| Pub. 519, U.S. Tax Guide for Aliens |
2005 Tax Year |
4.
How Income of Aliens Is Taxed
Resident and nonresident aliens are taxed in different ways. Resident aliens are generally taxed in the same way as U.S. citizens.
Nonresident
aliens are taxed based on the source of their income and whether or not their income is effectively connected with a U.S.
trade or business. The
following discussions will help you determine if income you receive during the tax year is effectively connected with a U.S.
trade or business and how
it is taxed.
Topics - This chapter discusses:
-
Income that is effectively connected with a U.S. trade or business, and
-
Income that is not effectively connected with a U.S. trade or business.
Useful Items - You may want to see:
See chapter 12 for information about getting these publications and forms.
Resident aliens are generally taxed in the same way as U.S. citizens. This means that their worldwide income is subject to
U.S. tax and must be
reported on their U.S. tax return. Income of resident aliens is subject to the graduated tax rates that apply to U.S. citizens.
Resident aliens use
the Tax Table or Tax Computation Worksheets located in the Form 1040 instructions, which apply to U.S. citizens.
A nonresident alien's income that is subject to U.S. income tax must be divided into two categories:
-
Income that is effectively connected with a trade or business in the United States, and
-
Income that is not effectively connected with a trade or business in the United States (discussed under The 30% Tax,
later).
The difference between these two categories is that effectively connected income, after allowable deductions, is taxed at
graduated rates. These
are the same rates that apply to U.S. citizens and residents. Income that is not effectively connected is taxed at a flat
30% (or lower treaty) rate.
If you were formerly a U.S. citizen or resident alien, these rules may not apply. See Expatriation Tax, later, in this chapter.
Trade or Business in the United States
Generally, you must be engaged in a trade or business during the tax year to be able to treat income received in that year
as effectively connected
with that trade or business. Whether you are engaged in a trade or business in the United States depends on the nature of
your activities. The
discussions that follow will help you determine whether you are engaged in a trade or business in the United States.
If you perform personal services in the United States at any time during the tax year, you usually are considered engaged
in a trade or business in
the United States.
Certain compensation paid to a nonresident alien by a foreign employer is not included in gross income. For more information,
see Services
Performed for Foreign Employer in chapter 3.
Other Trade or Business Activities
Other examples of being engaged in a trade or business in the United States follow.
Students and trainees.
You are considered engaged in a trade or business in the United States if you are temporarily present in the United
States as a nonimmigrant under
an “ F,” “ J,” “ M,” or “ Q” visa. A nonresident alien temporarily present in the United States under a “ J” visa includes a
nonresident alien individual admitted to the United States as an exchange visitor under the Mutual Educational and Cultural
Exchange Act of 1961. The
taxable part of any scholarship or fellowship grant that is U.S. source income is treated as effectively connected with a
trade or business in the
United States.
Business operations.
If you own and operate a business in the United States selling services, products, or merchandise, you are, with certain
exceptions, engaged in a
trade or business in the United States.
Partnerships.
If you are a member of a partnership that at any time during the tax year is engaged in a trade or business in the
United States, you are
considered to be engaged in a trade or business in the United States.
Beneficiary of an estate or trust.
If you are the beneficiary of an estate or trust that is engaged in a trade or business in the United States, you
are treated as being engaged in
the same trade or business.
Trading in stocks, securities, and commodities.
If your only U.S. business activity is trading in stocks, securities, or commodities (including hedging transactions)
through a U.S. resident
broker or other agent, you are not engaged in a trade or business in the United States.
For transactions in stocks or securities, this applies to any nonresident alien, including a dealer or broker in stocks
and securities.
For transactions in commodities, this applies to commodities that are usually traded on an organized commodity exchange
and to transactions that
are usually carried out at such an exchange.
This discussion does not apply if you have a U.S. office or other fixed place of business at any time during the tax
year through which, or by the
direction of which, you carry out your transactions in stocks, securities, or commodities.
Trading for a nonresident alien's own account.
You are not engaged in a trade or business in the United States if trading for your own account in stocks, securities,
or commodities is your only
U.S. business activity. This applies even if the trading takes place while you are present in the United States or is done
by your employee or your
broker or other agent.
This does not apply to trading for your own account if you are a dealer in stocks, securities, or commodities. This
does not necessarily mean,
however, that as a dealer you are considered to be engaged in a trade or business in the United States. Determine that based
on the facts and
circumstances in each case or under the rules given above in Trading in stocks, securities, and commodities.
Effectively Connected Income
If you are engaged in a U.S. trade or business, all income, gain, or loss for the tax year that you get from sources within
the United States
(other than certain investment income) is treated as effectively connected income. This applies whether or not there is any
connection between the
income and the trade or business being carried on in the United States during the tax year.
Two tests, described next under Investment Income, determine whether certain items of investment income (such as interest, dividends,
and royalties) are treated as effectively connected with that business.
In limited circumstances, some kinds of foreign source income may be treated as effectively connected with a trade or business
in the United
States. For a discussion of these rules, see Foreign Income, later.
Investment income from U.S. sources that may or may not be treated as effectively connected with a U.S. trade or business
generally falls into the
following three categories.
-
Fixed or determinable income (interest, dividends, rents, royalties, premiums, annuities, etc.).
-
Gains (some of which are considered capital gains) from the sale or exchange of the following types of property.
-
Timber, coal, or domestic iron ore with a retained economic interest.
-
Patents, copyrights, and similar property on which you receive contingent payments after October 4, 1966.
-
Patents transferred before October 5, 1966.
-
Original issue discount obligations.
-
Capital gains (and losses).
Use the two tests, described next, to determine whether an item of U.S. source income falling in one of the three categories
above and received
during the tax year is effectively connected with your U.S. trade or business. If the tests indicate that the item of income
is effectively connected,
you must include it with your other effectively connected income. If the item of income is not effectively connected, include
it with all other income
discussed under The 30% Tax, later, in this chapter.
Asset-use test.
This test usually applies to income that is not directly produced by trade or business activities. Under this test,
if an item of income is from
assets (property) used in, or held for use in, the trade or business in the United States, it is considered effectively connected.
An asset is used in, or held for use in, the trade or business in the United States if the asset is:
-
Held for the principal purpose of promoting the conduct of a trade or business in the United States,
-
Acquired and held in the ordinary course of the trade or business conducted in the United States (for example, an account
receivable or note
receivable arising from that trade or business), or
-
Otherwise held to meet the present needs of the trade or business in the United States and not its anticipated future needs.
Generally, stock of a corporation is not treated as an asset used in, or held for use in, a trade or business in the United
States.
Business-activities test.
This test usually applies when income, gain, or loss comes directly from the active conduct of the trade or business.
The business-activities test
is most important when:
-
Dividends or interest are received by a dealer in stocks or securities,
-
Royalties are received in the trade or business of licensing patents or similar property, or
-
Service fees are earned by a servicing business.
Under this test, if the conduct of the U.S. trade or business was a material factor in producing the income, the income is
considered
effectively connected.
You usually are engaged in a U.S. trade or business when you perform personal services in the United States. Personal service
income you receive in
a tax year in which you are engaged in a U.S. trade or business is effectively connected with a U.S. trade or business. Income
received in a year
other than the year you performed the services is also effectively connected if it would have been effectively connected if
received in the year you
performed the services. Personal service income includes wages, salaries, commissions, fees, per diem allowances, and employee
allowances and bonuses.
The income may be paid to you in the form of cash, services, or property.
If you are engaged in a U.S. trade or business only because you perform personal services in the United States during the
tax year, income and
gains from assets, and gains and losses from the sale or exchange of capital assets are generally not effectively connected
with your trade or
business. However, if there is a direct economic relationship between your holding of the asset and your trade or business
of performing personal
services, the income, gain, or loss is effectively connected.
Pensions.
If you were a nonresident alien engaged in a U.S. trade or business after 1986 because you performed personal services
in the United States, and
you later receive a pension or retirement pay attributable to these services, such payments are effectively connected income
in each year you receive
them. This is true whether or not you are engaged in a U.S. trade or business in the year you receive the retirement pay.
Transportation income (defined in chapter 2) is effectively connected if you meet both of the following conditions.
-
You had a fixed place of business in the United States involved in earning the income.
-
At least 90% of your U.S. source transportation income is attributable to regularly scheduled transportation.
“Fixed place of business” generally means a place, site, structure, or other similar facility through which you engage in a trade or
business. “Regularly scheduled transportation” means that a ship or aircraft follows a published schedule with repeated sailings or flights at
regular intervals between the same points for voyages or flights that begin or end in the United States. This definition applies
to both scheduled and
chartered air transportation.
If you do not meet the two conditions above, the income is not effectively connected and is taxed at a 4% rate. See Transportation Tax,
later, in this chapter.
Business Profits and Losses and Sales Transactions
All profits or losses from U.S. sources that are from the operation of a business in the United States are effectively connected
with a trade or
business in the United States. For example, profit from the sale in the United States of inventory property purchased either
in this country or in a
foreign country is effectively connected trade or business income. A share of U.S. source profits or losses of a partnership
that is engaged in a
trade or business in the United States is also effectively connected with a trade or business in the United States.
Real Property Gain or Loss
Gains and losses from the sale or exchange of U.S. real property interests (whether or not they are capital assets) are taxed
as if you are engaged
in a trade or business in the United States. You must treat the gain or loss as effectively connected with that trade or business.
U.S. real property interest.
This is any interest in real property located in the United States or the Virgin Islands or any interest (other than
as a creditor) in a domestic
corporation that is a U.S. real property holding corporation. Real property includes the following.
-
Land and unsevered natural products of the land, such as growing crops and timber, and mines, wells, and other natural deposits.
-
Improvements on land, including buildings, other permanent structures, and their structural components.
-
Personal property associated with the use of real property, such as equipment used in farming, mining, forestry, or construction
or property
used in lodging facilities or rented office space, unless the personal property is:
-
Disposed of more than one year before or after the disposition of the real property, or
-
Separately sold to persons unrelated either to the seller or to the buyer of the real property.
U.S. real property holding corporation.
A corporation is a U.S. real property holding corporation if the fair market value of the corporation's U.S. real
property interests are at least
50% of the total fair market value of:
-
The corporation's U.S. real property interests, plus
-
The corporation's interests in real property located outside the United States, plus
-
The corporation's other assets that are used in, or held for use in, a trade or business.
Gain or loss on the sale of the stock in any domestic corporation is taxed as if you are engaged in a U.S. trade or
business unless you establish
that the corporation is not a U.S. real property holding corporation.
A U.S. real property interest does not include a class of stock of a corporation that is regularly traded on an established
securities market,
unless you hold more than 5% of the fair market value of that class of stock. An interest in a foreign corporation owning
U.S. real property generally
is not a U.S. real property interest unless the corporation chooses to be treated as a domestic corporation.
Alternative minimum tax.
There may be a minimum tax on your net gain from the disposition of U.S. real property interests. Figure the amount
of this tax, if any, on Form
6251.
Withholding of tax.
If you dispose of a U.S. real property interest, the buyer may have to withhold tax. See the discussion of Tax Withheld on Real Property Sales
in chapter 8.
Under limited circumstances, you must treat three kinds of foreign source income as effectively connected with a trade or
business in the United
States. These circumstances are:
-
You have an office or other fixed place of business in the United States to which the income can be attributed,
-
That office or place of business is a material factor in producing the income, and
-
The income is produced in the ordinary course of the trade or business carried on through that office or other fixed place
of
business.
An office or other fixed place of business is a material factor if it significantly contributes to, and is an essential economic
element in, the
earning of the income.
The three kinds of foreign source income are listed below.
-
Rents and royalties for the use of, or for the privilege of using, intangible personal property located outside the United
States or from
any interest in such property. Included are rents or royalties for the use, or for the privilege of using, outside the United
States, patents,
copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and similar properties if the rents
or royalties are from
the active conduct of a trade or business in the United States.
-
Dividends or interest from the active conduct of a banking, financing, or similar business in the United States. 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.
-
Income, gain, or loss from the sale outside the United States, through the U.S. office or other fixed place of business, of:
-
Stock in trade,
-
Property that would be included in inventory if on hand at the end of the tax year, or
-
Property held primarily for sale to customers in the ordinary course of business.
Item number (3) will not apply if you sold the property for use, consumption, or disposition outside the United States and
an office or other fixed
place of business in a foreign country was a material factor in the sale.
Any foreign source income that is equivalent to any item of income described above is treated as effectively connected with
a U.S. trade or
business. For example, foreign source interest and dividend equivalents are treated as U.S. effectively connected income if
the income is derived by a
foreign person in the active conduct of a banking, financing, or similar business within the United States.
Tax on Effectively Connected Income
Income you receive during the tax year that is effectively connected with your trade or business in the United States is,
after allowable
deductions, taxed at the rates that apply to U.S. citizens and residents.
Generally, you can receive effectively connected income only if you are a nonresident alien engaged in trade or business in
the United States
during the tax year. However, income you receive from the sale or exchange of property, the performance of services, or any
other transaction in
another tax year is treated as effectively connected in that year if it would have been effectively connected in the year
the transaction took place
or you performed the services.
Example.
Ted Richards, a nonresident alien, entered the United States in August 2004, to perform personal services in the U.S. office
of his overseas
employer. He worked in the U.S. office until December 25, 2004, but did not leave this country until January 11, 2005. On
January 8, 2005, he received
his final paycheck for services performed in the United States during 2004. All of Ted's income during his stay here is U.S.
source income.
During 2004, Ted was engaged in the trade or business of performing personal services in the United States. Therefore, all
amounts paid to him in
2004 for services performed in the United States during 2004 are effectively connected with that trade or business during
2004.
The salary payment Ted received in January 2005 is U.S. source income to him in 2005. It is effectively connected with a trade
or business in the
United States because he was engaged in a trade or business in the United States during 2004 when he performed the services
that earned the income.
Real property income.
You may be able to choose to treat all income from real property as effectively connected. See Income From Real Property, later, in this
chapter.
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.
-
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.
-
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.
-
You bought the debt instrument at a premium or paid an acquisition premium.
-
The debt instrument is a stripped bond or a stripped coupon (including zero coupon instruments backed by U.S. Treasury
securities).
-
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.
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.
If the sale is in foreign currency, for the purpose of determining gain, the cost and selling price of the property should
be expressed in U.S.
currency at the rate of exchange prevailing as of the date of the purchase and date of the sale, respectively.
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.
-
Gains on the disposal of timber, coal, or domestic iron ore with a retained economic interest.
-
Gains on contingent payments received from the sale or exchange of patents, copyrights, and similar property after October
4, 1966.
-
Gains on certain transfers of all substantial rights to, or an undivided interest in, patents if the transfers were made before
October 5,
1966.
-
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 effectively 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
effectively connected with a trade or business in the United States on a separate Schedule D (Form 1040), Form 4797, or both.
Attach them 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 effectively 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.
-
That you are making the choice.
-
Whether the choice is under Internal Revenue Code section 871(d) (explained above) or a tax treaty.
-
A complete list of all your real property, or any interest in real property, located in the United States. 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 property.
-
The location of the property.
-
A description of any major improvements to the property.
-
The dates you owned the property.
-
Your income from the property.
-
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).
A 4% tax rate applies to transportation income that is not effectively connected because it does not meet the two conditions
listed earlier under
Transportation Income. If you receive transportation income subject to the 4% tax, you should figure the tax and show it on line 56 of Form
1040NR. Attach a statement to your return that includes the following information (if applicable).
-
Your name, taxpayer identification number, and tax year.
-
A description of the types of services performed (whether on or off board).
-
Names of vessels or registration numbers of aircraft on which you performed the services.
-
Amount of U.S. source transportation income derived from each type of service for each vessel or aircraft for the calendar
year.
-
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.
The expatriation tax provisions apply to U.S. citizens who have renounced their citizenship and long-term residents who have
ended their residency.
In 2004, the expatriation rules changed. If you expatriated on or before June 3, one set of rules applies. If you expatriated
after June 3, another
set of rules applies. These rules are explained later under Expatriation On or Before June 3, 2004 and Expatriation After June 3,
2004.
Long-term resident defined.
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.
Expatriation On or Before June 3, 2004
If you expatriated on or before June 3, 2004, the expatriation rules apply if one of the principal purposes of the action
is the avoidance of U.S.
taxes. You are presumed to have tax avoidance as a principal purpose if:
-
Your average annual net income tax for the last 5 tax years ending before the date of the action is more than $124,000, or
-
Your net worth on the date of the action is $622,000 or more.
Ruling request.
If you meet either test (1) or (2) above, 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. If you receive this ruling,
the expatriation tax
provisions do not apply.
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.
-
You became at birth a U.S. citizen and a citizen of another country and continue to be a citizen of that other country.
-
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.
-
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.
-
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.
-
You become (within a reasonable period after your expatriation) a resident fully liable for income tax in one of the following
countries.
-
The country in which you were born.
-
The country where your spouse was born.
-
The country where either of your parents was born.
-
You were present in the United States for no more than 30 days during each year of the 10-year period prior to expatriation.
-
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.
Reporting requirements.
If you lost your U.S. citizenship, you must file Form 8854 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.
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.
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 After June 3, 2004
If you expatriated after June 3, 2004, the expatriation rules apply to you if any of the following statements apply.
-
Your average annual net income tax for the 5 years ending before the date of expatriation or termination of residency is more
than:
-
$124,000 if you expatriated or terminated residency in 2004.
-
$127,000 if you expatriated or terminated residency in 2005.
-
Your net worth is $2 million or more on the date of your expatriation or termination of residency.
-
You fail to certify on Form 8854 that you have complied with all U.S. federal tax obligations for the 5 years preceding the
date of your
expatriation or termination of residency.
Exception for dual-citizens and certain minors.
Dual-citizens and certain minors (defined next) are not subject to the expatriation tax even if they meet (1) or (
2) above. However, they still
must provide the certification required in (3) above.
Dual-citizens.
You are a dual-citizen if all of the following apply.
-
You became at birth a U.S. citizen and a citizen of another country and you continue to be a citizen of that other country.
-
You were never a resident alien of the United States (as defined in chapter 1).
-
You never held a U. S. passport.
-
You were present in the United States for no more than 30 days during any calendar year that is 1 of the 10 calendar years
preceding your
loss of U. S. citizenship.
Certain minors.
You may qualify for the exception described above if you meet all of the following requirements.
-
You became a U.S. citizen at birth.
-
Neither of your parents was a U.S. citizen at the time of your birth.
-
You expatriated before you were 18½.
-
You were not present in the United States for more than 30 days during any calendar year that is 1 of the 10 calendar years
preceding your
expatriation.
Tax consequences of presence in the United States.
The following rules apply if you do not meet the exception above for dual-citizens and certain minors and the expatriation
rules would otherwise
apply to you.
The expatriation tax does not apply to any tax year during the 10-year period if you are physically present in the
United States for more than 30
days during the calendar year ending in that year. Instead, you are treated as a U.S. citizen or resident and taxed on your
worldwide income for that
tax year. You must file Form 1040, 1040A, or 1040EZ and figure your tax as prescribed in the instructions for those forms.
When counting the number of days of presence during a calendar year, count any day you were physically present in
the United States at any time
during the day. However, do not count any days (up to a limit of 30 days) on which you performed personal services in the
United States for an
employer who is not related to you if either of the following apply.
-
You have ties with other countries. You have ties with other countries if:
-
You became (within a reasonable period after your expatriation or termination of residency) a citizen or resident of the country
in which
you, your spouse, or either of your parents were born, and
-
You became fully liable for income tax in that country.
-
You were physically present in the United States for 30 days or less during each year in the 10-year period ending on the
date of
expatriation or termination of residency. Do not count any day you were an exempt individual or were unable to leave the United
States because of a
medical condition that arose while you were in the United States. See Exempt individual and Medical condition in chapter 1 under
Substantial Presence Test, but disregard the information about Form 8843.
Related employer.
If your employer in the United States is any of the following, then your employer is related to you. You must count
any days you performed services
in the United States for that employer as days of presence in the United States.
-
Members of your family. This includes only your brothers and sisters, half-brothers and half-sisters, spouse, ancestors (parents,
grandparents, etc.), and lineal descendants (children, grandchildren, etc.).
-
A partnership in which you directly or indirectly own more than 50% of the capital interest or the profits interest.
-
A corporation in which you directly or indirectly own more than 50% in value of the outstanding stock. (See Publication 550,
chapter 4,
Constructive ownership of stock, for how to determine whether you directly or indirectly own outstanding stock.)
-
A tax-exempt charitable or educational organization that is directly or indirectly controlled, in any manner or by any method,
by you or by
a member of your family, whether or not this control is legally enforceable.
Date of tax expatriation.
For purposes of U.S. tax rules, the date of your expatriation or termination of residency is the later of the dates
on which you perform the
following actions.
-
You notify either the Department of State or the Department of Homeland Security (whichever is appropriate) of your expatriating
act or
termination of residency.
-
You file Form 8854 in accordance with the form instructions.
Annual return.
If the expatriation tax applies to you, you must file Form 8854 each year during the 10-year period following the
date of expatriation. You must
file this form even if you owe no U.S. tax.
Penalty.
If you fail to file Form 8854 for any tax year, fail to include all information required to be shown on the form,
or include incorrect information,
you may have to pay a penalty of $10,000. You will not have to pay a penalty if you show that the failure is due to reasonable
cause and not to
willful neglect.
How To Figure the Expatriation 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 and during the periods you met the ownership requirements discussed above.
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.
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.
-
You were a U.S. resident for a period that includes at least 3 consecutive calendar years.
-
You were a U.S. resident for at least 183 days in each of those years.
-
You ceased to be treated as a U.S. resident.
-
You then again became a U.S. resident before the end of the third calendar year after the end of 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, 2000, as a lawful permanent resident. On August
1, 2002, 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 (2000, 2001, and 2002). He returned to the United States on October 5, 2005, as a
lawful permanent resident.
He became a resident before the close of the third calendar year (2005) beginning after the end of his first period of residence
(August 1, 2002).
Therefore, he is subject to tax under the special rule for the period of nonresidence (August 2, 2002, through October 4,
2005) 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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