Table of Contents
- Topics - This chapter discusses:
- Resident Aliens
- Nonresident Aliens
- Community Income
After you have determined your alien status, you must determine the source of your income. This chapter will help you determine the source of different types of income you may receive during the tax year. This chapter also discusses special rules for married individuals who are domiciled in a country with community property laws.
A resident alien's income is generally subject to tax in the same manner as a U.S. citizen. If you are a resident alien, you must report all interest, dividends, wages, or other compensation for services, income from rental property or royalties, and other types of income on your U.S. tax return. You must report these amounts from sources within and outside the United States.
A nonresident alien usually is subject to U.S. income tax only on U.S. source income. Under limited circumstances, certain foreign source income is subject to U.S. tax. See Foreign Income in chapter 4.
The general rules for determining U.S. source income that apply to most nonresident aliens are shown in Table 2-1. The following discussions cover the general rules as well as the exceptions to these rules.
Generally, U.S. source interest income includes the following items.
Interest on bonds, notes, or other interest-bearing obligations of U.S. residents or domestic corporations.
Interest paid by a domestic or foreign partnership or foreign corporation engaged in a U.S. trade or business at any time during the tax year.
Original issue discount.
Interest from a state, the District of Columbia, or the U.S. Government.
The place or manner of payment is immaterial in determining the source of the income.
A substitute interest payment made to the transferor of a security in a securities lending transaction or a sale-repurchase transaction is sourced in the same manner as the interest on the transferred security.
Interest paid by a resident alien or a domestic corporation on obligations issued before August 10, 2010, if for the 3-year period ending with the close of the payer's tax year preceding the interest payment, at least 80% of the payer's total gross income:
Is from sources outside the United States, and
Is attributable to the active conduct of a trade or business by the individual or corporation in a foreign country or a U.S. possession.
However, the interest will be considered U.S. source interest income if either of the following apply.
The recipient of the interest is related to the resident alien or domestic corporation. See section 954(d)(3) for the definition of related person.
The terms of the obligation are significantly modified after August 9, 2010. Any extension of the term of the obligation is considered a significant modification.
Interest paid by a foreign branch of a domestic corporation or a domestic partnership on deposits or withdrawable accounts with mutual savings banks, cooperative banks, credit unions, domestic building and loan associations, and other savings institutions chartered and supervised as savings and loan or similar associations under federal or state law if the interest paid or credited can be deducted by the association.
Interest on deposits with a foreign branch of a domestic corporation or domestic partnership, but only if the branch is in the commercial banking business.
In most cases, dividend income received from domestic corporations is U.S. source income. Dividend income from foreign corporations is usually foreign source income. Exceptions to both of these rules are discussed below.
A substitute dividend payment made to the transferor of a security in a securities lending transaction or a sale-repurchase transaction is sourced in the same manner as a distribution on the transferred security.
|Foreign corporation's gross income connected with a U.S. trade or business for the 3-year period|
|Foreign corporation's gross income from all sources for that period|
Certain amounts received directly or indirectly, for the provision of a guarantee of indebtedness issued after September 27, 2010, are U.S. source income. They must be paid by a noncorporate resident or U.S. corporation or by any foreign person if the amounts are effectively connected with the conduct of a U.S. trade or business. For more information, see Internal Revenue Code sections 861(a)(9) and 862(a)(9).
All wages and any other compensation for services performed in the United States are considered to be from sources in the United States. The only exceptions to this rule are discussed in chapter 3 under Employees of foreign persons, organizations, or offices, and under Crew members.
If you are an employee and receive compensation for labor or personal services performed both inside and outside the United States, special rules apply in determining the source of the compensation. Compensation (other than certain fringe benefits) is sourced on a time basis. Certain fringe benefits (such as housing and education) are sourced on a geographical basis.
Or, you may be permitted to use an alternative basis to determine the source of compensation. See Alternative Basis , later.
Use a time basis to figure your U.S. source compensation (other than the fringe benefits discussed later). Do this by multiplying your total compensation (other than the fringe benefits discussed later) by the following fraction:
|Number of days you performed services in the United States during the year|
|Total number of days you performed services during the year|
You can use a unit of time less than a day in the above fraction, if appropriate. The time period for which the compensation is made does not have to be a year. Instead, you can use another distinct, separate, and continuous time period if you can establish to the satisfaction of the IRS that this other period is more appropriate.
Christina Brooks, a resident of the Netherlands, worked 240 days for a U.S. company during the tax year. She received $80,000 in compensation. None of it was for fringe benefits. Christina performed services in the United States for 60 days and performed services in the Netherlands for 180 days. Using the time basis for determining the source of compensation, $20,000 ($80,000 × 60/240) is her U.S. source income.
Rob Waters, a resident of South Africa, is employed by a corporation. His annual salary is $100,000. None of it is for fringe benefits. During the first quarter of the year he worked entirely within the United States. On April 1, Rob was transferred to Singapore for the remainder of the year. Rob is able to establish that the first quarter of the year and the last 3 quarters of the year are two separate, distinct, and continuous periods of time. Accordingly, $25,000 of Rob's annual salary is attributable to the first quarter of the year (.25 × $100,000). All of it is U.S. source income because he worked entirely within the United States during that quarter. The remaining $75,000 is attributable to the last three quarters of the year. During those quarters, he worked 150 days in Singapore and 30 days in the United States. His periodic performance of services in the United States did not result in distinct, separate, and continuous periods of time. Of this $75,000, $12,500 ($75,000 × 30/180) is U.S. source income.
Compensation you receive as an employee in the form of the following fringe benefits is sourced on a geographical basis.
Hazardous or hardship duty pay as defined in Regulations section 1.861-4(b)(2)(ii)(D)(5).
Moving expense reimbursement.
The amount of fringe benefits must be reasonable and you must substantiate them by adequate records or by sufficient evidence.
The total time you spend at each place,
The amount of work you do at each place, and
How much money you earn at each place.
Utilities (except telephone charges).
Real and personal property insurance.
Occupancy taxes not deductible under section 164 or 216(a).
Nonrefundable fees for securing a leasehold.
Rental of furniture and accessories.
Fair rental value of housing provided in kind by your employer.
Deductible interest and taxes (including deductible interest and taxes of a tenant-stockholder in a cooperative housing corporation),
The cost of buying property, including principal payments on a mortgage,
The cost of domestic labor (maids, gardeners, etc.),
Pay television subscriptions,
Improvements and other expenses that increase the value or appreciably prolong the life of property,
Purchased furniture or accessories,
Depreciation or amortization of property or improvements,
The value of meals or lodging that you exclude from gross income, or
The value of meals or lodging that you deduct as moving expenses.
Tuition, fees, academic tutoring, special needs services for a special needs student, books, supplies, and other equipment.
Room and board and uniforms that are required or provided by the school in connection with enrollment or attendance.
If you are an employee, you can determine the source of your compensation under an alternative basis if you establish to the satisfaction of the IRS that, under the facts and circumstances of your case, the alternative basis more properly determines the source of your compensation than the time or geographical basis. If you use an alternative basis, you must keep (and have available for inspection) records to document why the alternative basis more properly determines the source of your compensation. Also, if your total compensation from all sources is $250,000 or more, check “Yes” to both questions on line K on page 5 of Form 1040NR, and attach a written statement to your tax return that sets forth all of the following.
Your name and social security number (written across the top of the statement).
The specific compensation income, or the specific fringe benefit, for which you are using the alternative basis.
For each item in (2), the alternative basis of allocation of source used.
For each item in (2), a computation showing how the alternative allocation was computed.
A comparison of the dollar amount of the U.S. compensation and foreign compensation sourced under both the alternative basis and the time or geographical basis discussed earlier.
Transportation income is income from the use of a vessel or aircraft or for the performance of services directly related to the use of any vessel or aircraft. This is true whether the vessel or aircraft is owned, hired, or leased. The term “vessel or aircraft” includes any container used in connection with a vessel or aircraft.
All income from transportation that begins and ends in the United States is treated as derived from sources in the United States. If the transportation begins or ends in the United States, 50% of the transportation income is treated as derived from sources in the United States.
For transportation income from personal services, 50% of the income is U.S. source income if the transportation is between the United States and a U.S. possession. For nonresident aliens, this only applies to income derived from, or in connection with, an aircraft.
For information on how U.S. source transportation income is taxed, see chapter 4.
Generally, the source of scholarships, fellowship grants, grants, prizes, and awards is the residence of the payer regardless of who actually disburses the funds. However, see Activities to be performed outside the United States , later.
For example, payments for research or study in the United States made by the United States, a noncorporate U.S. resident, or a domestic corporation, are from U.S. sources. Similar payments from a foreign government or foreign corporation are foreign source payments even though the funds may be disbursed through a U.S. agent.
Payments made by an entity designated as a public international organization under the International Organizations Immunities Act are from foreign sources.
If you receive a pension from a domestic trust for services performed both in and outside the United States, part of the pension payment is from U.S. sources. That part is the amount attributable to earnings of the pension plan and the employer contributions made for services performed in the United States. This applies whether the distribution is made under a qualified or nonqualified stock bonus, pension, profit-sharing, or annuity plan (whether or not funded).
If you performed services as an employee of the United States, you may receive a distribution from the U.S. Government under a plan, such as the Civil Service Retirement System, that is treated as a qualified pension plan. Your U.S. source income is the otherwise taxable amount of the distribution that is attributable to your total U.S. Government basic pay other than tax-exempt pay for services performed outside the United States.
Your U.S. source income includes rent and royalty income received during the tax year from property located in the United States or from any interest in that property.
U.S. source income also includes rents or royalties for the use of, or for the privilege of using, in the United States, intangible property such as patents, copyrights, secret processes and formulas, goodwill, trademarks, franchises, and similar property.
Real property is land and buildings and generally anything built on, growing on, or attached to land.
Gross income from sources in the United States includes gains, profits, and income from the sale or other disposition of real property located in the United States.
|Item of income||Factor determining source|
|Salaries, wages, other compensation||Where services performed|
|Personal services||Where services performed|
|Sale of inventory—purchased||Where sold|
|Sale of inventory—produced||Allocation|
|Interest||Residence of payer|
|Dividends||Whether a U.S. or foreign corporation*|
|Rents||Location of property|
|Natural resources||Location of property|
|Patents, copyrights, etc.||Where property is used|
|Sale of real property||Location of property|
|Sale of personal property||Seller's tax home (but see Personal Property , later, for exceptions)|
|Pension distributions attributable to contributions||Where services were performed that earned the pension|
|Investment earnings on pension contributions||Location of pension trust|
|Sale of natural resources||Allocation based on fair market value of product at export terminal. For more information, see section 1.863-1(b) of the regulations.|
a) Dividends paid by a U.S. corporation are foreign source if the corporation elects the
American Samoa economic development credit.
b) Part of a dividend paid by a foreign corporation is U.S. source if at least 25% of the
corporation's gross income is effectively connected with a U.S. trade or business for the
3 tax years before the year in which the dividends are declared.
Personal property is property, such as machinery, equipment, or furniture, that is not real property.
Gain or loss from the sale or exchange of personal property generally has its source in the United States if you have a tax home in the United States. If you do not have a tax home in the United States, the gain or loss generally is considered to be from sources outside the United States.
If you are married and you or your spouse is subject to the community property laws of a foreign country, a U.S. state, or a U.S. possession, you generally must follow those laws to determine the income of yourself and your spouse for U.S. tax purposes. But you must disregard certain community property laws if:
Both you and your spouse are nonresident aliens, or
One of you is a nonresident alien and the other is a U.S. citizen or resident and you do not both choose to be treated as U.S. residents as explained in chapter 1.
In these cases, you and your spouse must report community income as explained later.
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