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 (OID).   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.

1. You received a payment on a debt instrument. In this case, the amount of OID subject to tax is the OID that accrued while you held the debt instrument 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 debt instrument.
2. You sold or exchanged the debt instrument. The amount of OID subject to tax is the OID that accrued while you held the debt instrument 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.

1. You bought the debt instrument at a premium or paid an acquisition premium.
2. The debt instrument is a stripped bond or a stripped coupon (including zero coupon instruments backed by U.S. Treasury securities).
3. The debt instrument is a contingent payment or inflation-indexed debt instrument.

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.

1. Gains on the disposal of timber, coal, or domestic iron ore with a retained economic interest.
2. Gains on contingent payments received from the sale or exchange of patents, copyrights, and similar property after October 4, 1966.
3. Gains on certain transfers of all substantial rights to, or an undivided interest in, patents if the transfers were made before October 5, 1966.
4. 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.

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 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.

Example.   You are a nonresident alien and are not engaged in a U.S. trade or business. You own a single family house in the United States that you rent out. Your rental income for the year is $10,000. This is your only U.S. source income. As discussed earlier under The 30% Tax, the rental income is subject to a tax at a 30% (or lower treaty) rate. You received a Form 1042-S showing that your tenants properly withheld this tax from the rental income. You do not have to file a U.S. tax return (Form 1040NR) because your U.S. tax liability is satisfied by the withholding of tax.

If you make the choice discussed above, you can offset the $10,000 income by certain rental expenses. (See Publication 527, Residential Rental Property, for information on rental expenses.) Any resulting net income is taxed at graduated rates. If you make this choice, report the rental income and expenses on Schedule E (Form 1040) and attach the schedule to Form 1040NR. For the first year you make the choice, also attach the statement discussed next.

Making the choice.   Make the initial choice by attaching a statement to your return, or amended return, for the year of the choice. Include the following in your statement.

1. That you are making the choice.
2. Whether the choice is under Internal Revenue Code section 871(d)(explained above) or a tax treaty.
3. A complete list of all your real property, or any interest in real property, located in the United States.
4. The extent of your ownership in the property.
5. The location of the property.
6. A description of any major improvements to the property.
7. The dates you owned the property.
8. Your income from the property.
9. 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

A 4% tax rate applies to transportation income that is not effectively connected because it does not meet the two conditions listed earlier underTransportation Income. 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).

1. Your name, taxpayer identification number, and tax year.
2. A description of the types of services performed (whether on or off board).
3. Names of vessels or registration numbers of aircraft on which you performed the services.
4. Amount of U.S. source transportation income derived from each type of service for each vessel or aircraft for the calendar year.
5. 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 2001, you are presumed to have tax avoidance as a principal purpose if:

1. Your average annual net income tax for the last five tax years ending before the date of the action is more than $116,000, or
2. Your net worth on the date of the action is $580,000 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.

1. You became at birth a U.S. citizen and a citizen of another country and continue to be a citizen of that other country.
2. 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.
3. 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.
4. You lost your U.S. citizenship before reaching age 18½.

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.

1. You become (within a reasonable period after your expatriation) a resident fully liable to income tax in one of the following countries.
   1. The country in which you were born.
   2. The country where your spouse was born.
   3. The country where either of your parents was born.
2. You were present in the United States for no more than 30 days during each year of the 10-year period prior to expatriation.
3. You ceased to be a long-term resident before reaching age 18½.

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 dual-status 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 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.

1. You were a U.S. resident for a period that includes at least 3 consecutive calendar years.
2. You were a U.S. resident for at least 183 days in each of those years.
3. You ceased to be treated as a U.S. resident.
4. 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, 1996, as a lawful permanent resident. On August 1, 1998, 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 (1996, 1997, and 1998). He returned to the United States on October 5, 2001, as a lawful permanent resident. He became a resident before the close of the third calendar year (2001) beginning after the end of his first period of residence (August 1, 1998). Therefore, he is subject to tax under the special rule for the period of nonresidence (August 2, 1998, through October 4, 2001) 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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