Other income subject to 30% withholding generally includes fixed or determinable income such as interest (other than portfolio interest), dividends, pensions and annuities, and gains from certain sales and exchanges, discussed in chapter 4. It also includes 85% of social security benefits paid to nonresident aliens.

The following income is not subject to withholding at the 30% (or lower treaty) rate if you file Form W-8ECI with the payer of the income.

• Income (other than compensation) that is effectively connected with your U.S. trade or business.
• Income from real property that you choose to treat as effectively connected with a U.S. trade or business. See Income From Real Property in chapter 4 for details about this choice.

Special rules for withholding on partnership income, scholarships, and fellowships are explained next.

Tax Withheld on Partnership Income

If you are a foreign partner in a U.S. or foreign partnership, the partnership will withhold tax on your share of effectively connected taxable income from the partnership. The partnership will give you a statement on Form 8805, Foreign Partner's Information Statement of Section 1446 Withholding Tax, showing the tax withheld. A partnership that is publicly traded may withhold on your actual distributions of effectively connected income. In this case the partnership will give you a statement on Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding. For 2001, the withholding rate was either 39.6 or 39.1%. Claim the tax withheld as a credit on line 62b of Form 1040NR.

If you are a foreign partner responsible for withholding, see Partnership Withholding on Effectively Connected Income in Publication 515.

Withholding on Scholarships and Fellowship Grants

There is no withholding on a qualified scholarship received by a candidate for a degree. See chapter 3.

If you are a nonresident alien student or grantee with an "F," "J," "M," or "Q" visa and you receive a U.S. source grant or scholarship that is not fully exempt, the withholding agent (usually the payer of the scholarship) withholds tax at 14% (or lower treaty rate) of the taxable part of the grant or scholarship. However, if you are not a candidate for a degree and the grant does not meet certain requirements, tax will be withheld at the 30% (or lower treaty) rate.

Reduced Withholding

You may be entitled to reduce withholding on the taxable part of your grant or scholarship if the withholding agent chooses to withhold under an alternative withholding procedure. (This alternative withholding procedure is not mandatory, and the withholding agent does not have to use it.) Your withholding agent chooses this alternative procedure by asking you to fill out Form W-4 and the Personal Allowances Worksheet (attached to Form W-4). Use the following instructions instead of the Form W-4 instructions to complete the worksheet.

Line A. Enter the total of the following amounts on line A.

Personal exemption. Include the prorated part of your allowable personal exemption. Figure the amount by multiplying the number of days you expect to be in the United States in 2002 by the daily exemption amount ($8.22).

Expenses. Include expenses that will be deductible on your return. These include away-from-home expenses (meals, lodging, and transportation), certain state and local income taxes, charitable contributions, and casualty losses, discussed earlier under Itemized Deductions in chapter 5. They also include business expenses, moving expenses, and the IRA deduction discussed under Deductions in chapter 5.

The amount of away-from-home expenses should be the anticipated actual amount, if known. If you do not know the amount of actual expenses at the time you complete Form W-4, you can claim the current per diem allowance for participants in the Career Education Program under the Federal Travel Regulations. The current per diem allowance is $18 per day.

Nontaxable grant or scholarship. Include the part of your grant or scholarship that is not taxable under U.S. law or under a tax treaty.

Line B. Enter -0- unless the following paragraph applies to you.

If you are a student who qualifies under Article 21(2) of the United States-India income tax treaty, and you are not claiming deductions for away-from-home expenses or other itemized deductions (discussed earlier), enter the standard deduction on line B. The standard deduction amount for 2002 is $4,700 if you are single or $3,925 if you are married.

Lines C and D. Enter -0- on both lines unless the following paragraphs apply to you.

If you are a resident of Canada, Mexico, Japan, South Korea, or a U.S. national, an additional daily exemption amount may be allowed for your spouse and each of your dependents.

If you are a resident of India who is eligible for the benefits of Article 21(2) of the United States-India income tax treaty, you can claim an additional daily exemption amount for your spouse. You can also claim an additional amount for each of your dependents not admitted to the United States on "F-2," "J-2," or "M-2" visas if they meet the same rules that apply to U.S. citizens.

Enter any additional amount for your spouse on line C. Enter any additional amount for your dependents on line D.

Lines E, F, and G. No entries should be made on lines E, F, and G.

Line H. Add the amounts on lines A through D and enter the total on line H.

Form W-4. Complete lines 1 through 4 of Form W-4. Sign and date the form and give it with the Personal Allowances Worksheet to your withholding agent.

If you file a Form W-4 to reduce or eliminate the withholding on your scholarship or grant, you must file an annual U.S. income tax return to be allowed the exemptions and deductions you claimed on that form. If you are in the United States during more than one tax year, you must attach a statement to your yearly Form W-4 indicating that you have filed a U.S. income tax return for the previous year. If you have not been in the United States long enough to be required to file a return, you must attach a statement to your Form W-4 saying you will file a U.S. income tax return when required.

After the withholding agent has accepted your Form W-4, tax will be withheld on your scholarship or grant at the graduated rates that apply to wages. The gross amount of the income is reduced by the amount on line H of the worksheet and the withholding tax is figured on the remainder.

You will receive a Form 1042-S from the withholding agent (usually the payer of your grant) showing the gross amount of your taxable scholarship or fellowship grant less the withholding allowance amount, the tax rate, and the amount of tax withheld. Use this form to file your annual U.S. income tax return.

Previous | First | Next

Publication Index | 2001 Tax Help Archives | Tax Help Archives | Home