Introduction

Table A. What You Need To Know About Taxes For tax purposes, an alien is an individual who is not a U.S. citizen. Aliens are classified as nonresident aliens and resident aliens. This publication will help you determine your status and give you information you will need to file your U.S. tax return. Resident aliens generally are taxed on their worldwide income, the same as U.S. citizens. Nonresident aliens are taxed only on their income from sources within the United States and on certain income connected with the conduct of a trade or business in the United States.

Table A, What You Need To Know About U.S. Taxes, provides a list of questions and the chapter or chapters in this publication where you will find the related discussion.

Answers to frequently asked questions are presented in the back of the publication.

The information in this publication is not as comprehensive for resident aliens as it is for nonresident aliens. Resident aliens are generally treated the same as U.S. citizens and can find more information in other IRS publications.

Comments and suggestions.   We welcome your comments about this publication and your suggestions for future editions.

You can e-mail us while visiting our web site at www.irs.gov.

You can write to us at the following address:

Internal Revenue Service
Technical Publications Branch
W:CAR:MP:FP:P
1111 Constitution Ave. NW
Washington, DC 20224

We respond to many letters by telephone. Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence.

Important Changes for 2001

Reduced tax rates.   For tax years beginning in 2001, the 28%, 31%, 36%, and 39.6% graduated income tax rates have been reduced to 27.5%, 30.5%, 35.5%, and 39.1%, respectively. A portion of your income that would be subject to the 15% tax rate is reduced to 10%.

Resident aliens. If you filed a 2000 U.S. tax return (Form 1040, 1040A, or 1040EZ), you may have received the benefits of the 10% rate through an advance payment of income tax in 2001. You do not have to report this payment as income on your 2001 tax return. If you did not receive an advance payment and you are filing as a U.S. resident for 2001, you will receive the benefits of the 10% rate through the rate reduction credit. See the instructions for Form 1040, Form 1040A, or Form 1040EZ.

Nonresident aliens. The 10% tax rate is reflected in the tax table and tax rate schedules. If you filed a 2000 U.S. tax return and received an advance payment of your 2001 U.S. tax, you must use the Tax Computation Worksheet for Nonresident Alien Individuals Who Received an Advance Payment of Their 2001 Tax to figure your 2001 tax. See the instructions for line 39 in the Form 1040NR instructions.

Foreign earned income exclusion.   For 2001, the foreign earned income exclusion is $78,000. The exclusion increases to $80,000 for 2002 and later years. For more information, see chapter 3.

Interest on student loans.    The maximum deduction for interest paid on a qualified student loan has increased to $2,500. See Student loan interest under Deductions in chapter 5.

Tax relief for victims of terrorist attacks.   At the time this publication was being prepared for print, Congress was considering legislation that would provide tax relief for victims of terrorist attacks in the United States.

For more information, see Publication 3920.

Third party designee.   Beginning with your tax return for 2001, you can check the Yes box in the Third Party Designee area of your return to authorize the IRS to discuss your return with a friend, family member, or any other person you choose. This allows the IRS to call the person you identified as your designee to answer any questions that may arise during the processing of your return. It also allows your designee to perform certain actions. See your income tax package for details.

Important Changes for 2002

Reduced tax rates.   For tax years beginning in 2002, the 27.5%, 30.5%, 35.5%, and 39.1% graduated income tax rates are reduced to 27%, 30%, 35%, and 38.6%, respectively. The 10% rate will be reflected in the tax tables and tax rate schedules for resident and nonresident aliens.

Interest on student loans.   There will no longer be a 60-month limit on deducting student loan interest. Also, the income phaseout limit will increase to $65,000 and the maximum deduction will increase to $3,000.

Individual retirement arrangements (IRAs).    Your maximum contribution (and any allowable deduction) limit is increased. Previously, the limit was $2,000. The new limit depends on your age at the end of the year.

• If you are under age 50, the most you can contribute is the smaller of $3,000, or your taxable compensation.
• If you are age 50 or older, the most you can contribute is the smaller of $3,500, or your taxable compensation.

Adoption credit.    The maximum credit for qualifying expenses paid to adopt an eligible child will increase to $10,000.

Earned income credit (EIC).   In 2002, the EIC will be based, in part, on adjusted gross income, not modified adjusted gross income. For information about other changes to the EIC, see Publication 596, Earned Income Credit (EIC).

Estimated tax safe harbor for higher income individuals.   For installment payments for tax years beginning in 2002, the estimated tax safe harbor for higher income individuals (other than farmers and fishermen) has been modified. If your 2001 adjusted gross income is more than $150,000 ($75,000 if married filing a separate return in 2002), you will have to deposit the smaller of 90% of your expected tax for 2002 or 112% of the tax shown on your 2001 return to avoid an estimated tax penalty. For more information, see Estimated Tax Form 1040-ES (NR) in chapter 8.

Important Reminders

Individual taxpayer identification number (ITIN).   The IRS will issue an ITIN to a nonresident or resident alien who does not have and is not eligible to get a social security number. To apply for an ITIN, file Form W-7, Application for IRS Individual Taxpayer Identification Number, with the IRS. An ITIN is for tax use only. It does not entitle the holder to social security benefits or change the holder's employment or immigration status under U.S. law. See Identification Number in chapter 5.

Disclosure of a treaty-based position that reduces your tax.   If you take the position that any U.S. tax is overruled or otherwise reduced by a U.S. treaty (a treaty-based position), you generally must disclose that position on your affected return. See Effect of Tax Treaties in chapter 1.

Form 1040NR-EZ.   You may be able to use Form 1040NR-EZ, U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents. This form is shorter and easier to prepare than Form 1040NR. To see if you meet the conditions for filing this form, see Form 1040NR-EZ in chapter 7.

Earned income credit for nonresident aliens.   If you are a nonresident alien for any part of the year, you cannot claim the earned income credit unless you are married and choose to be treated as a resident alien for the entire year. See Choosing Resident Alien Status and Nonresident Spouse Treated as a Resident in chapter 1.

Leaving the United States.   Generally, aliens must obtain a sailing permit or departure permit before leaving the United States. See chapter 11 for more information.

Change of address.   If you change your mailing address, be sure to notify the Internal Revenue Service using Form 8822, Change of Address.

Nonresident aliens who filed Form 1040NR or Form 1040NR-EZ with the Internal Revenue Service Center, Philadelphia, PA 19255, should send the form there. Resident aliens should send the form to the Internal Revenue Service Center for their old address (addresses for the Service Centers are on the back 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. See Expatriation Tax in chapter 4.

Photographs of missing children.   The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.

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