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TAXES
> Individuals (1040)
The
basic idea is that expenses incurred in the course of earning taxable
income are deductible against that income. For example, employee business
expenses are deductible against wages and business costs are deductible
against gross business income. Investment interest is deductible to the
extent of investment income, etc
Be
you not from round these parts? The idea of filing taxes a novel one?
Read on.
For U.S. non-residents whose permanent place of abode is outside the U.S
and who are working in the U.S. on F1, J1 or O1 visas, or those with H1,
H1A, H1B, C1 or L1 who intend to return from whence you came upon expiration
of your visa, we have good news and bad news. This, of course, depends
on your situation.
BAD NEWS You, more than most others, must see a professional tax preparer
(and we do mean professional, not some housewife who has completed a six-
week training course).
GOOD NEWS The IRS loves you. So much so that they want you to pay less
in tax than almost anyone. Most things you need to survive in your U.S.
based job are tax-deductible, which means all ordinary employee business
expenses (Form 2106) PLUS the cost of temporary accommodations (rent,
utilties, and telephone). Forget about what you've heard. You CANNOT deduct
anything you can take with you, such as furniture or electronics, with
the exception of equipment purchased for use on your job (computer, palm
pilot, cell phone, etc.).
In addition to your regular tax information you must bring your passport
and current VISA, a list of the exact dates you were out of the U.S.,
the number of days spent outside the U.S. for two years' prior, and the
housing information referred to above. Remember, when in doubt - ask!
Resident
aliens ( 4651 ) are generally taxed just like U.S. citizens, on their
income from U.S. sources. (Reg § 1.871-1(a)) FTC O-1008; USTR
8712; Tax Desk 19,052 For aliens' foreign-source income, see
4610 et seq.
For whether income is from U.S. or foreign sources, see 4664 . For
nonresident aliens, see 4654 et seq.
An
alien individual is treated as a U.S. resident for any calendar year in
which he (1) meets a lawful permanent residence ("green card")
test, (2) meets a "substantial presence" test ( 4652 ), or (3)
makes the "first year election" ( 4653). (Code Sec. 7701(b)(1)(A)
) FTC O-1051; USTR 8714; Tax Desk 19,059 For who is
a nonresident alien, see 4655.
Subject
to certain exceptions, an individual meets the substantial presence test
(i.e., is a U.S. resident, see 4651 ) for any calendar (current)
year if:
(1) he is present in the U.S. on at least 31 days during the year, and
(2) the sum of the number of days he was present in the U.S. during the
current year and the two preceding calendar years, when multiplied by
the applicable multiplier (1 for the current year,1/3 for the first preceding
year, and 1/6 for the second preceding year), is at least 183. (Code Sec.
7701(b)(3)(A)) FTC O-1057 ; USTR 8714; Tax Desk 19,060
A
nonresident alien individual is an individual who isn't a U.S. citizen
or resident ( 4651). (Code Sec. 7701(b)(1)(B) ) Aliens who are residents
of Puerto Rico, Guam, American Samoa or the Northern Mariana Islands for
the entire tax year are generally taxed like resident aliens (Code Sec.
876) FTC O-1010, FTC O-1086; USTR 8714, USTR 8764,
USTR 9314 et seq. ; Tax Desk 63,108 (except for income from
these possessions, see 4622 ).
A
foreign corporation or nonresident alien engaged in a U.S. business (
4657 ), at any time in the tax year is taxed at regular U.S. rates on
taxable income "effectively connected" with that business –
i.e., the gross income effectively connected with the U.S. business, less
allowable deductions ( 4663). (Code Sec. 871(b), Code Sec. 882(a) ) FTC
O-10501, FTC O-10601, FTC O-10602; USTR 864 et seq.;
Tax Desk 64,101 For tax on nonbusiness income, see 4658.
All U.S.-source income, gain, or loss (other than periodical income and
capital gains and losses) derived by a nonresident alien or foreign corporation
engaged in a U.S. business any time in the tax year is treated as "effectively
connected." (Code Sec. 864(c)(3)) FTC O-10604; USTR 864
et seq. ; Tax Desk 64,206
Foreign-source income treated as "effectively connected" is
limited to the items below to the extent the item is attributable to an
office or other fixed place of business in the U.S.:
...Rents, royalties and gains on intangible personal property from derived
from an active licensing business.... Dividends, interest or gain from
stock or obligations derived from an active banking, financing or trading
business.... Certain inventory sales attributable to a U.S. sales office.
(Code Sec. 864(c)(4) ) FTC O-10622; USTR 8644.02 ; Tax Desk
64,211
Nonresident
aliens and foreign corporations are taxed at a flat 30% (or lower treaty
rate) on this income, if U.S.-source and not "effectively connected"
with a U.S. business:
...Interest (other than original issue discount (OID) and certain portfolio
and bank account interest), dividends, rents, salaries, wages, premiums,
annuities, compensations, remunerations, emoluments and other fixed or
determinable annual or periodical gains, profits and income. (Code Sec.
871(a)(1)(A), Code Sec. 881(a)(1) )... Gains from lump-sum distributions
from qualified employee plans. (Code Sec. 871(a)(1)(B))... Payments on
bonds with OID, and amounts received on their disposition, that are ordinary
income under the OID rules ( 1318 et seq.). (Code Sec. 871(a)(1)(C), Code
Sec. 881(a)(3) )... Amounts includible in income of residual REMIC interest
holders. (Code Sec. 860G(b)(1))... 85% of Social Security benefits paid
to nonresident aliens. (Code Sec. 871(a)(3))... Gains on sale or exchange
of patents, copyrights and the like, where payments are contingent on
productivity, etc. (Code Sec. 871(a)(1)(D), Code Sec. 881(a)(4) )... Certain
types of gambling winnings (but not winnings from blackjack, baccarat,
craps, roulette or big six wheel, except to the extent provided in regs).
(Code Sec. 871(j))... Gains from the disposal, with a retained economic
interest, of timber, coal or iron ore. (Code Sec. 871(a)(1)(B) , Code
Sec. 881(a)(2) ) FTC O-10201 et seq.; USTR 8714.02, USTR
8814.02 ; Tax Desk 63,201 et seq.
No deductions are allowed against this income. The tax is on the gross
amount. (Code Sec. 873, Code Sec. 882(c) ) FTC O-10641, FTC
O-10648; USTR 8734, USTR 8814.02 ; Tax Desk 64,104 (But
if a nonresident alien has a U.S. spouse, the couple can, effectively,
elect to be taxed at regular rates, see 4707.)
Non-"effectively connected" long- and short-term capital gains
(except as listed above) aren't taxed to foreign corporations (Code Sec.
881), and are taxed to nonresident aliens only if they are present in
the U.S. for at least 183 days in the tax year. (Code Sec. 871(a)(2))
FTC O-10231; USTR 8714.02, USTR 8814.02 ; Tax Desk
63,130
Foreign
corporations and nonresident aliens generally may take deductions only
to the extent related (under regs) to "effectively connected"
income ( 4656). (Code Sec. 873(a) ,Code Sec. 882(c)(1)(A) ; Reg § 1.882-5)
FTC O-10641, FTC O-10648; USTR 8734, USTR 8824
; Tax Desk 64,104 But these deductions are allowed whether or not
related to that income: for charitable contributions; and for nonresident
aliens, for nonbusiness casualty and theft losses, and personal exemptions
(limited). (Code Sec. 873(b), Code Sec. 882(c)(1)(B) ) FTC O-10243,
FTC O-10648; USTR 8734, USTR 8824 ; Tax Desk 64,104
Credits also generally are allowable only if attributable to "effectively
connected" income, except for certain credits (e.g., for taxes withheld
at source, earned income credit). (Code Sec. 874(b), Code Sec. 882(c)(2);
Reg § 1.874-1 ) FTC O-10643, FTC O-10675; USTR 8824
; Tax Desk 64,106
Generally, a return (see 4669 et seq.) must be filed to get the
benefit of an otherwise allowable deduction or credit. (Code Sec. 874(a),
Code Sec. 882(c)(2) ) FTC O-10644, FTC O-10676; Tax Desk
64,107
Tax
treaties typically exempt or reduce U.S. tax on certain business, compensation
and investment income. (Code Sec. 894(a)) FTC O-15000 et seq.; USTR
8944 ; Tax Desk 63,106 Treaty partners appoint competent authorities
to carry out the various provisions of treaties in force between them.
For the U.S., the Assistant Commissioner (International) acts as "competent
authority." FTC O-15100 et seq.; USTR 8944
The U.S. has income tax treaties with Australia, Austria, Barbados, Belgium,
Canada, China (doesn't apply to Hong Kong), Cyprus, Czech Republic, Denmark,
Egypt, Finland, France, Germany, Greece, Hungary, Iceland, India, Indonesia,
Ireland, Israel, Italy, Jamaica, Japan, Kazakhstan, Korea (South), Luxembourg,
Mexico, Morocco, Netherlands, New Zealand, Norway, Pakistan, Philippines,
Poland, Portugal, Romania, Russian Federation, Slovak Republic, Spain,
Sweden, Switzerland, Trinidad & Tobago, Tunisia, the former U.S.S.R.
(in effect for Armenia, Azerbaijan, Byelarus, Georgia, Kyrgyzstan, Moldova,
Tajikistan, Turkmenistan, Ukraine, and Uzbekistan), and the U.K. FTC
O-16500 et seq.; USTR 8944 ; Tax Desk 19,210
A taxpayer who takes a return position that a treaty overrules or otherwise
modifies the Code and thereby effects (or potentially effects) a reduction
of any tax incurred at any time, must disclose that return position on
Form 8833 attached to the return. (If a return wouldn't otherwise be required,
the taxpayer must file one, signed, but need only include his name, address,
TIN and disclosure statement.) Disclosure is waived for certain treaty-based
return positions. (Code Sec. 6114(a); Reg § 301.6114-1 ) FTC O-15010
et seq.; USTR 61,144 ; Tax Desk 19,206
(a)
General rule. In the case of a nonresident alien individual, except where
the context clearly indicates otherwise gross income includes only –
(1) gross income which is derived from sources within the United States
and which is not effectively connected with the conduct of a trade or
business within the United States, and
(2) gross income which is effectively connected with the conduct of a
trade or business within the United States.
(b) Exclusions. The following items shall not be included in gross income
of a nonresident alien individual, and shall be exempt from taxation under
this subtitle:
(1) Ships operated by certain nonresidents. Gross income derived by an
individual resident of a foreign country from the international operation
of a ship or ships if such foreign country grants an equivalent exemption
to individual residents of the United States.
(2) Aircraft operated by certain nonresidents. Gross income derived by
an individual resident of a foreign country from the international operation
of aircraft if such foreign country grants an equivalent exemption to
individual residents of the United States.
(3) Compensation of participants in certain exchange or training programs.
Compensation paid by a foreign employer to a nonresident alien individual
for the period he is temporarily present in the United States as a non-immigrant
under subparagraph (F), (J), or (Q) of section 101(a)(15) of the Immigration
and Nationality Act, as amended. For purposes of this paragraph, the term
"foreign employer" means –
(A) a nonresident alien individual, foreign partnership, or foreign corporation,
or
(B) an office or place of business maintained in a foreign country or
in a possession of the United States by a domestic corporation, a domestic
partnership, or an individual who is a citizen or resident of the United
States.
(4) Certain bond income of residents of the Ryukyu Islands or the Trust
Territory of the Pacific Islands. Income derived by a nonresident alien
individual from a series E or series H United States savings bond, if
such individual acquired such bond while a resident of the Ryukyu Islands
or the Trust Territory of the Pacific Islands.
(5) Certain rental income. Income to which paragraphs (1) and (2) apply
shall include income which is derived from the rental on a full or bareboat
basis of a ship or ships or aircraft, as the case may be.
(6) Application to different types of transportation. The Secretary may
provide that this subsection be applied separately with respect to income
from different types of transportation.
(7) Treatment of possessions. To the extent provided in regulations, a
possession of the United States shall be treated as a foreign country
for purposes of this subsection.
(a)
General rule. In the case of a nonresident alien individual, the deductions
shall be allowed only for purposes of section 871(b) and (except as provided
by subsection (b)) only if and to the extent that they are connected with
income which is effectively connected with the conduct of a trade or business
within the United States; and the proper apportionment and allocation
of the deductions for this purpose shall be determined as provided in
regulations prescribed by the Secretary.
(b) Exceptions. The following deductions shall be allowed whether or not
they are connected with income which is effectively connected with the
conduct of a trade or business within the United States:
(1) Losses. The deduction allowed by section 165 for casualty or theft
losses described in paragraph (2) or (3) of section 165(c), but only if
the loss is of property located within the United States.
(2) Charitable contributions. The deduction for charitable contributions
and gifts allowed by section 170.
(3) Personal exemption. The deduction for personal exemptions allowed
by section 151, except that only one exemption shall be allowed under
section 151 unless the taxpayer is a resident of a contiguous country
or is a national of the United States.
(c) Cross Reference. For rule that certain foreign taxes are not to be
taken into account in determining deduction or credit, see section 906(b)(1).
Tax
treaties typically exempt or reduce U.S. tax on certain business, compensation
and investment income. (Code Sec. 894(a)) FTC O-15000 et seq.; USTR
8944 ; Tax Desk 63,106 Treaty partners appoint competent authorities
to carry out the various provisions of treaties in force between them.
For the U.S., the Assistant Commissioner (International) acts as "competent
authority." FTC O-15100 et seq.; USTR 8944
The U.S. has income tax treaties with Australia, Austria, Barbados, Belgium,
Canada, China (doesn't apply to Hong Kong), Cyprus, Czech Republic, Denmark,
Egypt, Finland, France, Germany, Greece, Hungary, Iceland, India, Indonesia,
Ireland, Israel, Italy, Jamaica, Japan, Kazakhstan, Korea (South), Luxembourg,
Mexico, Morocco, Netherlands, New Zealand, Norway, Pakistan, Philippines,
Poland, Portugal, Romania, Russian Federation, Slovak Republic, Spain,
Sweden, Switzerland, Trinidad & Tobago, Tunisia, the former U.S.S.R.
(in effect for Armenia, Azerbaijan, Byelarus, Georgia, Kyrgyzstan, Moldova,
Tajikistan, Turkmenistan, Ukraine, and Uzbekistan), and the U.K. FTC
O-16500 et seq.; USTR 8944 ; Tax Desk 19,210
A taxpayer who takes a return position that a treaty overrules or otherwise
modifies the Code and thereby effects (or potentially effects) a reduction
of any tax incurred at any time, must disclose that return position on
Form 8833 attached to the return. (If a return wouldn't otherwise be required,
the taxpayer must file one, signed, but need only include his name, address,
TIN and disclosure statement.) Disclosure is waived for certain treaty-based
return positions. (Code Sec. 6114(a); Reg § 301.6114-1 ) FTC O-15010
et seq.; USTR 61,144 ; Tax Desk 19,206
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