2003 HTML Instructions for Form 1040NR,

This is archived information that pertains only to the 2003 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.

Table of Contents

For details on these and other changes for 2003 and 2004, see Pub. 553.

What's New for 2003?

Tax Rates Reduced. The tax rates of 27%, 30%, 35%, and 38.6% have been reduced to 25%, 28%, 33%, and 35%, respectively. The 10% tax rate applies to the first $7,000 of taxable income (the first $14,000 of taxable income if qualifying widow(er)). These changes are reflected in the Tax Table that begins on page 29 and the Tax Rate Schedules on page 41.

Married People—Increased Tax Benefit. For married taxpayers filing a separate return, the income subject to the 15% tax bracket has been expanded to cover the same income range as that of single filers. This change is reflected in the Tax Table that begins on page 29 and the Tax Rate Schedules on page 41.

Qualifying Widow(er)—Increased Tax Benefit. The 15% tax bracket has been expanded to cover twice the income range as that of single filers. This change is reflected in the Tax Table that begins on page 29 and the Tax Rate Schedules on page 41.

Child Tax Credits Increased. You may be able to take credits of up to $1,000 for each qualifying child. But, you must reduce your credits by any advance child tax credit payment you received in 2003 (see Advance Child Tax Credit Payment below). For more details, see the instructions for line 45 on page 18.

Advance Child Tax Credit Payment. You must reduce your 2003 child tax credits by any advance child tax credit payment you received in 2003. Enter the amount of any advance payment you received (before offset) on line 2 of your Child Tax Credit Worksheet. The amount of your advance payment (before offset) is shown on Notice 1319. This notice was mailed to you in 2003. If you do not have this notice, you can check the amount of your advance payment (before offset) on the IRS website at www.irs.gov or call us at 1-800-829-1040. For details on offsets, see Refund Offset on page 20.

If you received an advance payment but did not have a qualifying child for 2003 (see the instructions for line 7c, column (4) on page 8), you do not have to 8), you do not have to pay back the amount you received. Do not enter the amount of your advance payment on your return. If you filed a joint return for 2002, but for 2003 you are not filing a joint return, you are considered to have received one-half of the advance payment.

Dividends—New Tax Rate. The maximum tax rate for qualified dividends is 15% (generally 5% for people whose other income is taxed at the 10% or 15% rate). See the instructions for line 10b on page 10. Use Schedule D or the Qualified Dividends and Capital Gain Tax Worksheet, whichever applies, to figure your tax. See the instructions for line 39 on page 16.

Capital Gains—Maximum Tax Rate Reduced. The maximum tax rate for most net capital gain taken into account after May 5, 2003, has been reduced to 15% (generally, 5% for people whose other income is taxed at the 10% or 15% rate). Use Schedule D or the Qualified Dividends and Capital Gain Tax Worksheet, on page 17, whichever applies, to figure your tax. See the instructions for line 39 on
page 16.

Alternative Minimum Tax—Exemption Amount Increased. The alternative minimum tax exemption amount has increased to $40,250 ($58,000 if qualifying widow(er); $29,000 if married filing separately).

Archer MSA Deduction. Archer MSA deductions are now reported on Form 1040NR, line 32. See the instructions for line 32 on page 15.

Child and Dependent Care Credit Increased. You may be able to take a credit of up to $1,050 for the expenses you paid for the care of one qualifying person; $2,100 if you paid for the care of two or more qualifying persons. See the Instructions for Form 2441 for details.

Self-Employed Health Insurance Deduction. You may be able to deduct up to 100% of your health insurance expenses. See the instructions for line 28 beginning on page 14.

IRA Deduction Allowed to More People Covered by Retirement Plans. You may be able to take an IRA deduction if you were covered by a retirement plan and your 2003 modified AGI is less than $50,000 ($70,000 if qualifying widow(er)). See the instructions for line 25 on page 14.

Standard Mileage Rate. The 2003 rate for business use of your vehicle is 36 cents a mile.

Third Party Designee. A third party designee can ask the IRS for copies of notices or transcripts related to your return. Also, the authorization can be revoked. See page 22.

What To Look for in 2004

Certain Credits No Longer Allowed Against Alternative Minimum Tax (AMT). The credit for child and dependent care expenses, mortgage interest credit, and District of Columbia first-time homebuyer credit will no longer be allowed against AMT. However, the child tax credit, adoption credit, and credit for qualified retirement savings contributions will still be allowed against your AMT.

IRA deduction allowed to more people covered by retirement plans. You may be able to take an IRA deduction if you were covered by a retirement plan and your 2004 modified AGI is less than $55,000 ($75,000 if qualifying widow(er)).

Standard Mileage Rate. The 2004 rate for business use of your vehicle is 37½ cents a mile. The 2004 rate for use of your vehicle to move is 14 cents a mile.

Items To Note

Form 1040NR-EZ. You may be able to use Form 1040NR-EZ if your only income from U.S. sources is wages, salaries, tips, taxable refunds of state and local income taxes, and scholarship or fellowship grants. For more details, see Form 1040NR-EZ and its instructions.

Other reporting requirements. If you meet the closer connection to a foreign country exception to the substantial presence test, you must file
Form 8840. If you exclude days of presence in the United States for purposes of the substantial presence test, you must file Form 8843. This rule does not apply to foreign-government- related individuals who exclude days of presence in the United States. Certain dual-resident taxpayers who claim tax treaty benefits must file Form 8833. A dual-resident taxpayer is one who is a resident of both the United States and another country under each country's tax laws.

Additional Information

If you need more information, our free publications may help you. Pub. 519, U.S. Tax Guide for Aliens, will be the most important, but the following publications may also help.

Pub. 525	Taxable and Nontaxable Income
Pub. 529	Miscellaneous Deductions
Pub. 552	Recordkeeping for Individuals
Pub. 597	Information on the United States-Canada Income Tax Treaty
Pub. 901	U.S. Tax Treaties
Pub. 910	Guide to Free Tax Services (includes a list of all publications)

These free publications and the forms and schedules you will need are available from the Internal Revenue Service. You can download them from the IRS website at www.irs.gov. Also see Taxpayer Assistance on page 27 for other ways to get them (as well as information on receiving IRS assistance in completing the forms).

Resident Alien or Nonresident Alien

If you are not a citizen of the United States, specific rules apply to determine if you are a resident alien or a nonresident alien for tax purposes. Generally, you are considered a resident alien if you meet either the green card test or the substantial presence testfor 2003. (These tests are explained below.) Even if you do not meet either of these tests, you may be able to choose to be treated as a U.S. resident for part of 2003. See First-Year Choice in Pub. 519 for details.

You are generally considered a nonresident alien for the year if you are not a U.S. resident under either of these tests. However, even if you are a U.S. resident under one of these tests, you may still be considered a nonresident alien if you qualify as a resident of a treaty country within the meaning of the tax treaty between the United States and that country. You may download the complete text of most U.S. tax treaties at www.irs.gov. Technical explanations for many of those treaties are also available at that site.

For more details on resident and nonresident status, the tests for residence, and the exceptions to them, see Pub. 519.

Green Card Test

You are a resident for tax purposes if you were a lawful permanent resident (immigrant) of the United States at any time during 2003.

Substantial Presence Test

You are considered a U.S. resident if you meet the substantial presence test for 2003. You meet this test if you were physically present in the United States for at least:

31 days during 2003 and
183 days during the period 2003, 2002, and 2001, counting all the days of physical presence in 2003, but only ⅓ the number of days of presence in 2002 and only ⅙ the number of days in 2001.

Generally, you are treated as present in the United States on any day that you are physically present in the country at any time during the day. However, there are exceptions to this rule. In general, do not count the following as days of presence in the United States for the substantial presence test.

Days you commute to work in the United States from a residence in Canada or Mexico if you regularly commute from Canada or Mexico.
Days you are in the United States for less than 24 hours when you are in transit between two places outside of the United States.
Days you are in the United States as a crew member of a foreign vessel.
Days you intend, but are unable, to leave the United States because of a medical condition that develops while you are in the United States.
Days you are an exempt individual (defined below).

Exempt individual. For these purposes, an exempt individual is generally an individual who is a:

Foreign-government-related individual,
Teacher or trainee,
Student, or
Professional athlete who is temporarily in the United States to compete in a charitable sports event.

Note:

Alien individuals with “Q” visas are treated as either students, teachers, or trainees and, as such, are exempt individuals for purposes of the substantial presence test if they otherwise qualify. “Q” visas are issued to aliens participating in certain international cultural exchange programs.

See Pub. 519 for more details regarding days of presence in the United States for the substantial presence test.

Closer Connection to Foreign Country

Even though you would otherwise meet the substantial presence test, you can be treated as a nonresident alien if you:

Were present in the United States for fewer than 183 days during 2003,
Establish that during 2003 you had a tax home in a foreign country, and
Establish that during 2003 you had a closer connection to one foreign country in which you had a tax home than to the United States unless you had a closer connection to two foreign countries.

See Pub. 519 for more information.

Who Must File

File Form 1040NR if any of the following four conditions applies to you.

You were a nonresident alien engaged in a trade or business in the United States during 2003. You must file even if—
- None of your income came from a trade or business conducted in the United States,
- You have no U.S. source income, or
- Your income is exempt from U.S. tax.
However, if you have no gross income for 2003, do not complete the schedules for Form 1040NR. Instead, attach a list of the kinds of exclusions you claim and the amount of each.

Exception. If you were a nonresident alien student, teacher, or trainee who was temporarily present in the United States under an “F,” “J,” “M,” or “Q” visa, you must file Form 1040NR (or Form 1040NR-EZ) only if you have income that is subject to tax under section 871 (that is, the income items listed on lines 8 through 21 on page 1 of Form 1040NR and on lines 73a through 82 on page 4 of
Form 1040NR).
You were a nonresident alien not engaged in a trade or business in the United States during 2003 and:
- You received income from U.S. sources that is reportable on lines 73a through 82 and
- Not all of the U.S. tax that you owe was withheld from that income.
You represent a deceased person who would have had to file Form 1040NR.
You represent an estate or trust that has to file Form 1040NR.

Exception for children under age 14. If your child was under age 14 at the end of 2003, had income only from interest and dividends that are effectively connected with a U.S. trade or business, and that income totaled less than $7,500, you may be able to elect to report your child's income on your return. But you must use Form 8814 to do so. If you make this election, your child does not have to file a return. For details, see Form 8814.

A child born on January 1, 1990, is considered to be age 14 at the end of 2003. Do not use Form 8814 for such a child.

Filing a deceased person's return. The personal representative must file the return for a deceased person who was required to file a return for 2003. A personal representative can be an executor, administrator, or anyone who is in charge of the deceased person's property.

Filing for an estate or trust. If you are filing Form 1040NR for a nonresident alien estate or trust, change the form to reflect the provisions of Subchapter J, Chapter 1, of the Internal Revenue Code. You may find it helpful to refer to Form 1041 and its instructions.

Simplified Procedure for Claiming Certain Refunds

You may use this procedure only if you meet all of the following conditions for the tax year.

You were a nonresident alien.
You were not engaged in a trade or business in the United States at any time.
You had no income that was effectively connected with the conduct of a U.S. trade or business.
Your U.S. income tax liability was fully satisfied through withholding of tax at source.
You are filing Form 1040NR solely to claim a refund of U.S. tax withheld at source.

Example. John is a nonresident alien individual. The only U.S. source income he received during the year was dividend income from U.S. stocks. The dividend income was reported to him on Form(s) 1042-S. On one of the dividend payments, the withholding agent incorrectly withheld at a rate of 30% (instead of 15%). John is eligible to use the simplified procedure.

If you meet all of the conditions listed earlier for the tax year, complete Form 1040NR as follows.

Page 1. Enter your name, identifying number (defined on page 7), country of citizenship, and all address information requested at the top of page 1. Leave the rest of page 1 blank.

Page 4, lines 73a through 82. Enter the amounts of gross income you received from dividends, interest, royalties, pensions, annuities, and other income. If any income you received was subject to backup withholding or withholding at source, you must include all gross income of that type that you received. The amount of each type of income should be shown in the column under the appropriate U.S. tax rate, if any, that applies to that type of income in your particular circumstances.

If you are entitled to a reduced rate of, or exemption from, withholding on the income pursuant to a tax treaty, the applicable rate of U.S. tax is the same as the treaty rate. Use column (e) if the applicable tax rate is 0%.

Example. Mary is a nonresident alien individual. The only U.S. source income she received during the year was as follows:

4 dividend payments
12 interest payments

All payments were reported to Mary on Form(s) 1042-S. On one of the dividend payments, the withholding agent incorrectly withheld at a rate of 30% (instead of 15%). There were no other withholding discrepancies. Mary must report all four dividend payments. She is not required to report any of the interest payments.

Note:

Payments of gross proceeds from the sale of securities or regulated futures contracts are generally exempt from U.S. tax. If you received such payments and they were subjected to backup withholding, specify the type of payment on line 82 and show the amount in column (e).

Line 83. Enter the total amount of U.S. tax withheld at source (and not refunded by the payer or withholding agent) for the income you included on lines 73a through 82.

Lines 84 through 86. Complete these lines as instructed on the form.

Page 5. You must answer all questions that apply. For item M, you must identify the income tax treaty and treaty article(s) under which you are applying for a refund of tax. Also, enter the type of income (for example, dividends, royalties) and amount in the appropriate space. You must provide the information required for each type of income for which a treaty claim is made.

Note:

If you are claiming a reduced rate of, or exemption from, tax based on a tax treaty, you must generally be a resident of the particular treaty country within the meaning of the treaty and you cannot have a permanent establishment or fixed base in the United States.

Page 2, lines 51 and 56. Enter your total income tax liability.

Lines 64 and 67. Enter the total amount of U.S. tax withheld (from
line 83).

Lines 68 and 69a. Enter the difference between line 56 and line 67. This is your total refund.

Signature. You must sign and date your tax return. See Reminders on page 26.

Documentation. You must attach acceptable proof of the withholding for which you are claiming a refund. If you are claiming a refund of backup withholding tax based on your status as a nonresident alien, you must attach a copy of the Form 1099 that shows the income and the amount of backup withholding. If you are claiming a refund of U.S. tax withheld at source, you must attach a copy of the Form 1042-S that shows the income and the amount of U.S. tax withheld.

Additional Information

Portfolio interest. If you are claiming a refund of U.S. tax withheld from portfolio interest, include a description of the relevant debt obligation, including the name of the issuer, CUSIP number (if any), interest rate, and the date the debt was issued.

Withholding on distributions. If you are claiming an exemption from withholding on a distribution from a U.S. corporation with respect to its stock because the corporation had insufficient earnings and profits to support ordinary income treatment, you must attach a statement that identifies the distributing corporation and provides the basis for the claim.

If you are claiming an exemption from withholding on a distribution from a mutual fund or real estate investment trust (REIT) with respect to its stock because the distribution was designated as long-term capital gain or a return of capital, you must attach a statement that identifies the mutual fund or REIT and provides the basis for the claim.

If you are claiming an exemption from withholding on a distribution from a U.S. corporation with respect to its stock because, in your particular circumstances, the transaction qualifies as a redemption of stock under
section 302, you must attach a statement that describes the transaction and presents the facts necessary to establish that the payment was(a) a complete redemption, (b) a disproportionate redemption, or (c) not essentially equivalent to a dividend.

When To File

Individuals. If you were an employee and received wages subject to U.S. income tax withholding, file Form 1040NR by the 15th day of the 4th month after your tax year ends. A return for the 2003 calendar year is due by April 15, 2004.

If you did not receive wages as an employee subject to U.S. income tax withholding, file Form 1040NR by the 15th day of the 6th month after your tax year ends. A return for the 2003 calendar year is due by June 15, 2004.

Estates and trusts. If you file for a nonresident alien estate or trust that has an office in the United States, file the return by the 15th day of the 4th month after the tax year ends. If you file for a nonresident alien estate or trust that does not have an office in the United States, file the return by the 15th day of the 6th month after the tax year ends.

Note:

If the regular due date for filing falls on a Saturday, Sunday, or legal holiday, file by the next business day.

Extension of time to file. If you cannot file your return by the due date, you should file Form 4868. You must file Form 4868 by the regular due date of the return.

Note:

Form 4868 does not extend the time to pay your income tax. The tax is due by the regular due date of the return.

Where To File

File Form 1040NR with the Internal Revenue Service Center, Philadelphia, PA 19255, U.S.A.

Private Delivery Services

You can use certain private delivery services designated by the IRS to meet the “timely mailing as timely filing/paying” rule for tax returns and payments. The most recent list of designated private delivery services was published by the IRS in September 2002. The list includes only the following:

Airborne Express (Airborne): Overnight Air Express Service, Next Afternoon Service, and Second Day Service.
DHL Worldwide Express (DHL): DHL “Same Day” Service, and DHL USA Overnight.
Federal Express (FedEx): FedEx Priority Overnight, FedEx Standard Overnight, FedEx 2Day, FedEx International Priority, and FedEx International First.
United Parcel Service (UPS): UPS Next Day Air, UPS Next Day Air Saver, UPS 2nd Day Air, UPS 2nd Day Air A.M., UPS Worldwide Express Plus, and UPS Worldwide Express.

The private delivery service can tell you how to get written proof of the mailing date.

Private delivery services cannot deliver items to P.O. boxes. You must use the U.S. Postal Service to mail any item to an IRS P.O. box address.

Election To Be Taxed as a Resident Alien

You can elect to be taxed as a U.S. resident for the whole year if all of the following apply:

You were married.
Your spouse was a U.S. citizen or resident alien on the last day of the tax year.
You file a joint return for the year of the election using Form 1040, 1040A, or 1040EZ.

To make this election, you must attach the statement described in
Pub. 519 to your return. Do not use Form 1040NR.

Your worldwide income for the whole year must be included and will be taxed under U.S. tax laws. You must agree to keep the records, books, and other information needed to figure the tax. If you made the election in an earlier year, you may file a joint return or separate return for 2003. If you file a separate return, use Form 1040 or Form 1040A. Your worldwide income for the whole year must be included whether you file a joint or separate return.

Nonresident aliens who make this election may forfeit the right to claim benefits otherwise available under a U.S. tax treaty. For more details, see the specific treaty.

Dual-Status Taxpayers

Note:

If you elect to be taxed as a resident alien (discussed earlier), the special instructions and restrictions discussed here do not apply.

Dual-Status Tax Year

A dual-status year is one in which you change status between nonresident and resident alien. Different U.S. income tax rules apply to each status.

Most dual-status years are the years of arrival or departure. Before you arrive in the United States, you are a nonresident alien. After you arrive, you may or may not be a resident, depending on the circumstances.

If you become a U.S. resident, you stay a resident until you leave the United States. You may become a nonresident alien when you leave, if, after leaving (or after your last day of lawful permanent residency if you met the green card test) and for the remainder of the calendar year of your departure, you have a closer connection to a foreign country than to the United States, and, during the next calendar year, you are not a U.S. resident under either the green card test or the substantial presence test. See Pub. 519.

What and Where to File for a Dual-Status Year

If you were a U.S. resident on the last day of the tax year, file Form 1040. Write “Dual-Status Return” across the top and attach a statement showing your income for the part of the year you were a nonresident. You may use Form 1040NR as the statement; write “Dual-Status Statement” across the top. File your return and statement with the Internal Revenue Service Center, Philadelphia, PA 19255, U.S.A.

If you were a nonresident on the last day of the tax year, file Form 1040NR. Write “Dual-Status Return” across the top and attach a statement showing your income for the part of the year you were a U.S. resident. You may use Form 1040 as the statement; write “Dual-Status Statement” across the top. File your return and statement with the Internal Revenue Service Center, Philadelphia, PA 19255, U.S.A.

Statements. Any statement you file with your return must show your name, address, and identifying number (defined on page 7).

Former U.S. long-term residents are required to file Form 8854 with their dual-status return for the last year of U.S. residency. To determine if you are a former U.S. long-term resident, see page 6.

Income Subject to Tax for Dual-Status Year

As a dual-status taxpayer not filing a joint return, you are taxed on income from all sources for the part of the year you were a resident alien. Generally, you are taxed on income only from U.S. sources for the part of the year you were a nonresident alien. However, all income effectively connected with the conduct of a trade or business in the United States is taxable.

Income you received as a dual-status taxpayer from sources outside the United States while a resident alien is taxable even if you became a nonresident alien after receiving it and before the close of the tax year. Conversely, income you received from sources outside the United States while a nonresident alien is not taxable in most cases even if you became a resident alien after receiving it and before the close of the tax year. Income from U.S. sources is taxable whether you received it while a nonresident alien or a resident alien.

Restrictions for Dual-Status Taxpayers

Standard deduction. You may not take the standard deduction.

Head of household. You may not use the Head of Household Tax Table column or Tax Rate Schedule.

Joint return. You may not file a joint return unless you elect to be taxed as a resident alien (see page 4) in lieu of these dual-status taxpayer rules.

Tax rates. If you were married and a nonresident of the United States for all or part of the tax year and you do not make the election to be taxed as a resident alien as discussed earlier, you must use the Tax Table column or Tax Rate Schedule for Married Filing Separately to figure your tax on income effectively connected with a U.S. trade or business. If married, you may not use the Single Tax Table column or Tax Rate Schedule.

Deduction for exemptions. As a dual-status taxpayer, you usually will be entitled to your own personal exemption. Subject to the general rules for qualification, you are allowed exemptions for your spouse and dependents in figuring taxable income for the part of the year you were a resident alien. The amount you may claim for these exemptions is limited to your taxable income (determined without regard to exemptions) for the part of the year you were a resident alien. You may not use exemptions (other than your own) to reduce taxable income to below zero for that period.

Special rules apply for exemptions for the part of the tax year a dual-status taxpayer is a nonresident alien if the taxpayer is a resident of Canada, Mexico, Japan, or the Republic of Korea (South Korea); a U.S. national; or a student or business apprentice from India. See Pub. 519.

Tax credits. You may not take the earned income credit, the credit for the elderly or disabled, or an education credit unless you elect to be taxed as a resident alien (see page 4) in lieu of these dual-status taxpayer rules. For information on other credits, see Chapter 6 of Pub. 519.

How To Figure Tax for Dual-Status Year

When you figure your U.S. tax for a dual-status year, you are subject to different rules for the part of the year you were a resident and the part of the year you were a nonresident.

All income for the period of residence and all income that is effectively connected with a trade or business in the United States for the period of nonresidence, after allowable deductions, is combined and taxed at the same rates that apply to U.S. citizens and residents. Income that is not effectively connected with a trade or business in the United States for the period of nonresidence is subject to the flat 30% rate or lower treaty rate. No deductions are allowed against this income.

If you were a resident alien on the last day of the tax year and you are filing Form 1040, include the tax on the noneffectively connected income in the total on Form 1040, line 60. To the left of line 60 write “Tax from Form 1040NR” and the amount.

If you are filing Form 1040NR, enter the tax from the Tax Table, Tax Rate Schedules, Qualified Dividends and Capital Gain Tax Worksheet, Schedule D (Form 1040), Schedule J (Form 1040), or Form 8615 on line 39 and the tax on the noneffectively connected income on line 51.

Credit for taxes paid. You are allowed a credit against your U.S. income tax liability for certain taxes you paid, are considered to have paid, or that were withheld from your income. These include:

1.	Tax withheld from wages earned in the United States and taxes withheld at the source from various items of income from U.S. sources other than wages. This includes U.S. tax withheld on dispositions of U.S. real property interests.
	When filing Form 1040, show the total tax withheld on line 61. Enter amounts from the attached statement (Form 1040NR, lines 57, 64, 65a, 65b, 66a, and 66b) to the right of line 61 and identify and include in the amount on line 61.
	When filing Form 1040NR, show the total tax withheld on lines 57, 64, 65a, 65b, 66a, and 66b. Enter the amount from the attached statement (Form 1040, line 61) to the left of line 57 and identify and include in the amount on line 57.
2.	Estimated tax paid with Form 1040-ES or Form 1040-ES (NR).
3.	Tax paid with Form 1040-C at the time of departure from the United States. When filing Form 1040, include the tax paid with Form 1040-C with the total payments on line 68. Identify the payment in the area to the left of the entry.

How To Report Income on Form 1040NR

Community Income

If either you or your spouse (or both you and your spouse) were nonresident aliens at any time during the tax year and you had community income during the year, treat the community income according to the applicable community property laws except as follows:

Earned income of a spouse, other than trade or business income or partnership distributive share income. The spouse whose services produced the income must report it on his or her separate return.
Trade or business income, other than partnership distributive share income. Treat this income as received by the spouse carrying on the trade or business and report it on that spouse's return.
Partnership distributive share income (or loss). Treat this income (or loss) as received by the spouse who is the partner and report it on that spouse's return.
Income derived from the separate property of one spouse that is not earned income, trade or business income, or partnership distributive share income. The spouse with the separate property must report this income on his or her separate return.

See Pub. 555 for more details.

Kinds of Income

You must divide your income for the tax year into the following three categories.

Income effectively connected with a U.S. trade or business. This income is taxed at the same rates that apply to U.S. citizens and residents. Report this income on page 1 of Form 1040NR. Pub. 519 describes this income in greater detail.
U.S. income not effectively connected with a U.S. trade or business. This income is taxed at 30% unless a treaty between your country and the United States has set a lower rate that applies to you. Report this income on page 4 of Form 1040NR. Pub. 519 describes this income more fully.

Note:

Use line 54 to report the 4% tax on U.S. source gross transportation income.
Income exempt from U.S. tax. Complete items L and/or M on page 5 of Form 1040NR and, if applicable,
line 22 on page 1.

Dispositions of U.S. Real Property Interests

Gain or loss on the disposition of a U.S. real property interest (see Pub. 519 for definition) is taxed as if the gain or loss were effectively connected with the conduct of a U.S. trade or business. See section 897 and its regulations.

Report gains and losses on the disposition of U.S. real property interests on Schedule D (Form 1040) and Form 1040NR, line 14a. Also, net gains may be subject to the alternative minimum tax. See the instructions for line 40.

Income You May Elect To Treat as Effectively Connected With a U.S. Trade or Business

You may elect to treat some items of income as effectively connected with a U.S. trade or business. The election 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:

Gains from the sale or exchange of such property or an interest therein.
Gains on the disposal of timber, coal, or iron ore with a retained economic interest.
Rents and royalties from mines, oil or gas wells, or other natural resources.

The election does not apply to dispositions of U.S. real property interests discussed earlier.

To make the election, attach a statement to your return for the year of the election. Include in your statement:

That you are making the election.
A complete list of all of your real property, or any interest in real property, located in the United States (including location). Give the legal identification of U.S. timber, coal, or iron ore in which you have an interest.
The extent of your ownership in the real property.
A description of any substantial improvements to the property.
Your income from the property.
The dates you owned the property.
Whether the election is under section 871(d) or a tax treaty.
Details of any previous elections and revocations of the real property election.

Foreign Income Taxed by the United States

You may be required to report some income from foreign sources on your U.S. return if it is effectively connected with a U.S. trade or business. For this foreign income to be treated as effectively connected with a U.S. trade or business, you must have an office or other fixed place of business in the United States to which the income can be attributed. For more information, including a list of the types of foreign source income that must be treated as effectively connected with a U.S. trade or business, see Pub. 519.

Inflation-Adjusted Amounts for Expatriation Actions After 1996
IF you expatriated during ...	THEN, the rules outlined on this page apply if ...
	Your 5-year average annual net income tax was more than ...	OR	Your net worth equaled or exceeded ...
1997	$106,000		$528,000
1998	109,000		543,000
1999	110,000		552,000
2000	112,000		562,000
2001	116,000		580,000
2002	120,000		599,000
2003	122,000		608,000

Special Rules for Former U.S. Citizens and Former U.S. Long-Term Residents

Section 877 may affect your tax liability if you are a former citizen or former long-term resident (LTR) of the United States. You are a former LTR if you were a lawful permanent resident of the United States (that is, you had a green card) for at least 8 of the 15 consecutive tax years ending with the year your residency ended. In determining if you are a former LTR, do not count any year that you were treated as a resident of another country under a tax treaty and you did not waive treaty benefits.

If you were a former citizen or former LTR and you relinquished your citizenship or terminated your residency after February 5, 1995, you are subject to the provisions of section 877 on your U.S. source income if one of the principal purposes of your action was to avoid U.S. taxes.

You are considered to have tax avoidance as a principal purpose if (a) your average annual net income tax for the last 5 tax years ending before the date of your action to relinquish your citizenship or terminate your residency was more than $100,000 or (b) your net worth on the date of your action was $500,000 or more. These amounts are adjusted for inflation if your expatriation action is after 1996 (see the chart below).

Although there are exceptions to these rules, you will qualify for an exception only if you are eligible to submit a ruling request to the IRS that your renunciation of U.S. citizenship or termination of U.S. residency did not have as one of its principal purposes the avoidance of U.S. tax and you submit such a ruling request in a complete and good faith manner. For more details about these exceptions, see section 877(c); Notice 97-19, 1997-1 C.B. 394; and Notice 98-34, 1998-2 C.B. 29. You can find
Notice 97-19 on page 40 of Internal Revenue Bulletin 1997-10. You can find Notice 98-34 on page 30 of Internal Revenue Bulletin 1998-27.

If the rules of section 877 apply to you, check the “Yes” box in item P on page 5 of the form. You are subject to tax on U.S. source income and gains on either (a) a net basis at the graduated rates applicable to individuals with allowable deductions or (b) a gross basis at a rate of 30% under the rules of section 871(a). See
page 24 for more details on the tax imposed under section 871(a).

If you have items of U.S. source income that are subject to tax under section 871(a), you will be taxed at a rate of 30% on your gross income only if this tax exceeds the tax at the regular graduated rates on your net income. If the 30% tax on your gross income exceeds the graduated tax on your net income, report those items on the appropriate lines on page 4 of
Form 1040NR. If the graduated tax on your net income exceeds the 30% tax on your gross income, report your income on the appropriate lines on page 1 of Form 1040NR and attach a statement describing the items and amounts of income that are subject to tax by reason of section 877.

If you have other items of U.S. source income that are not subject to tax under section 871(a), you will be taxed on a net basis at the regular graduated rates applicable to individuals. Report this income on the appropriate lines on page 1 of
Form 1040NR.

For purposes of computing the tax due under section 877, the following items of income are treated as U.S. source.

Gains on the sale or exchange of personal property located in the United States.
Gains on the sale or exchange of stock issued by a domestic corporation or debt obligations of the United States, U.S. persons, a state or political subdivision thereof, and the District of Columbia.
Income or gain derived from stock in a foreign corporation if you owned, either directly or indirectly (through the rules of sections 958(a) and 958(b)) more than 50% of the vote or value of the stock of the corporation on the date of your renunciation of citizenship or termination of residency or at any time during the 2 years preceding such date. Such income or gain is considered U.S. source only to the extent of your share of the earnings and profits earned or accumulated prior to the date of renunciation of U.S. citizenship or termination of residency.

You may not claim that a tax treaty in effect on August 21, 1996, prevents the imposition of tax by reason of section 877.

Annual Information Statement

If the expatriation rules apply to you and you are liable for U.S. taxes, you must attach an annual information statement to Form 1040NR that sets forth by category (for example, dividends, interest, etc.) all items of U.S. and foreign source gross income (whether or not taxable in the United States). The statement must identify the source of such income (determined under section 877 as modified by Section V of Notice 97-19) and those items of income subject to tax under section 877. If the expatriation rules apply to you, you must attach this statement to Form 1040NR, even if you have fully satisfied your U.S. tax liability through withholding of tax at source.

If you fail to furnish a complete statement, as described above, you will not be considered to have filed a true and accurate return. Therefore, you will not be entitled to any deductions or credits if your tax liability for your 2003 taxable year is later adjusted. See section 874(a).

See Notice 97-19, Section VII, for additional information.

General Instructions