates.

I arrived in the United Stateson [insert the date ofyour last arrival in the UnitedStates before beginning theteaching or research services forwhich exemption is claimed]. Thetreaty exemption is available onlyfor compensation paid during aperiod of two years beginning onthat date.

LuxembourgI am a resident of Luxembourg.I am not a U.S. citizen. I havenot been lawfully accorded theprivilege of residing permanentlyin the United States as an immi-grant.

I have accepted an invitationby [insert the name ofthe educational institution whereyou teach or engage inresearch], which is a recognizededucational institution, to cometo the United States for the pur-pose of teaching or engaging inresearch at that institution. I willreceive compensation for myteaching or research activities.

The teaching or researchcompensation received duringthe entire tax year (or during theperiod from to ) qual-ifies for exemption from with-

holding of federal tax under thetax treaty between the UnitedStates and Luxembourg. I havenot previously claimed an in-come tax exemption under thattreaty for income received as ateacher, researcher, or studentbefore the date of my arrival inthe United States.

Any research I perform willnot be carried on for the benefitof any person using or dissem-inating the results for purposesof profit.


Trinidad andTobagoI was a resident of Trinidad andTobago on the date of my arrivalin the United States. I am not aU.S. citizen. I have not beenlawfully accorded the privilegeof residing permanently in theUnited States as an immigrant.

I have accepted an invitationby the U.S. government, or by auniversity or other educationalinstitution in the United States,to come to the United States forthe purpose of teaching or en-gaging in research at[insert the name of the educa-tional institution], which is aneducational institution approvedby an appropriate governmental

education authority. No agree-ment exists between the gov-ernment of the United States andthe government of Trinidad andTobago for the provision of myservices. I will receive compen-sation for my teaching or re-search services.

The teaching or researchcompensation received duringthe entire tax year (or for theperiod from to ) qual-ifies for exemption from with-holding of federal tax under thetax treaty between the UnitedStates and Trinidad and Tobago.I have not previously claimed anincome tax exemption under thattreaty for income received as ateacher, researcher, or studentbefore the date of my arrival inthe United States.


I arrived in the United Stateson [insert the date ofyour last arrival in the UnitedStates before beginning theteaching or research services forwhich exemption is claimed}.The treaty exemption is availableonly for compensation receivedduring a period of two years be-ginning on that date.

United KingdomI was a resident of the UnitedKingdom on the date of my ar-rival in the United States. I amnot a U.S. citizen. I have notbeen accorded the privilege ofresiding permanently in theUnited States as an immigrant.

I am a professor or teachervisiting the United States for aperiod of not more than twoyears for the purpose of teachingor engaging in research at

[insert the name of theeducational institution], which isa recognized educational institu-tion. I will receive compensationfor my teaching or research ac-tivities.

The teaching or researchcompensation received duringthe entire tax year (or during theperiod from to ) qual-ifies for exemption from with-holding of federal tax under thetax treaty between the UnitedStates and the United Kingdom.I have not previously claimed anincome tax exemption under thattreaty for income received as ateacher, researcher, or studentbefore the date of my arrival inthe United States.

Any research I perform willbe undertaken in the public in-terest and not primarily for thebenefit of any private person orpersons.

I arrived in the United Stateson [insert the date ofyour last arrival in the UnitedStates before beginning theteaching or research services forwhich exemption is claimed]. Thetreaty exemption is available onlyfor compensation received dur-ing a period of two years begin-ning on that date. The entiretreaty exemption is lostretroactively if my stay in theUnited States exceeds twoyears.

Index

AAmerican Samoa, residents

of .................................... 10, 24

CCapital assets, sales or ex-

changes ................................ 17Casualty and theft losses .......... 22

Charitable contributions ............. 22 Community income .................... 12 Contingent interest .................... 13

Credits against tax:Child care credit ............. 23, 26Credit for the elderly ............ 26Earned income credit ........... 24Excess social security tax

withheld ........................... 24Foreign tax credit ........... 23, 26Regulated investment com-

pany credit ...................... 24Tax withheld at source ......... 24Tax withheld on partnership

income ............................. 24Withholding from wages ....... 24

DDividends, U.S. source income . 11Dual-status tax year:

Child care credit ................... 26Computation of tax ............... 25Credit for the elderly ............ 26

Exemptions ........................... 25Foreign tax credit ................. 26Forms to file ......................... 26Head of household. .............. 25Illustration of return .............. 26Income subject to tax ........... 25

Joint return ....................... 9, 25Residency ending date .......... 7Residency starting date ......... 7

Restrictions ........................... 25 Standard deduction .............. 25 Tax rates .............................. 25

When and where to file ........ 26

EEffectively connected income:

Foreign income .................... 16 Investment income ............... 15 Pensions ............................... 16

Real property gain or loss .... 16Real property income choice 18

Tax on .................................. 17 Transportation income ......... 16

Estimated Tax ........................... 39Exclusions from gross income:

Annuities ............................... 14Compensation from a foreign

employer ......................... 14 Students and exchangevisitors ............................. 14 Treaty income ................ 14, 40

Exemptions: Dual-status taxpayer ............ 25

Indian students and businessapprentices ...................... 22 Nonresident alien ................. 21 Resident alien ...................... 21

Expatriates ................................. 18

F Filing requirements .................... 32 Filing returns:

Amended returns .................. 33Claims for refund .................. 33Commonwealth of the Northern

Mariana Islands ............... 33 Dual-status taxpayer ............ 26 Estimated tax ....................... 39 Form 1040NR ................. 19, 32 Form 1040NR–EZ .......... 19, 32 Form 1040–C ....................... 44 Form 2063 ............................ 44 Guam .................................... 33 Nonresident alien ................. 19 Virgin Islands ........................ 33

Who must file ....................... 32Foreign governments, employees

of .......................................... 42 Forms:

1040-ES(NR) ........................ 39 1040NR ................................ 32 1040NR–EZ .......................... 32 1040–C ................................. 44 2063 ..................................... 44 8840 ....................................... 7 8843 ....................................... 6

GGreen card test ........................... 3

HHead of household:

Nonresident alien ................. 20 Resident alien ...................... 20

Help from IRS ............................ 45

IIdentification number, taxpayer . 20Income from U.S. sources:

Dividends .............................. 11 Interest ................................. 10

Pensions and annuities ........ 11 Personal property ................. 11 Personal services ................. 11 Real property ........................ 11

Rents or royalties ................. 11International organizations, em-

ployees of ............................. 42 Itemized deductions .................. 22

J Job expenses ............................ 23 Joint return:Dual-status tax year ............... 9

Nonresident alien ................. 20

M Miscellaneous deductions ......... 23 Moving expenses ...................... 21

NNational of the United

States ....................... 20, 25, 34 Nonresident alien:

Annuity income ..................... 14

Business expenses .............. 21Casualty and theft losses ..... 22

Charitable contributions ....... 22Child care credit ................... 23Credit for excess social secu-

rity tax withheld ............... 24Credit for income tax

withheld ........................... 24Credit for prior year minimum

tax ................................... 24 Defined ................................... 3

Earned income credit ........... 24Effectively connected income,

tax on .............................. 17Filing Form 1040NR ............. 19Filing Form 1040NR–EZ ...... 19Foreign tax credit ................. 23Head of household ............... 20How income is taxed ............ 15Individual retirement arrange-

ments .............................. 21 Interest income ..................... 10 Job expenses ....................... 23 Joint return ........................... 20 Losses .................................. 21

Married filing separately ....... 20 Miscellaneous deductions .... 23 Moving expenses ................. 21 Personal exemptions ............ 21 Qualifying widow(er) ............. 20

Regulated investment com-pany credit ...................... 24 Standard deduction .............. 22

State and local income taxes 22Tax withheld at source ......... 24

Travel expenses ................... 23Withholding from partnership

income ............................. 24 Withholding tax ..................... 33

Nonresident spouse .................... 9

P Pensions .................................... 16 Personal services ...................... 40 Portfolio interest ........................ 13

Puerto Rico, residents of ..... 10, 24

RRailroad retirement benefits 17, 25Real property income ................ 18Refunds, claims for ................... 33

Resident alien: Defined ................................... 3

Head of household ............... 20 Joint return ........................... 20 Qualifying widow(er) ............. 20

SSailing permits, departing

aliens: Aliens not requiring .............. 43Bond furnished, insuring tax

payment .......................... 44 Form 1040–C ....................... 44 Form 2063 ............................ 44

Forms to file ......................... 44When to get .......................... 44Where to get ........................ 43

Sales or exchanges, capital as-sets ....................................... 17

Scholarships and fellowshipgrants ................................... 14

Self-employment tax .................. 39Social security benefits ....... 17, 25Social security tax:

Binational agreements ......... 39Foreign students and ex-

change visitors ................ 38 Self-employment tax ............ 39

Source of income ...................... 10 Standard deduction ................... 22

State and local income taxes .... 22Substantial presence test ............ 3

TTax payments and credits:

Nonresident aliens ............... 23 Resident aliens ..................... 23

Tax treaties: Capital gains ........................ 41

Employees of foreign govern-ments .............................. 40

Exclusions from income ....... 14Obtaining copies of .............. 41Reduced tax rates ................ 40Reporting benefits claimed .. 41Table of treaty articles ......... 41Teachers and professors ..... 40Trainees, students, and ap-

prentices .......................... 41Visitors on short stay ........... 40

Taxpayer identification number . 20Trade or business, U.S.:

Beneficiary of estate or trust 15 Business operations ............. 15

Income from U.S. sources ... 15 Partnerships ......................... 15 Personal services ................. 15

Students and trainees .......... 15Trading in stocks, securities,

and commodities ............. 15 Transportation tax ..................... 18 Travel expenses ........................ 23

UU.S. national .................. 20, 25, 34

WWhat, when, and where to file .. 32Who must file ............................ 32

Withholding tax:Allowance for personal ex-

emption ........................... 35Central withholding agree-

ments .............................. 34Notification of alien status .... 34

Pensions ............................... 34Puerto Rico, residents of ..... 36Real property sales .............. 37Residents of Canada, Mexico,

Japan, or Korea, or U.S.nationals .......................... 35

Scholarships and grants ...... 36Social security taxes ............ 38Tax treaty benefits ............... 37

Tip income ............................ 34Virgin Islands, residents of ... 36

Wages .................................. 34 Withholding agreements ...... 34

Withholding from compen-sation ............................... 34

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Introduction U.S. Tax Guide Important Changes for Aliens · Introduction For tax purposes, an alien...

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Transcript of Introduction U.S. Tax Guide Important Changes for Aliens · Introduction For tax purposes, an alien...