5. Figuring Your Tax

Introduction

After you have determined your alien status, the source of your income, and if and how that income is taxed in the United States, your next step is to figure your tax. The information in this chapter is not as comprehensive for resident aliens as it is for nonresident aliens. Resident aliens should get publications, forms, and instructions for U.S. citizens, because the information for filing returns for resident aliens is generally the same as for U.S. citizens.

If you are both a nonresident alien and a resident alien in the same tax year, see chapter 6 for a discussion of dual-status aliens.

Topics This chapter discusses:

• Identification numbers,
• Filing status,
• Deductions,
• Exemptions,
• Tax credits and payments, and
• Special rules for bona fide residents of American Samoa and Puerto Rico.

Useful Items You may want to see:

Publication

• 463   Travel, Entertainment, Gift, and Car Expenses
• 501   Exemptions, Standard Deduction, and Filing Information
• 521   Moving Expenses
• 526   Charitable Contributions
• 535   Business Expenses
• 597   Information on the United States-Canada Income Tax Treaty

Form (and Instructions)

• W-7   Application for IRS Individual Taxpayer Identification Number
• 1040   U.S. Individual Income Tax Return
• 1040NR   U.S. Nonresident Alien Income Tax Return
• 1040NR-EZ   U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents
• 2106   Employee Business Expenses
• 2106-EZ   Unreimbursed Employee Business Expenses
• 3903   Moving Expenses
• 4563   Exclusion of Income for Bona Fide Residents of American Samoa

See chapter 12 for information about getting these publications and forms.

Tax Year

You must figure your income and file a tax return on the basis of an annual accounting period called a tax year. If you have not previously established a fiscal tax year, your tax year is the calendar year. A calendar year is 12 consecutive months ending on December 31. If you have previously established a regular fiscal year (12 consecutive months ending on the last day of a month other than December or a 52-53 week year) and are considered to be a U.S. resident for any calendar year, you will be treated as a U.S. resident for any part of your fiscal year that falls within that calendar year.

Identification Number

A taxpayer identification number must be furnished on returns, statements, and other tax-related documents. For an individual, this is a social security number (SSN). If you do not have and are not eligible to get an SSN, the IRS will issue you an individual taxpayer identification number (ITIN). An employer identification number (EIN) is required if you are engaged in a trade or business as a sole proprietor and have employees or a qualified retirement plan.

You must furnish a taxpayer identification number if you are:

1. An alien who has income effectively connected with the conduct of a U.S. trade or business at any time during the year,
2. An alien who has a U.S. office or place of business at any time during the year,
3. A nonresident alien spouse treated as a resident, as discussed in chapter 1, or
4. Any other alien who files a tax return, an amended return, or a refund claim (but not information returns).

Social security number.   Generally, you can get an SSN if you have been lawfully admitted to the United States for permanent residence or under other immigration categories that authorize U.S. employment.

To apply for this number, get Form SS-5, Application for a Social Security Card, from your local Social Security Administration office or call the SSA at 1-800-772-1213. The completed form should be returned to the SSA. It usually takes about 2 weeks to get an SSN.

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

You cannot claim the earned income credit, discussed later, using an ITIN. You and your spouse (if filing a joint return) and any qualifying child must have SSNs.

ITINs are for tax use only. They do not affect your immigration status or your right to be legally employed in the United States.

To apply for an ITIN, file Form W-7 with the IRS. It usually takes 4 to 6 weeks to get an ITIN.

In addition to those aliens who are required to furnish a taxpayer identification number and are not eligible for an SSN, a Form W-7 should be filed for:

• Alien individuals who are claimed as dependents and are not eligible for an SSN, and
• Alien individual spouses who are claimed as exemptions and are not eligible for an SSN.

Employer identification number.    An individual may use an SSN (or ITIN) for individual taxes and an EIN for business taxes. To apply for an EIN, file Form SS-4, Application for Employer Identification Number, with the IRS.

Filing Status

The amount of your tax depends on your filing status. Your filing status is important in determining whether you can take certain deductions and credits. The rules for determining your filing status are different for resident aliens and nonresident aliens.

Resident Aliens

Resident aliens can use the same filing statuses available to U.S. citizens. See your form instructions or Publication 501 for more information on filing status.

Married filing jointly.   Generally, you can file as married filing jointly only if both you and your spouse were resident aliens for the entire tax year, or if you make one of the choices discussed in chapter 1 to treat your spouse as a resident alien for the entire tax year.

Qualifying widow(er).   If your spouse died in 1999 or 2000, you have not remarried, and you have a dependent child living with you, you may qualify to file as a qualifying widow(er) and use the joint return tax rates. This applies only if you could have filed a joint return with your spouse for the year your spouse died.

Head of household.   You can qualify as head of household if you are unmarried or considered unmarried on the last day of the year and you pay more than half the cost of keeping up a home for you and a qualifying person. You must be a resident alien for the entire tax year.

You are considered unmarried for this purpose if your spouse was a nonresident alien at any time during the year and you do not make one of the choices discussed in chapter 1 to treat your spouse as a resident alien for the entire tax year.

Note.   Even if you are considered unmarried for head of household purposes because you are married to a nonresident alien, you may still be considered married for purposes of the earned income credit. In that case, you will not be entitled to the credit. See Publication 501 for more information.

Nonresident Aliens

If you are a nonresident alien filing Form 1040NR, you may be able to use one of the filing statuses discussed below. If you are filing Form 1040NR-EZ, you can only claim Single nonresident alien or Married nonresident alien as your filing status.

Married filing jointly.   Generally, you cannot file as married filing jointly if either spouse was a nonresident alien at any time during the tax year.

However, nonresident aliens married to U.S. citizens or residents can choose to be treated as U.S. residents and file joint returns. For more information on these choices, see chapter 1.

Qualifying widow(er).   You may be eligible to file as a qualifying widow(er) and use the joint return tax rates if:

1. You were a resident of Canada, Mexico, Japan, or South Korea, or a U.S. national (defined below),
2. Your spouse died in 1999 or 2000 and you have not remarried, and
3. You have a dependent child living with you.

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

A U.S. national is an individual who, although not a U.S. citizen, owes his or her allegiance to the United States. U.S. nationals include American Samoans and Northern Mariana Islanders who chose to become U.S. nationals instead of U.S. citizens.

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

1. Your spouse is a resident alien or U.S. citizen for the entire tax year,
2. You do not choose to be treated as a resident alien, and
3. Your spouse meets the other requirements for this filing status, as discussed earlier under Resident Aliens.

Note.   Even if your spouse is considered unmarried for head of household purposes because you are a nonresident alien, your spouse may still be considered married for purposes of the earned income credit. In that case, your spouse will not be entitled to the credit. See Publication 501 for more information.

Married filing separately.   Married nonresident aliens who are not married to U.S. citizens or residents generally must use the Tax Table column or the Tax Rate Schedule for married filing separate returns when determining the tax on income effectively connected with a U.S. trade or business. They normally cannot use the Tax Table column or the Tax Rate Schedule for single individuals. However, if you are a married resident of Canada, Mexico, Japan, or South Korea, or are a married U.S. national, you may be able to file as single if you lived apart from your spouse during the last 6 months of the year. See the instructions for Form 1040NR to see if you qualify. U.S. national was defined earlier in this section under Qualifying widow(er).

Nonresident aliens who are married to U.S. citizens or residents can choose to be treated as a resident and file a joint return. For information on these choices, see chapter 1. If you do not make the choice to file jointly, use the Tax Table column or the Tax Rate Schedule for married individuals filing separately.

A nonresident alien estate or trust using Form 1040NR must use Tax Rate Schedule W in the Form 1040NR instructions when determining the tax on income effectively connected with a U.S. trade or business.

Special rules for aliens from certain U.S. possessions.   A nonresident alien who is a bona fide resident of American Samoa or Puerto Rico for the entire tax year and who is temporarily working in the United States should read Bona Fide Residents of American Samoa or Puerto Rico, at the end of this chapter, for information about special rules.

Reporting Your Income

You must report each item of income that is taxable according to the rules in chapters 2, 3, and 4. For resident aliens, this includes income from sources both within and outside the United States. For nonresident aliens, this includes both income that is effectively connected with a trade or business in the United States (subject to graduated tax rates) and income from U.S. sources that is not effectively connected (subject to a flat 30% tax rate or lower tax treaty rate).

Deductions

Resident and nonresident aliens can claim similar deductions on their U.S. tax returns. However, nonresident aliens generally can claim only deductions related to income that is effectively connected with their U.S. trade or business.

Resident Aliens

You can claim the same deductions allowed to U.S. citizens if you are a resident alien for the entire tax year. While the discussion that follows contains some of the same general rules and guidelines that apply to you, it is specifically directed toward nonresident aliens. You should get Form 1040 and instructions for more information on how to claim your allowable deductions.

Nonresident Aliens

You can claim deductions to figure your effectively connected taxable income. You generally cannot claim deductions related to income that is not connected with your U.S. business activities. Except for personal exemptions, and certain itemized deductions, discussed later, you can claim deductions only to the extent they are connected with your effectively connected income.

Ordinary and necessary business expenses.   You can deduct all ordinary and necessary expenses in the operation of your U.S. trade or business to the extent they relate to income effectively connected with that trade or business. The deduction for travel expenses while in the United States is discussed under Itemized Deductions, later. For information about other business expenses, see Publication 535.

Losses.   You can deduct losses resulting from transactions that you entered into for profit and that you were not reimbursed for by insurance, etc., to the extent that they relate to income that is effectively connected with a trade or business in the United States.

Individual retirement arrangement (IRA).   You may qualify to establish a traditional IRA whether or not you are covered by a qualified retirement plan at work. You can contribute the smaller of $2,000 or your taxable compensation effectively connected with your U.S. trade or business to an IRA for 2001. If you or your spouse are covered by a plan at work, or you are self-employed and had a SEP, SIMPLE, or qualified retirement plan, you can only deduct these contributions subject to certain limits.

For more information, see Publication 590, Individual Retirement Arrangements (IRAs).

Moving expenses.   If you are a nonresident alien temporarily in the United States earning taxable income for performing personal services, you can deduct moving expenses to the United States if you meet both of the following tests.

1. You are a full-time employee for at least 39 weeks during the 12 months right after you move, or if you are self-employed, you work full time for at least 39 weeks during the first 12 months and 78 weeks during the first 24 months right after you move.
2. Your new job location is at least 50 miles farther (by the shortest commonly traveled route) from your former home than your former job location was. If you had no former job location, the new job location must be at least 50 miles from your former home.

You cannot deduct the moving expense you have when returning to your home abroad or moving to a foreign job site.

Figure your deductible moving expenses to the United States on Form 3903, and deduct them on line 27 of Form 1040NR.

For more information on the moving expense deduction, see Publication 521.

Reimbursements.   If you were reimbursed by your employer for allowable moving expenses, your employer should have excluded these reimbursements from your income. You can only deduct allowable moving expenses that were not reimbursed by your employer or that were reimbursed but the reimbursement was included in your income. For more information, see Publication 521.

Moving expense or travel expense.   If you deduct moving expenses to the United States, you cannot also deduct travel expenses ( discussed, later, under Itemized Deductions) while temporarily away from your tax home in a foreign country. Moving expenses are based on a change in your principal place of business while travel expenses are based on your temporary absence from your principal place of business.

Self-employed SEP, SIMPLE, and qualified retirement plans.   If you are self-employed, you may be able to deduct contributions to a SEP, SIMPLE, or qualified retirement plan that provides retirement benefits for yourself and your common-law employees, if any. To make deductible contributions for yourself, you must have net earnings from self-employment that are effectively connected with your U.S. trade or business.

Get Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans), for further information.

Penalty on early withdrawal of savings.   You must include in income all effectively connected interest income you receive or that is credited to your account during the year. Do not reduce it by any penalty you must pay on an early withdrawal from a time savings account. However, if the interest income is effectively connected with your U.S. trade or business during the year, you can deduct on line 30 of Form 1040NR the amount of the early withdrawal penalty that the banking institution charged.

Student loan interest.   If you paid interest on a student loan in 2001, you may be able to deduct up to $2,500 of the interest you paid. Generally, you can claim the deduction if all of the following requirements are met.

1. Your filing status is any filing status except married filing separately.
2. Your modified adjusted gross income is less than $55,000.
3. No one else is claiming an exemption for you on their tax return.
4. You paid interest on a loan taken out only to pay tuition and other qualified higher education expenses for yourself, your spouse, or someone who was your dependent when the loan was taken out.
5. The education expenses were paid or incurred within a reasonable period of time before or after the loan was taken out.
6. The person for whom the expenses were paid or incurred was an eligible student.
7. The first 60 months in which interest payments were required on the loan did not end before January 2001.

For more information, see Publication 970, Tax Benefits for Higher Education.

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