us internal revenue service: p519--1998

8/14/2019 US Internal Revenue Service: p519--1998

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

Important Changes ............................ 1

Important Reminders ......................... 3

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

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

3. Exclusions From Gross Income . 13

4. How Income of Aliens Is Taxed . 15

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

6. Dual-Status Tax Year ................... 25

7. What, When, and Where To File . 33

8. Paying Tax Through Withholdingor Estimated Tax ......................... 34

9. Tax Treaty Benefits ...................... 41

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 individualwho 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. Nonresi-dent aliens are taxed only on their incomefrom sources within the United States and oncertain income connected with the conductof a trade or business in the United States.

Table A, What You Need To Know AboutU.S. Taxes, provides a list of questions andthe chapter or chapters in this publication

where you will find the related discussion.The information in this publication is not

as 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.

Important Changes

Child tax credit. Beginning in 1998, you maybe able to take a credit on your tax return ofup to $400 for each qualifying child. For thiscredit a qualifying child:

Departmentof theTreasury

InternalRevenueService

Publica tion 519Cat. No. 15023T

U.S. Tax Guidefor Aliens

For use in preparing

1998 Returns


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b) Claim that such person is the ben-eficial owner of the income forwhich the form is being furnished,and

c) If applicable, claim a reduced rateof, or exemption from, withholdingas a resident of a foreign countrywith which the United States hasan income tax treaty.

2) Form W-8ECI, Certificate of ForeignPerson's Claim for Exemption From

Withholding on Income Effectively Con-nected With the Conduct of a Trade orBusiness in the United States, should beprovided to a withholding agent or payerby a foreign person to:

a) Establish foreign status,


c) Claim that certain income is effec-tively connected with the conductof a trade or business in the UnitedStates.

3) Form W-8EXP, Certification of ForeignGovernments and Other Foreign Organ-izations for United States Tax Withhold-ing, should be provided to a withholdingagent or payer by a foreign government,international organization, foreign centralbank of issue, or foreign tax-exempt or-ganization to:

a) Establish foreign status,


c) If applicable, claim a reduced rateof, or exemption from, withholding

under the Internal Revenue Code.

In addition, Form W-9, Request for TaxpayerIdentification Number and Certification, maybe used to determine whether to treat a payeeor beneficial owner as a U.S. person.

The new certificates will replace the fol-lowing existing forms and statement.

Form W-8, Certificate of Foreign Status

Form 1001, Ownership, Exemption, orReduced Rate Certificate

Form 1078, Certificate of Alien ClaimingResidence in the United States

Form 4224, Exemption From Withholding

of Tax on Income Effectively ConnectedWith the Conduct of a Trade or Businessin the United States

Form 8709, Exemption From Withholdingon Investment Income of Foreign Gov-ernments and International Organizations

Statement under regulation section1.1441-5, relating to an individual's claimto be a U.S. citizen or resident, or apartnership's or corporation's claim thatit is a domestic entity

Tax payment. If you pay your tax by checkor money order, make it payable to theUnited States Treasury.

New tax treaties. The United States ex-changed instruments of ratification for newincome tax treaties with Austria, Ireland,South Africa, Switzerland, Thailand, and Tur-key. The new treaties with Austria, Ireland,and Switzerland replace existing treaties.Generally, the treaties are effective for taxyears beginning on or after January 1, 1998.The new treaty with Austria is effective for taxyears beginning on or after January 1, 1999.You can elect to apply the old treaty withAustria, Ireland, or Switzerland in its entiretyfor the first tax year following the date the newtreaty would otherwise apply. See Publication901, U.S. Tax Treaties, 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. For1998 and subsequent years, this income istaxable in the United States and France.However, the United States will allow a creditfor taxes paid to France.

Important RemindersIndividual taxpayer identification number(ITIN). The IRS will issue an ITIN to a non-resident or resident alien who does not haveand 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 Numberin chapter 5.

Disclosure of a treaty-based position thatreduces your tax. If you take the positionthat any U.S. tax is overruled or otherwisereduced by a U.S. treaty (a treaty-based po-sition), you generally must disclose that posi-tion on your affected return. See Effect of TaxTreaties, in chapter 1.

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-EZin chapter 7.

Earned income credit for nonresident al-iens. If you are a nonresident alien for anypart of the year, you cannot claim the earned

income credit unless you elect to be treatedas a resident alien for tax purposes.

Leaving the United States. Generally, al-iens must obtain a sailing permit or departurepermit before leaving the United States. Seechapter 11 for more information.

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 InternalRevenue Service Center, Philadelphia, PA19255, should send the form there. Resident

aliens should send the form to the InternalRevenue Service Center for their old address(addresses for the Service Centers are on theback 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 nonresidentalien or a resident alien. Figure 1-A will helpyou find whether you are a nonresident orresident 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 a

resident 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.

Chapter 1 Nonresident Alien or Resident Alien? Page 3


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Resident AliensYou 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 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 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 under

this 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, your

resident 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 is

issued. 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 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 in

the second year before the currentyear.

Example. You were physically present inthe United States on 120 days in each of theyears 1996, 1997, and 1998. To determine ifyou meet the substantial presence test for1998, count the full 120 days of presence in1998, 40 days in 1997 (1/3 of 120), and 20days in 1996 (1/6 of 120). Since the total forthe 3-year period is 180 days, you are notconsidered a resident under the substantialpresence test for 1998.

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.

Days of Presence

in 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.

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

Days you are in the United States for lessthan 24 hours when you are in transitbetween two places outside the UnitedStates.

Days you are in the United States as acrew member of a foreign vessel.

Days you were unable to leave the UnitedStates because of a medical conditionthat developed while you were in theUnited States.

Days you were an exempt individual.

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

Regular commuters from Canada orMexico. Do not count the days on which youcommute to work in the United States from

your 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 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. Do not count the days youare in the United States for less than 24 hoursand you are in transit between two placesoutside the United States. You are consideredto be in transit if you engage in activities thatare substantially related to completing travelto your foreign destination. For example, ifyou travel between airports in the UnitedStates to change planes en route to your for-eign destination, 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.

Crew members. Do not count the days youare temporarily present in the United Statesas a regular member of a crew of a foreignvessel engaged in transportation between theUnited States and a foreign country or a U.S.possession. However, this exception does notapply if you otherwise engage in any tradeor business in the United States on such day.

Medical condition. Do not count the daysyou intended 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 to

Page 4 Chapter 1 Nonresident Alien or Resident Alien?


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Figure 1-A. Nonresident Alien or Resident Alien?

Start here to determine your status for 1998

Yes No

Were you a lawful permanent resident of the United States (had agreen card) at any time during 1998?

Were you physically present in the United States on at least 31days during 1998?

3

Were you physically present in the United States on at least 183days during the 3-year period consisting of 1996, 1997, and1998, counting all days of presence in 1998, 13 the days ofpresence in 1997, and 16 the days of presence in 1996?

3

Were you physically present in the United States on at least 183days during 1998?

Can you show that for 1998 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.

3See Days of Presence in the United States in this chapter for days that do not count as days of presence in the United States.

4 If you meet the substantial presence test for 1999, you may be able to choose treatment as a U.S. resident alien for part of 1998. For details see SubstantialPresence Testunder Resident Aliensand First-year choiceunder Dual-Status Aliensin Chapter 1.

Yes

Yes

Yes

No

No

No4

No

Yes

leave 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 of

that extended period.In the case of an individual who is judged

mentally 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 the

condition when you entered the UnitedStates.

Exempt individual. Do not count days forwhich you are an exempt individual. The termexempt 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 designated



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by 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 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 the

loss 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 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. SeeForm 8843, 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 2

years 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 substantially

complies 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 have

substantially 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 presence

as 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 anexempt 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 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 1998 income taxreturn. If you do not have to file a return, sendForm 8843 to the Internal Revenue ServiceCenter, Philadelphia, PA 19255, by the duedate for filing an income tax return. The duedate for filing is discussed in chapter 7.

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 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 each

foreign 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



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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 law

to 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 Rights, Privileges, Ex-emptions and Immunities

Form I-485, Application to Register Perma-nent Residence or Adjust Status

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

Form I-140, Immigrant Petition for AlienWorker, on your behalf

Form ETA-750, Application for Alien Employ-ment 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 an 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 8833 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 figuringyour 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 a

nonresident alien. You must also attach a fullycompleted Form 8833. See Reporting TreatyBenefits Claimed in chapter 9 for more infor-mation on reporting 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 dual

status 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 States

during 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 ForeignCountry, earlier.

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 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 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, 1998, to attend abusiness meeting and returned to Russia onJanuary 10, 1998. His tax home remained in

Russia. On March 1, 1998, 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 January610. 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).



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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 excluding

in figuring your first day of residency.6) Sufficient facts to establish that you have

maintained 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 an 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. Therefore, your first dayof residency will be the first day you are

present 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 dayduring 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, 1997, and remained until November 5,1997, when he returned to Switzerland.

Robert came back to the United States onMarch 5, 1998, as a lawful permanent resi-dent and still resides here. In calendar year1998, Robert's U.S. residency is deemed tobegin on January 1, 1998, because he qual-ified as a resident in calendar year 1997.

First-Year ChoiceIf you do notmeet either the green card testor the substantial presence test for 1997 or1998 and you did not choose to be treatedas a resident for part of 1997, but you meetthe substantial presence test for 1999, youcan choose to be treated as a U.S. residentfor part of 1998. To make this choice, youmust:

1) Be present in the United States for atleast 31 days in a row in 1998, 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 1998.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 theexceptions discussed earlier under Days ofPresence in the United States.

If you make the first-year choice, yourresidency starting date for 1998 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, 1998, andwas here on 31 consecutive days (from No-vember 1 through December 1, 1998). Juanreturned to the Philippines on December 1and did not come back to the United Statesuntil December 17, 1998. He stayed in theUnited States for the rest of the year. During1999, Juan was a resident of the UnitedStates under the substantial presence test.Juan can make the first-year choice for 1998because he was in the United States in 1998for a period of 31 days in a row (November1 through December 1) and for at least 75%of the days following (and including) the first

day 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, 1998.

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 1998 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 1997,

3) That you are a resident under the sub-stantial presence test in 1999,

4) The number of days of presence in theUnited States during 1999,

5) The date or dates of your 31-day periodof presence and the period of continuouspresence in the United States during1998, and

6) The date or dates of absence from theUnited States during 1998 that you aretreating as days of presence.

You cannot file the form or statement untilyou meet the substantial presence test for1999. If you have not met the test for 1999as of April 15, 1999, you can request an ex-tension of time for filing your 1998 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 1998figured as if you were a nonresident alien theentire year. You can use Form 1040NR orForm 1040NR-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 1998. 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.

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 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 to



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be 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. Attach

Form 1040, Form 1040A, or Form 1040EZand write Amended across the top of thecorrected return. If you make the choice withan amended return, you and your spousemust also amend any returns that you mayhave filed after the year for which you madethe 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.

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,later. If you previously made that choice, and

it 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.

Last Year of ResidencyIf you were a U.S. resident in 1998 but arenot a U.S. resident during any part of 1999,you cease to be a U.S. resident on your res-idency termination date. Your residencytermination date is December 31, 1998.

Special residency termination date. Your

residency termination date is:

1) The last day in 1998 that you are phys-ically present in the United States, if youmet the substantial presence test,

2) The first day in 1998 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 1998, 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 beforethe due date for filing an 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 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 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, 1998, and resided hereuntil August 25, 1998. On December 12,

1998, Lola came to the United States for va-cation and stayed here until December 16,1998, when she returned to Malta. She is ableto establish a closer connection to Malta forthe period December 1216. Lola is not aU.S. resident for tax purposes during 1999and can establish a closer connection toMalta for the rest of calendar year 1998. Lolais a U.S. resident under the substantial pres-ence test for 1998 because she was presentin the United States for 183 days (178 daysfor the period March 1 to August 25 plus 5days in December). Lola's residency termi-nation date is August 25, 1998.

Residency during the next year. If you area U.S. resident during any part of 1999 andyou are a resident during any part of 1998,you will be taxed as a resident through theend of 1998. This applies whether you havea closer connection to a foreign country thanthe United States during 1998, and whetheryou are a resident under the substantialpresence test or green card test.

Nonresident Spouse

Treated 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. 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 containthe following:

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.)



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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,Form 1040A, or Form 1040EZ 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.

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 Choice

The 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, 1995, and married toJudy, a nonresident alien. They chose to treatJudy as a resident alien and filed joint 1995and 1996 income tax returns. On January 10,1997, Dick became a nonresident alien. Judyhad remained a nonresident alien throughoutthe period. Dick and Judy could have filed

joint or separate returns for 1997. However,since neither Dick nor Judy is a resident alienat any time during 1998, 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 in1998, they must file separate returns as non-resident aliens. If Dick becomes a resident

alien again in 1998, their choice is no longersuspended.

Ending the Choice

Once 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 that

the 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 spouse

receives 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 the

same 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 anytax 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 gives the general rules for de-termining U.S. source income that apply tomost nonresident aliens. The following dis-cussions cover the general rules as well asthe exceptions to these rules.

TIP

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

Page 10 Chapter 2 Source of Income


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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. Inaddition, all interest received by a nonresidentalien individual from a state, the District of

Columbia, 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.

A substitute interest payment made to thetransferor of a security in a securities lendingtransaction or a sale-repurchase transactionis treated the same as the interest on thetransferred security.

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 periodending with the close of the payer's tax

year preceding the interest payment atleast 80% of the payer's total gross in-come:

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 orstate 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 isusually foreign source income. Exceptions toboth of these rules are discussed below.

A substitute dividend payment made to thetransferor of a security in a securities lendingtransaction or a sale-repurchase transactionis treated the same as a distribution on thetransferred security.

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 ending

with 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. sourceincome by multiplying the dividend by thefollowing 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 the

United 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.

Crew members. Compensation for servicesperformed by a nonresident alien in con-nection with the individual's temporary pres-ence in the United States as a regular mem-ber of the crew of a foreign vessel engagedin transportation between the United Statesand a foreign country or U.S. possession isnot income from sources in the United States.

Transportation IncomeTransportation income is income from the useof a vessel or aircraft. This is true whether thevessel or aircraft is owned, hired, or leased,or the income is from the performance ofservices directly related to the use of a vesselor aircraft. The term vessel or aircraft in-

cludes any container used in connection witha vessel or aircraft.

All income from transportation that beginsand ends in the United States is treated asderived from sources in the United States. Ifthe transportation begins or ends in theUnited States, 50% of the transportation in-come is treated as derived from sources inthe United States.

For transportation income from personalservices, 50% of the income is U.S. sourceincome if the transportation is between theUnited States and a U.S. possession. Fornonresident aliens, this only applies to incomederived from, or in connection with, an air-craft.

For information on how U.S. sourcetransportation income is taxed, see chapter4.

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 for

activities 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 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.

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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 andyou do not both choose to be treated asU.S. residents as explained in chapter1.

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

Earned income. Earned income of a

spouse, 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's

distributive 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 meetcertain 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 HomeSee 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 days

during any period of 12 consecutive months,you may qualify for the foreign earned incomeexclusion. For tax years beginning in 1998,the exclusion is $72,000. In addition, youmay be able to exclude or deduct certain for-eign housing amounts. You may also qualifyif you 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.

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, the

airspace over the foreign country, and theseabed and subsoil of submarine areas adjacent 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 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 power

of 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 either ofthe following:

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).

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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 temporarily

present 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 your pay for these ser-vices.

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

Example 1. During 1998, 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 1998performing personal services for the overseasoffice of the partnership. That office paid hima total gross salary of $2,800 for those ser-vices. During 1998, 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 1998 was $4,500. Hereceived $2,875 in 1998, and $1,625 in 1999.During 1998, 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.

Crew members. Compensation for servicesperformed by a nonresident alien in con-

nection with the individual's temporary pres-ence in the United States as a regular mem-ber of the crew of a foreign vessel engagedin transportation between the United Statesand a foreign country or U.S. possession isnot U.S. source income and is exempt fromU.S. tax.

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 qualifiedtrustexempt 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 underthe 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. Seechapter 9.

Gain From the Sale ofYour Main HomeIf you sold your main home, you may be able

to exclude $250,000 of the gain on the saleof your home. If you are married and file a joint return, you may be able to exclude$500,000. For information on the require-ments for this exclusion, see Publication 523.

CAUTION

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

chapter 4.

Scholarships andFellowship GrantsIf you are a candidate for a degree, you may

be 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.

TIP

If a nonresident alien receives a grantthat is not from U.S. sources, it is notsubject to U.S. tax. SeeScholarships,

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, or

to 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 other

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States 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 neces-sarily mean, however, that as a dealer youare considered to be engaged in a trade orbusiness 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 IncomeIf 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 discus

us internal revenue service: p519--1998

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