| Publication 519 |
2000 Tax Year |
Nonresident Aliens
A nonresident alien's income that is subject to U.S. income tax
must be divided into two categories:
- Income that is effectively connected with a trade
or business in the United States, and
- Income that is not effectively connected with a
trade or business in the United States (discussed under The 30%
Tax, later).
The difference between these two categories is that effectively
connected income, after allowable deductions, is taxed at
graduated rates. These are the same rates that apply to
U.S. citizens and residents. Income that is not effectively connected
is taxed at a flat 30% (or lower treaty) rate.
If you were formerly a U.S. citizen or resident alien, these rules
may not apply. See Expatriation Tax, later, in this
chapter.
Trade or Business
in the United States
Generally, you must be engaged in a trade or business during the
tax year to be able to treat income received in that year as
effectively connected with that trade or business. Whether you are
engaged in a trade or business in the United States depends on the
nature of your activities. The discussions that follow will help you
determine whether you are engaged in a trade or business in the United
States.
Personal Services
If you perform personal services in the United States at any time
during the tax year, you usually are considered engaged in a trade or
business in the United States.
Certain compensation paid to a nonresident alien by a foreign
employer is not included in gross income. For more information, see
Services Performed for Foreign Employer in chapter 3.
Other Trade or Business Activities
Other examples of being engaged in a trade or business in the
United States follow.
Students and trainees.
You are considered engaged in a trade or business in the United
States if you are temporarily present in the United States as a
nonimmigrant under a "F," "J," "M," or "Q" visa. A
nonresident alien temporarily present in the United States under a
"J" visa includes a nonresident alien individual admitted to the
United States as an exchange visitor under the Mutual
Educational and Cultural Exchange Act of 1961. The taxable part of any
scholarship or fellowship grant that is U.S. source income is treated
as effectively connected with a trade or business in the United
States.
Business operations.
If you own and operate a business in the United States selling
services, products, or merchandise, you are, with certain exceptions,
engaged in a trade or business in the United States.
Partnerships.
If you are a member of a partnership that at any time during the
tax year is engaged in a trade or business in the United States, you
are considered to be engaged in a trade or business in the United
States.
Beneficiary of an estate or trust.
If you are the beneficiary of an estate or trust that is engaged in
a trade or business in the United States, you are treated as being
engaged in the same trade or business.
Trading in stocks, securities, and commodities.
If your only U.S. business activity is trading in stocks,
securities, or commodities (including hedging transactions) through a
U.S. resident broker or other agent, you are not engaged in a trade or
business in the United States.
For transactions in stocks or securities, this applies to any
nonresident alien, including a dealer or broker in stocks and
securities.
For transactions in commodities, this applies to commodities that
are usually traded on an organized commodity exchange and to
transactions that are usually carried out at such an exchange.
This discussion does not apply if you have a U.S. office or other
fixed place of business at any time during the tax year through which,
or by the direction of which, you carry out your transactions in
stocks, securities, or commodities.
Trading for a nonresident alien's own account.
You are not engaged in a trade or business in the United States if
trading for your own account in stocks, securities, or commodities is
your only U.S. business activity. This applies even if the trading
takes place while you are present in the United States or is done by
your employee or your broker or other agent.
This does not apply to trading for your own account if you are a
dealer in stocks, securities, or commodities. This does not
necessarily mean, however, that as a dealer you are considered to be
engaged in a trade or business in the United States. Determine that
based on the facts and circumstances in each case or under the rules
given above in Trading in stocks, securities, and commodities.
Effectively
Connected Income
If you are engaged in a U.S. trade or business, all income, gain,
or loss for the tax year that you get from sources within the
United States (other than certain investment income) is treated
as effectively connected income. This applies whether or not there is
any connection between the income and the trade or business being
carried on in the United States during the tax year.
Two tests, described under Investment Income , determine
whether certain items of investment income (such as interest,
dividends, and royalties) are treated as effectively connected with
that business.
In limited circumstances, some kinds of foreign source income may
be treated as effectively connected with a trade or business in the
United States. For a discussion of these rules, see Foreign
Income, later.
Investment Income
Investment income from U.S. sources that may or may not be treated
as effectively connected with a U.S. trade or business generally falls
into the following three categories.
- Fixed or determinable income (interest, dividends, rents,
royalties, premiums, annuities, etc.).
- Gains (some of which are considered capital gains) from the
sale or exchange of the following types of property.
- Timber, coal, or domestic iron ore with a retained economic
interest.
- Patents, copyrights, and similar property on which you
receive contingent payments after October 4, 1966.
- Patents transferred before October 5, 1966.
- Original issue discount obligations.
- Capital gains (and losses).
Use the two tests, described next, to determine whether an item of
U.S. source income falling in one of the three categories above and
received during the tax year is effectively connected with your U.S.
trade or business. If the tests indicate that the item of income is
effectively connected, you must include it with your other effectively
connected income. If the item of income is not effectively connected,
include it with all other income discussed under The 30% Tax,
later, in this chapter. Asset-use test.
This test usually applies to income that is not directly produced
by trade or business activities. Under this test, if an item of income
is from assets (property) used in, or held for use in, the trade or
business in the United States, it is considered effectively connected.
An asset is used in, or held for use in, the trade or business in
the United States if the asset is:
- Held for the principal purpose of promoting the conduct of a
trade or business in the United States,
- Acquired and held in the ordinary course of the trade or
business conducted in the United States (for example, an account
receivable or note receivable arising from that trade or business), or
- Otherwise held to meet the present needs of the trade or
business in the United States and not its anticipated future
needs.
Generally, stock of a corporation is not treated as an asset
used in, or held for use in, a trade or business in the United States.
Business-activities test.
This test usually applies when income, gain, or loss comes directly
from the active conduct of the trade or business. The
business-activities test is most important when:
- Dividends or interest are received by a dealer in stocks or
securities,
- Royalties are received in the trade or business of licensing
patents or similar property, or
- Service fees are earned by a servicing business.
Under this test, if the conduct of the U.S. trade or business
was a material factor in producing the income, the income is
considered effectively connected.
Personal Service Income
You usually are engaged in a U.S. trade or business when you
perform personal services in the United States. Personal service
income you receive in a tax year in which you are engaged in a U.S.
trade or business is effectively connected with a U.S. trade or
business. Income received in a year other than the year you performed
the services is also effectively connected if it would have been
effectively connected if received in the year you performed the
services. Personal service income includes wages, salaries,
commissions, fees, per diem allowances, and employee allowances and
bonuses. The income may be paid to you in the form of cash, services,
or property.
If you are engaged in a U.S. trade or business only because you
perform personal services in the United States during the tax year,
income and gains from assets, and gains and losses from the sale or
exchange of capital assets are generally not effectively connected
with your trade or business. However, if there is a direct
economic relationship between your holding of the asset and your
trade or business of performing personal services, the income, gain,
or loss is effectively connected.
Pensions.
If you were engaged in a U.S. trade or business in a tax year
because you performed personal services in the United States, and you
later receive a pension or retirement pay as a result of these
services, the retirement pay is effectively connected income in each
year you receive it. This is true whether or not you are engaged in a
U.S. trade or business in the year you receive the retirement pay.
Transportation Income
Transportation income is effectively connected if you meet the
following two conditions.
- You had a fixed place of business in the United States
involved in earning the income.
- At least 90% of your U.S. source transportation income is
attributable to regularly scheduled transportation.
"Fixed place of business" generally means a place, site,
structure, or other similar facility through which you engage in a
trade or business. "Regularly scheduled transportation" means
that a ship or aircraft follows a published schedule with repeated
sailings or flights at regular intervals between the same points for
voyages or flights that begin or end in the United States. This
definition applies to both scheduled and chartered air transportation.
If you do not meet the two conditions above, the income is not
effectively connected and different rules apply. See
Transportation Tax, later, in this chapter.
Business Profits and Losses and Sales Transactions
All profits or losses from U.S. sources that are from the operation
of a business in the United States are effectively connected with a
trade or business in the United States. For example, profit from the
sale in the United States of inventory property purchased either in
this country or in a foreign country is effectively connected trade or
business income. A share of U.S. source profits or losses of a
partnership that is engaged in a trade or business in the United
States is also effectively connected with a trade or business in the
United States.
Real Property Gain or Loss
Gains and losses from the sale or exchange of U.S. real property
interests (whether or not they are capital assets) are taxed as if you
are engaged in a trade or business in the United States. You must
treat the gain or loss as effectively connected with that trade or
business.
U.S. real property interest.
This is any interest in real property located in the United States
or the Virgin Islands or any interest in a domestic corporation that
is a U.S. real property holding corporation. Real property includes:
- Land and unsevered natural products of the land, such as
growing crops and timber, and mines, wells, and other natural
deposits,
- Improvements on land, including buildings, other permanent
structures, and their structural components, and
- Personal property associated with the use of real property,
such as equipment used in farming, mining, forestry, or construction
or property used in lodging facilities or rented office space, unless
the personal property is:
- Disposed of more than one year before or after the
disposition of the real property, or
- Separately sold to persons unrelated either to the seller or
to the buyer of the real property.
U.S. real property holding corporation.
A corporation is a U.S. real property holding corporation if the
fair market value of the corporation's U.S. real property interests
are at least 50% of the total fair market value of:
- The corporation's U.S. real property interests, plus
- The corporation's interests in real property located outside
the United States, plus
- The corporation's other assets that are used in, or held for
use in, a trade or business.
You generally are subject to tax on the sale of the stock in any
domestic corporation unless you establish that the corporation is
not a U.S. real property holding corporation.
A U.S. real property interest does not include a class of stock of
a corporation that is regularly traded on an established securities
market, unless you hold more than 5% of the fair market value of that
class of stock. An interest in a foreign corporation owning U.S. real
property generally is not a U.S. real property interest unless the
corporation chooses to be treated as a domestic corporation.
Alternative minimum tax.
There may be a minimum tax on your net gain from the disposition of
U.S. real property interests. Figure the amount of this tax, if any,
on Form 6251.
Withholding of tax.
If you dispose of a U.S. real property interest, the buyer may have
to withhold tax. See the discussion of Tax Withheld on Real
Property Sales, in chapter 8.
Foreign Income
Under limited circumstances, you must treat three kinds of foreign
source income as effectively connected with a trade or business in the
United States. These circumstances are:
- You have an office or other fixed place of business in the
United States to which the income can be attributed,
- That office or place of business is a material factor in
producing the income, and
- The income is produced in the ordinary course of the trade
or business carried on through that office or other fixed place of
business.
An office or other fixed place of business is a material
factor if it significantly contributes to, and is an essential
economic element in, the earning of the income.
The three kinds of foreign source income are listed below.
- Rents and royalties for the use of, or for the privilege of
using, intangible personal property located outside the United States
or from any interest in such property. Included are rents or royalties
for the use, or for the privilege of using, outside the United States,
patents, copyrights, secret processes and formulas, goodwill,
trademarks, trade brands, franchises, and similar properties if the
rents or royalties are from the active conduct of a trade or business
in the United States.
- Dividends or interest from the active conduct of a banking,
financing, or similar business in the United States. A substitute
dividend or interest payment received under a securities lending
transaction or a sale-repurchase transaction is treated the same as
the amounts received on the transferred security.
- Income, gain, or loss from the sale outside the United
States, through the U.S. office or other fixed place of business, of
stock in trade, property that would be included in inventory if on
hand at the end of the tax year, or property held primarily for sale
to customers in the ordinary course of business. This will not apply
if you sold the property for use, consumption, or disposition outside
the United States and an office or other fixed place of business in a
foreign country was a material factor in the sale.
Tax on Effectively
Connected Income
Income you receive during the tax year that is effectively
connected with your trade or business in the United States is, after
allowable deductions, taxed at the rates that apply to U.S. citizens
and residents.
Generally, you can receive effectively connected income only if you
are a nonresident alien engaged in trade or business in the United
States during the tax year. However, income you receive from the sale
or exchange of property, the performance of services, or any other
transaction in another tax year is treated as effectively connected in
that year if it would have been effectively connected in the year the
transaction took place or you performed the services.
Example.
Ted Richards, a nonresident alien, entered the United States in
August 1999, to perform personal services in the U.S. office of his
overseas employer. He worked in the U.S. office until December 25,
1999, but did not leave this country until January 11, 2000. On
January 7, 2000, he received his final paycheck for services performed
in the United States during 1999. All of Ted's income during his stay
here is U.S. source income.
During 1999, Ted was engaged in the trade or business of performing
personal services in the United States. Therefore, all amounts paid to
him in 1999 for services performed in the United States during 1999
are effectively connected with that trade or business during 1999.
The salary payment Ted received in January 2000 is U.S. source
income to him in 2000. It is effectively connected with a trade or
business in the United States because he was engaged in a trade or
business in the United States during 1999 when he performed the
services that earned the income.
Real property income.
You may be able to choose to treat all income from real property as
effectively connected. See Income From Real Property,
later, in this chapter.
The 30% Tax
Tax at a 30% (or lower treaty) rate applies to certain items of
income or gains from U.S. sources but only if the items are not
effectively connected with your U.S. trade or business.
Fixed or Determinable Income
The 30% (or lower treaty) rate applies to the gross amount of U.S.
source fixed or determinable annual or periodic gains, profits, or
income.
Income is fixed when it is paid in amounts known ahead
of time. Income is determinable whenever there is a basis
for figuring the amount to be paid. Income can be periodic
if it is paid from time to time. It does not have to be paid
annually or at regular intervals. Income can be determinable or
periodic even if the length of time during which the payments are made
is increased or decreased.
Items specifically included as fixed or determinable income are
interest (other than original issue discount), dividends, rents,
premiums, annuities, salaries, wages, and other compensation. A
substitute dividend or interest payment received under a securities
lending transaction or a sale-repurchase transaction is treated the
same as the amounts received on the transferred security. Other items
of income, such as royalties, also may be subject to the 30% tax.
Some fixed or determinable income may be exempt from U.S. tax. See
chapter 3
if you are not sure whether the income is taxable.
Original issue discount.
If you sold, exchanged, or received a payment on a bond or other
debt instrument that was issued at a discount after March
31, 1972, all or part of the original issue discount (OID) (other than
portfolio interest) may be subject to the 30% tax. The amount of OID
is the difference between the stated redemption price at maturity and
the issue price of the debt instrument. The 30% tax applies in the
following circumstances.
- You received a payment on an obligation. In this case, the
amount of OID subject to tax is the OID that accrued while you held
the obligation minus the OID previously taken into account. But the
tax on the OID cannot be more than the payment minus the tax on the
interest payment on the obligation.
- You sold or exchanged the obligation. The amount of OID
subject to tax is the OID that accrued while you held the obligation
minus the amount already taxed in (1) above.
Report on your return the amount of OID shown on Form 1042-S,
Foreign Person's U.S. Source Income Subject to Withholding,
if you bought the debt instrument at original issue. However, you must
recompute your proper share of OID shown on Form 1042-S if any
of the following apply.
- You bought the obligation at a premium or paid an
acquisition premium.
- The obligation is a stripped bond or a stripped coupon
(including zero coupon instruments backed by U.S. Treasury
securities).
- You receive a Form 1042-S as a nominee recipient.
For the definition of premium and acquisition
premium and instructions on how to recompute OID, get
Publication 1212.
If you held a bond or other debt instrument that was issued at a
discount before April 1, 1972, contact the IRS for further
information. See chapter 12.
Social Security Benefits
A nonresident alien must include 85% of any U.S. social security
benefit (and the social security equivalent part of a tier 1 railroad
retirement benefit) in U.S. source fixed or determinable annual or
periodic income. This income is exempt under some tax treaties. See
Table 1 in Publication 901,
U.S. Tax Treaties,
for a list of tax treaties that exempt U.S. social security
benefits from U.S. tax.
Sales or Exchanges
of Capital Assets
These rules apply only to those capital gains and losses from
sources in the United States that are not effectively
connected with a trade or business in the United States. They apply
even if you are engaged in a trade or business in the United States.
These rules do not apply to the sale or exchange of a U.S. real
property interest or to the sale of any property that is effectively
connected with a trade or business in the United States. See Real
Property Gain or Loss, earlier, under Effectively Connected
Income.
A capital asset is everything you own except:
- Inventory.
- Business accounts or notes receivable.
- Depreciable property used in a trade or business.
- Real property used in a trade or business.
- Supplies regularly used in a trade or business.
- Certain copyrights, literary or musical or artistic
compositions, letters or memoranda, or similar property.
- Certain U.S. government publications.
- Certain commodities derivative financial instruments held by
a commodities derivatives dealer.
- Hedging transactions.
A capital gain is a gain on the sale or exchange of a
capital asset. A capital loss is a loss on the sale or
exchange of a capital asset.
You may want to read Publication 544.
However, use Publication 544
only to determine what is a sale or exchange of a capital asset, or
what is treated as such. Specific tax treatment that applies to U.S.
citizens or residents generally does not apply to you.
The following gains are subject to the 30% (or lower treaty) rate
without regard to the 183-day rule, discussed later.
- Gains on the disposal of timber, coal, or domestic iron ore
with a retained economic interest.
- Gains on contingent payments received from the sale or
exchange of patents, copyrights, and similar property after October 4,
1966.
- Gains on certain transfers of all substantial rights to, or
an undivided interest in, patents if the transfers were made before
October 5, 1966.
- Gains on the sale or exchange of original issue discount
obligations.
Gains in (1) are not subject to the 30% (or lower treaty) rate if
you choose to treat the gains as effectively connected with a U.S.
trade or business. See Income From Real Property, later.
183-day rule.
If you were in the United States for 183 days or more during the
tax year, your net gain from sales or exchanges of capital assets is
taxed at a 30% (or lower treaty) rate. For purposes of the 30% (or
lower treaty) rate, net gain is the excess of your capital gains from
U.S. sources over your capital losses from U.S. sources. This rule
applies even if any of the transactions occurred while you were not in
the United States.
To determine your net gain, consider the amount of your gains and
losses that would be recognized and taken into account only if, and to
the extent that, they would be recognized and taken into account if
you were in a U.S. trade or business during the year and the gains and
losses were effectively connected with that trade or business during
the tax year. Also take into account, in arriving at your net gain,
all gains and losses treated under U.S. tax laws as gains or losses
from the sales or exchanges of capital assets.
In arriving at your net gain, do not take the following
into consideration.
- The four types of gains listed earlier.
- The deduction for a capital loss carryover.
- Capital losses in excess of capital gains.
- Exclusion for gain from the sale or exchange of qualified
small business stock (section 1202 exclusion).
- Losses from the sale or exchange of property held for
personal use. However, losses resulting from casualties or thefts may
be deductible on Schedule A (Form 1040NR). See Itemized
Deductions in chapter 5.
If you are not engaged in a trade or business in the United States
and have not established a tax year for a prior period, your tax year
will be the calendar year for purposes of the 183-day rule. Also, you
must file your tax return on a calendar-year basis.
If you were in the United States for less than 183 days
during the tax year, capital gains (other than gains listed
earlier) are tax exempt unless they are effectively connected with a
trade or business in the United States during your tax year.
Reporting.
Report your gains and losses from the sales or exchanges of capital
assets that are not connected with a trade or business in the United
States on page 4 of Form 1040NR. Report gains and losses from sales or
exchanges of capital assets (including real property) that are
connected with a trade or business in the United States on a separate
Schedule D (Form 1040) and attach it to Form 1040NR.
Income From Real Property
If you have income from real property located in the United States
that you own or have an interest in and hold for the production of
income, you can choose to treat all income from that property as
income effectively connected with a trade or business in the United
States. The choice applies to all income from real property located in
the United States and held for the production of income and to all
income from any interest in such property. This includes income from
rents, royalties from mines, oil or gas wells, or other natural
resources. It also includes gains from the sale or exchange of real
property and from the sale or exchange of timber, coal, or domestic
iron ore with a retained economic interest.
You can make this choice only for real property income that is not
otherwise connected with your U.S. trade or business.
If you make the choice, you can claim deductions attributable to
the real property income and only your net income from real property
is taxed.
This choice does not treat a nonresident alien, who is not
otherwise engaged in a U.S. trade or business, as being engaged in a
trade or business in the United States during the year.
Making the choice.
Make the initial choice by attaching a statement to your return, or
amended return, for the year of the choice. Include in your statement:
- A complete list of all your real property, or any interest
in real property, located in the United States,
- The extent of your ownership in the property,
- The location of the property,
- A description of any major improvements to the property, and
- Details of any previous choices and revocations of the real
property income choice.
This choice stays in effect for all later tax years unless you
revoke it.
Revoking the choice.
You can revoke the choice without IRS approval by filing Form
1040X, Amended U.S. Individual Income Tax Return, for the
year you made the choice and for later tax years. You must file Form
1040X within 3 years from the date your return was filed or 2 years
from the time the tax was paid, whichever is later. If this time
period has expired for the year of choice, you cannot revoke the
choice for that year. However, you may revoke the choice for later tax
years only if you have IRS approval. For information on how to get IRS
approval, see Regulation section 1.871-10(d)(2).
Transportation Tax
If you have transportation income that is not effectively connected
(see Transportation Income, earlier in this chapter), a 4%
tax rate applies. If you receive transportation income subject to the
4% tax, you should figure the tax and show it on line 52 of Form
1040NR. Attach a statement to your return that includes the following
information (if applicable):
- Your name, taxpayer identification number, and tax year,
- A description of the types of services performed (whether on
or off board),
- Names of vessels or registration numbers of aircraft on
which you performed the services,
- Amount of U.S. source transportation income derived from
each type of service for each vessel or aircraft for the calendar
year, and
- Total amount of U.S. source transportation income derived
from all types of services for the calendar year.
This 4% tax applies to your U.S. source gross transportation
income. This only includes transportation income that is treated as
derived from sources in the United States if the transportation begins
or ends in the United States. For transportation income
from personal services, the transportation must be between the United
States and a U.S. possession. For personal services of a nonresident
alien, this only applies to income derived from, or in connection
with, an aircraft.
Expatriation Tax
The expatriation tax provisions apply to U.S. citizens who have
renounced their citizenship and long-term residents who have ended
their residency, if one of the principal purposes of the action is the
avoidance of U.S. taxes. The expatriation tax applies to the 10-year
period following the date of the action.
If you expatriated in 2000, you are presumed to have tax avoidance
as a principal purpose if:
- Your average annual net income tax for the last five tax
years ending before the date of the action is more than $112,000,
or
- Your net worth on the date of the action is $562,000 or
more.
Ruling request.
If you are presumed to have tax avoidance as a principal purpose
because you meet either of the previous tests, you may be eligible to
request a ruling from the IRS that you did not expatriate to avoid
U.S. taxes. You must request this ruling within one year from the date
of expatriation. For information that must be included in your ruling
request, see section IV of Notice 97-19 in Cumulative Bulletin
1997-1 and Notice 98-34 in Cumulative Bulletin
1998-2.
Former U.S. citizen.
If you are a former U.S. citizen, you are eligible to request a
ruling if you are in one of the following categories.
- You became at birth a U.S. citizen and a citizen of another
country and continue to be a citizen of that other country.
- You become (within a reasonable period after loss of U.S.
citizenship) a citizen of the country in which you, your spouse, or
one of your parents were born.
- You were present in the United States for no more than 30
days during each year of the 10-year period ending on the date of
expatriation.
- You lost your U.S. citizenship before reaching age 18 1/2.
Former long-term resident.
If you are a former long-term resident, you are eligible to request
a ruling if you are in one of the following categories.
- You become (within a reasonable period after your
expatriation) a resident fully liable to income tax in one of the
following countries.
- The country in which you were born.
- The country where your spouse was born.
- The country where either of your parents was born.
- You were present in the United States for no more than 30
days during each year of the 10-year period prior to
expatriation.
- You ceased to be a long-term resident before reaching age 18 1/2.
You will not qualify under category (1) if you are not domiciled in
that country unless your income is taxed in the same manner as a
resident domiciled in that country.
Long-term residents.
You are a long-term resident if you were a lawful permanent
resident of the United States in at least 8 of the last 15 tax years
ending with the year your residency ends. In determining if you meet
the 8-year requirement, do not count any year that you are treated as
a resident of a foreign country under a tax treaty and do not waive
treaty benefits.
Your U.S. residency is considered to have ended when you cease to
be a lawful permanent resident or you begin to be treated as a
resident of another country under a tax treaty and do not waive treaty
benefits.
Tax.
If the expatriation tax applies to you, you are generally subject
to tax on your U.S. source gross income and gains on a net basis at
the graduated rates applicable to individuals (with allowable
deductions), unless you would be subject to a higher tax under the 30%
tax (discussed earlier) on income not connected with a U.S. trade or
business. In making this determination, you may not claim that an
income tax treaty in effect on August 21, 1996, reduces your tax
liability under the 30% tax on any items of U.S. source income.
For this purpose, U.S. source gross income (defined in chapter 2)
includes gains from the sale or exchange of:
- Property (other than stock or debt obligations) located in
the United States,
- Stock issued by a U.S. domestic corporation, and
- Debt obligations of U.S. persons or of the United States, a
state or political subdivision thereof, or the District of Columbia.
U.S. source income also includes any income or gain derived from
stock in certain controlled foreign corporations if you owned, or were
considered to own, at any time during the 2-year period ending on the
date of expatriation, more than 50% of:
- The total combined voting power of all classes of that
corporation's stock, or
- The total value of the stock.
The income or gain is considered U.S. source income only to the
extent of your share of earnings and profits earned or accumulated
before the date of expatriation.
Any exchange of property is treated as a sale of the property at
its fair market value on the date of the exchange and any gain is
treated as U.S. source gross income in the tax year of the exchange
unless you enter into a gain recognition agreement under Notice
97-19.
Other information.
For more information on the expatriation tax provisions, including
exceptions to the tax and special U.S. source rules, see section 877
of the Internal Revenue Code.
Reporting Requirements
If you lost your U.S. citizenship, you must file Form 8854,
Expatriation Information Statement, with a consular office
or a federal court at the time of loss of citizenship. If you end your
long-term residency, you must file Form 8854 with the Internal Revenue
Service when you file your tax return for the year your residency
ends.
Penalties.
If you fail to file Form 8854, you may have to pay a penalty equal
to the greater of 5% of the expatriation tax or $1,000. The penalty
will be assessed for each year during which your failure to file
continues for the 10-year period. The penalty will not be imposed if
you can show that the failure is due to reasonable cause and not
willful neglect.
Expatriation tax return.
If you are subject to the expatriation tax, you must file Form
1040NR for each year of the 10-year period following expatriation.
Complete line "P" on page 5 of Form 1040NR. See Special
Rules for Former U.S. Citizens and Former U.S. Long-Term Residents
in the instructions for Form 1040NR. You must attach Form 8854
and a statement to Form 1040NR listing, by category (dividends,
interest, etc.), all items of U.S. and foreign source income, whether
or not taxable in the United States.
If you do not attach a complete statement in any year you are
liable for any U.S. taxes, you will not be considered to have filed a
true and accurate return. You will not be entitled to any tax
deductions or credits if your tax liability for that year is later
adjusted.
Interrupted Period
of Residence
You are subject to tax under a special rule if you interrupt your
period of U.S. residence with a period of nonresidence. The special
rule applies if you meet all of the following conditions.
- You were a U.S. resident for a period that includes at least
3 consecutive calendar years.
- You were a U.S. resident for at least 183 days in each of
those years.
- You ceased to be treated as a U.S. resident.
- You then again became a U.S. resident before the end of the
third calendar year after the period described in (1) above.
Under this special rule, you are subject to tax on your U.S. source
gross income and gains on a net basis at the graduated rates
applicable to individuals (with allowable deductions) for the period
you were a nonresident alien, unless you would be subject to a higher
tax under the 30% tax (discussed earlier) on income not connected with
a U.S. trade or business.
Example.
John Willow, a citizen of New Zealand, entered the United States on
April 1, 1995, as a lawful permanent resident. On August 1, 1997, John
ceased to be a lawful permanent resident and returned to New Zealand.
During his period of residence, he was present in the United States
for at least 183 days in each of three consecutive years (1995, 1996,
and 1997). He returned to the United States on October 5, 2000, as a
lawful permanent resident. He became a resident before the close of
the third calendar year (2000) beginning after the end of his first
period of residence (August 1, 1997). Therefore, he is subject to tax
under the special rule for the period of nonresidence (August 2, 1997,
through October 4, 2000) if it is more than the tax that would
normally apply to him as a nonresident alien.
Reporting requirements.
If you are subject to this tax for any year in the period you were
a nonresident alien, you must file Form 1040NR for that year. The
return is due by the due date (including extensions) for filing your
U.S. income tax return for the year that you again become a U.S.
resident. If you already filed returns for that period, you must file
amended returns. You must attach a statement to your return that
identifies the source of all of your U.S. and foreign gross income and
the items of income subject to this special rule.
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