us internal revenue service: p519--1997

8/14/2019 US Internal Revenue Service: p519--1997

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Contents

Introduction ........................................ 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 ATax Treaty ExemptionProcedure for Students .............. 46

Appendix BTax 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

Publica tion 519Cat. No. 15023T

U.S. Tax Guidefor Aliens

For use in preparing

1997 Returns

Get f orms and other informat ion 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.


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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 Aliensin chapter 1.

See chapter 6.

See Nonresident Spouse Treated as aResident in chapter 1.

See Community Incomein chapter 2.

See Chapter 2.

See Chapter 3.

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

See Scholarships and Fellowship Grantsinchapter 3.

See chapter 9.

See chapter 4.

See Deductions in chapter 5.

See Exemptionsin chapter 5.

See Tax Payments and Credits in chapter 5.

See chapter 7.

See chapter 8.

See Income Entitled to Tax Treaty BenefitsinChapter 8.

See chapter 9.

See chapter 10.

See chapter 11.

See Expatriation Taxin chapter 4.

Important Changes

Exclusion 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. See

chapter 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 filed

your 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 Reminders

Individual 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 W7,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 Numbersin chapter 5.

Form 1040NREZ. You may be able to useForm 1040NREZ, 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 1040NREZin 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.

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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 1040NREZ 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 Taxin 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 1A 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)

1040 U.S. Individual Income Tax Return

1040AU.S. Individual Income Tax Return

1040NR U.S. Nonresident Alien IncomeTax Return

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

8840 Closer Connection ExceptionStatement for Aliens

8843 Statement for Exempt Individualsand Individuals With a MedicalCondition

See chapter 12 for information about get-

ting these publications and forms.

Nonresident AliensIf 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 AliensYou are a resident alien of the United Statesfor tax purposes if you meet either the greencard test or the substantial presence test

for the calendar year (January 1December31). 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 Choiceunder Dual Status Al-iens, later.

Green Card TestYou are a resident for tax purposes if you area lawful permanent resident of the UnitedStates at any timeduring 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 States

as 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 the

final administrative order of abandonment isissued. If you are granted an appeal to afederal court of competent jurisdiction, a final

judicial 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 TestYou 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 the

years 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? Page 3


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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 agreen 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, 13 the days ofpresence in 1996, and 16 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.

1If 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.

2In 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 ofthe treaty carefully.

3Do 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.

4If 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 SubstantialPresence Testunder Resident Aliensand First-year choiceunder Dual-Status Aliensin Chapter 1.

Yes

Yes

Yes

Yes

No

No

No4

No

No

Yes

Page 4 Chapter 1 Nonresident Alien or Resident Alien?


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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 24hour period. Workdays are thedays on which you work in the United Statesor Canada or Mexico. Working periodmeans 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 8843later.

You cannot exclude any days of presence

in 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 United

States.

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 Qvisa, who substantially complies with therequirements of the visa.

3) A student temporarily present in theUnited States under an F, J, M, orQ 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 individual

is 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 the

privileges, 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 familyincludethe 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.



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You will notbe 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 bean 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 Form8843later.

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 by

a 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 could

result 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 8843later.

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 days

on 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 Form8843next.

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 United

States as planned because of a medicalcondition.

2) You were temporarily in the UnitedStates as a teacher or trainee on a Jor 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, you

cannot 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 totwoforeign 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 or

indefinitely 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,



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Certificate of Alien Claiming Residencein the United States, or Form W8, 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 I508, Waiver of Immunities

Form I485, Application for Status as Per-manent Resident

Form I130, Petition for Alien Relative, onyour behalf

Form I140, Petition for Prospective Immi-grant Employee, on your behalf

Form ETA750, Application for Alien Em-ployment Certification, on your behalf

Form OF230, 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 taxpayeris 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 Form1040NREZ, 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 BenefitsClaimedin 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 dateis 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 residency

starting 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 dateis thefirst day in the calendar year on which youare present in the United States as a lawfulpermanent resident.

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



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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 Choice

If you do notmeet 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 orForm1040NREZ 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 you

met the substantial presence test,2) The first day in 1997 that you are no

longer 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



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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 the

days 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 whether

you 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, and

you are both taxed on worldwide income.Making the choice also means that you mustfile ajoint returnfor 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 your

joint 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 writeAmended 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. Pat

and 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 the

deceased 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



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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 filed

joint 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 a

U.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 SituationsIf 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

520 Scholarships and Fellowships

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.

TIP

Not all items of U.S. source incomeare taxable. See chapter 3.

InterestGenerally, 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. In

addition, 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 3year 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

Page 10 Chapter 2 Source of Income


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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.

DividendsIn most cases, dividend income received fromdomestic corporations is U.S. source income.Dividend income from foreign corporations is

usually 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 3year 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 less

than 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 corporations gross incomeconnected with a U.S. trade orbusiness for the 3-year period

Foreign corporations gross incomefrom all sources for that period

Personal ServicesAll 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

242 $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 is

between the United States and a U.S. pos-session.Transportation income is income from the

use 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 amounts

paid as salary or other compensationfor services.

Pensions and AnnuitiesWhen 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 RoyaltiesYour 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 PropertyReal property is land and buildings and gen-erally anything built on, growing on, or at-

tached to land.Gross income from sources in the United

States 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 section1.8631(b) of the Income Tax Regulations.

Personal PropertyPersonal 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 homein 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

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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 1.8633 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 adjustments are the depreciation adjustments

to 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 propertyusually means thecost (money plus the fair market value of

other property or services) of property youacquire. Depreciationis 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

RoyaltiesNatural resources

RoyaltiesPatents, copyrights, etc.

Pensions

Sale of inventorypurchased

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 inventoryproduced 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 fixed

place 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 IncomeGenerally, if you are married and you or yourspouse are subject to the community propertylaws of a foreign country, a U.S. state, or a

U.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 the

spouse 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.

Exc lusions FromGross Income

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

Page 12 Chapter 3 Exclusions From Gross Income


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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

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

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 nottargetedto foreign markets, if you furnish thepayer of the interest (or the withholding

agent) a statement that you are not aU.S. person. You can make this state-ment on a Form W8, Certificate of For-eign Status, or on a substitute form sim-ilar to Form W8. 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 which

you 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 m

us internal revenue service: p519--1997

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