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Form 1040nr

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Form 1040nr

Form 1040nr 1. Form 1040nr   Investment Income Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: General InformationSSN for joint account. Form 1040nr Custodian account for your child. Form 1040nr Penalty for failure to supply SSN. Form 1040nr Certification. Form 1040nr Underreported interest and dividends. Form 1040nr How to stop backup withholding due to underreporting. Form 1040nr How to stop backup withholding due to an incorrect identification number. Form 1040nr Reporting backup withholding. Form 1040nr Nonresident aliens. Form 1040nr Penalties. Form 1040nr Savings account with parent as trustee. Form 1040nr Interest IncomeInterest not reported on Form 1099-INT. Form 1040nr Nominees. Form 1040nr Incorrect amount. Form 1040nr Information reporting requirement. Form 1040nr Taxable Interest — General Below-Market Loans U. Form 1040nr S. Form 1040nr Savings Bonds U. Form 1040nr S. Form 1040nr Treasury Bills, Notes, and Bonds Bonds Sold Between Interest Dates Insurance State or Local Government Obligations Discount on Debt InstrumentsOriginal Issue Discount (OID) Market Discount Bonds Discount on Short-Term Obligations Election To Report All Interest as OID When To Report Interest IncomeConstructive receipt. Form 1040nr How To Report Interest IncomeSchedule B (Form 1040A or 1040). Form 1040nr Worksheet for savings bonds distributed from a retirement or profit-sharing plan. Form 1040nr File Form 1099-INT with the IRS. Form 1040nr Dividends and Other DistributionsDividends not reported on Form 1099-DIV. Form 1040nr Nominees. Form 1040nr Ordinary Dividends Capital Gain Distributions Nondividend Distributions Liquidating Distributions Distributions of Stock and Stock Rights Other Distributions How To Report Dividend IncomeElection. Form 1040nr Independent contractor. Form 1040nr Investment interest deducted. Form 1040nr Exception 1. Form 1040nr Exception 2. Form 1040nr Undistributed capital gains. Form 1040nr File Form 1099-DIV with the IRS. Form 1040nr Stripped Preferred Stock REMICs, FASITs, and Other CDOsREMICs Collateralized Debt Obligations (CDOs) FASITs S CorporationsLimit on losses and deductions. Form 1040nr Passive activity losses. Form 1040nr Form 8582. Form 1040nr Investment ClubsInvestments in name of member. Form 1040nr Tax Treatment of the Club Topics - This chapter discusses: Interest Income , Discount on Debt Instruments , When To Report Interest Income , How To Report Interest Income , Dividends and Other Distributions , How To Report Dividend Income , Stripped Preferred Stock , Real estate mortgage investment conduits (REMICs), financial asset securitization investment trusts (FASITs), and other collateralized debt obligations (CDOs) , S Corporations , and Investment Clubs . Form 1040nr Useful Items - You may want to see: Publication 525 Taxable and Nontaxable Income 537 Installment Sales 590 Individual Retirement Arrangements (IRAs) 925 Passive Activity and At-Risk Rules 1212 Guide to Original Issue Discount (OID) Instruments Form (and Instructions) Schedule B (Form 1040A or 1040) Interest and Ordinary Dividends Schedule D (Form 1040) Capital Gains and Losses 1040 U. Form 1040nr S. Form 1040nr Individual Income Tax Return 1040A U. Form 1040nr S. Form 1040nr Individual Income Tax Return 1040EZ Income Tax Return for Single and Joint Filers With No Dependents 1099 General Instructions for Certain Information Returns 2439 Notice to Shareholder of Undistributed Long-Term Capital Gains 3115 Application for Change in Accounting Method 6251 Alternative Minimum Tax — Individuals 8582 Passive Activity Loss Limitations 8615 Tax for Certain Children Who Have Unearned Income 8814 Parents' Election To Report Child's Interest and Dividends 8815 Exclusion of Interest From Series EE and I U. Form 1040nr S. Form 1040nr Savings Bonds Issued After 1989 8818 Optional Form To Record Redemption of Series EE and I U. Form 1040nr S. Form 1040nr Savings Bonds Issued After 1989 8824 Like-Kind Exchanges 8949 Sales and Other Dispositions of Capital Assets 8960 Net Investment Income Tax—Individuals, Estates, and Trusts See chapter 5, How To Get Tax Help , for information about getting these publications and forms. Form 1040nr General Information A few items of general interest are covered here. Form 1040nr Recordkeeping. Form 1040nr You should keep a list showing sources and investment income amounts you receive during the year. Form 1040nr Also keep the forms you receive showing your investment income (Forms 1099-INT, Interest Income, and 1099-DIV, Dividends and Distributions, for example) as an important part of your records. Form 1040nr Net investment income tax (NIIT). Form 1040nr   Beginning in 2013, you may be subject to the NIIT. Form 1040nr The NIIT is a 3. Form 1040nr 8% tax on the lesser of your net investment income or the amount of your modified adjusted gross income (MAGI) that is over a threshold amount based on your filing status. Form 1040nr    Filing Status Threshold Amount Married filing jointly $250,000 Married filing separately $125,000 Single $200,000 Head of household (with qualifying person) $200,000 Qualifying Widow(er) with dependent child $250,000    For more information, see Form 8960 and Instructions for Form 8960. Form 1040nr Tax on unearned income of certain children. Form 1040nr   Part of a child's 2013 unearned income may be taxed at the parent's tax rate. Form 1040nr This may happen if all of the following are true. Form 1040nr The child had more than $2,000 of unearned income. Form 1040nr The child is required to file a tax return. Form 1040nr The child was: Under age 18 at the end of 2013, Age 18 at the end of 2013 and did not have earned income that was more than half of the child's support, or A full-time student over age 18 and under age 24 at the end of 2013 and did not have earned income that was more than half of the child's support. Form 1040nr At least one of the child's parents was alive at the end of 2013. Form 1040nr The child does not file a joint return for 2013. Form 1040nr A child born on January 1, 1996, is considered to be age 18 at the end of 2013; a child born on January 1, 1995, is considered to be age 19 at the end of 2013; a child born on January 1, 1990, is considered to be age 24 at the end of 2013. Form 1040nr   If all of these statements are true, Form 8615 must be completed and attached to the child's tax return. Form 1040nr If any of these statements is not true, Form 8615 is not required and the child's income is taxed at his or her own tax rate. Form 1040nr    However, the parent can choose to include the child's interest and dividends on the parent's return if certain requirements are met. Form 1040nr Use Form 8814 for this purpose. Form 1040nr   For more information about the tax on unearned income of children and the parents' election, see Publication 929, Tax Rules for Children and Dependents. Form 1040nr Beneficiary of an estate or trust. Form 1040nr   Interest, dividends, and other investment income you receive as a beneficiary of an estate or trust is generally taxable income. Form 1040nr You should receive a Schedule K-1 (Form 1041), Beneficiary's Share of Income, Deductions, Credits, etc. Form 1040nr , from the fiduciary. Form 1040nr Your copy of Schedule K-1 (Form 1041) and its instructions will tell you where to report the income on your Form 1040. Form 1040nr Social security number (SSN). Form 1040nr   You must give your name and SSN or individual tax identification number (ITIN) to any person required by federal tax law to make a return, statement, or other document that relates to you. Form 1040nr This includes payers of interest and dividends. Form 1040nr If you do not give your SSN or ITIN to the payer of interest, you may have to pay a penalty. Form 1040nr SSN for joint account. Form 1040nr   If the funds in a joint account belong to one person, list that person's name first on the account and give that person's SSN to the payer. Form 1040nr (For information on who owns the funds in a joint account, see Joint accounts , later. Form 1040nr ) If the joint account contains combined funds, give the SSN of the person whose name is listed first on the account. Form 1040nr This is because only one name and SSN can be shown on Form 1099. Form 1040nr   These rules apply both to joint ownership by a married couple and to joint ownership by other individuals. Form 1040nr For example, if you open a joint savings account with your child using funds belonging to the child, list the child's name first on the account and give the child's SSN. Form 1040nr Custodian account for your child. Form 1040nr   If your child is the actual owner of an account that is recorded in your name as custodian for the child, give the child's SSN to the payer. Form 1040nr For example, you must give your child's SSN to the payer of dividends on stock owned by your child, even though the dividends are paid to you as custodian. Form 1040nr Penalty for failure to supply SSN. Form 1040nr   You will be subject to a penalty if, when required, you fail to: Include your SSN on any return, statement, or other document, Give your SSN to another person who must include it on any return, statement, or other document, or Include the SSN of another person on any return, statement, or other document. Form 1040nr The penalty is $50 for each failure up to a maximum penalty of $100,000 for any calendar year. Form 1040nr   You will not be subject to this penalty if you can show that your failure to provide the SSN was due to reasonable cause and not to willful neglect. Form 1040nr   If you fail to supply an SSN, you may also be subject to backup withholding. Form 1040nr Backup withholding. Form 1040nr   Your investment income is generally not subject to regular withholding. Form 1040nr However, it may be subject to backup withholding to ensure that income tax is collected on the income. Form 1040nr Under backup withholding, the bank, broker, or other payer of interest, original issue discount (OID), dividends, cash patronage dividends, or royalties must withhold, as income tax, on the amount you are paid, applying the appropriate withholding rate. Form 1040nr   Backup withholding applies if: You do not give the payer your identification number (either a social security number or an employer identification number) in the required manner, The IRS notifies the payer that you gave an incorrect identification number, The IRS notifies the payer that you are subject to backup withholding on interest or dividends because you have underreported interest or dividends on your income tax return, or You are required, but fail, to certify that you are not subject to backup withholding for the reason described in (3). Form 1040nr Certification. Form 1040nr   For new accounts paying interest or dividends, you must certify under penalties of perjury that your SSN is correct and that you are not subject to backup withholding. Form 1040nr Your payer will give you a Form W-9, Request for Taxpayer Identification Number and Certification, or similar form, to make this certification. Form 1040nr If you fail to make this certification, backup withholding may begin immediately on your new account or investment. Form 1040nr Underreported interest and dividends. Form 1040nr   You will be considered to have underreported your interest and dividends if the IRS has determined for a tax year that: You failed to include any part of a reportable interest or dividend payment required to be shown on your return, or You were required to file a return and to include a reportable interest or dividend payment on that return, but you failed to file the return. Form 1040nr How to stop backup withholding due to underreporting. Form 1040nr   If you have been notified that you underreported interest or dividends, you can request a determination from the IRS to prevent backup withholding from starting or to stop backup withholding once it has begun. Form 1040nr You must show that at least one of the following situations applies. Form 1040nr No underreporting occurred. Form 1040nr You have a bona fide dispute with the IRS about whether underreporting occurred. Form 1040nr Backup withholding will cause or is causing an undue hardship, and it is unlikely that you will underreport interest and dividends in the future. Form 1040nr You have corrected the underreporting by filing a return if you did not previously file one and by paying all taxes, penalties, and interest due for any underreported interest or dividend payments. Form 1040nr   If the IRS determines that backup withholding should stop, it will provide you with a certification and will notify the payers who were sent notices earlier. Form 1040nr How to stop backup withholding due to an incorrect identification number. Form 1040nr   If you have been notified by a payer that you are subject to backup withholding because you have provided an incorrect SSN or employer identification number, you can stop it by following the instructions the payer gives you. Form 1040nr Reporting backup withholding. Form 1040nr   If backup withholding is deducted from your interest or dividend income or other reportable payment, the bank or other business must give you an information return for the year (for example, a Form 1099-INT) indicating the amount withheld. Form 1040nr The information return will show any backup withholding as “Federal income tax withheld. Form 1040nr ” Nonresident aliens. Form 1040nr    Generally, payments made to nonresident aliens are not subject to backup withholding. Form 1040nr You can use Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding, to certify exempt status. Form 1040nr However, this does not exempt you from the 30% (or lower treaty) withholding rate that may apply to your investment income. Form 1040nr For information on the 30% rate, see Publication 519, U. Form 1040nr S. Form 1040nr Tax Guide for Aliens. Form 1040nr Penalties. Form 1040nr   There are civil and criminal penalties for giving false information to avoid backup withholding. Form 1040nr The civil penalty is $500. Form 1040nr The criminal penalty, upon conviction, is a fine of up to $1,000, or imprisonment of up to 1 year, or both. Form 1040nr Where to report investment income. Form 1040nr   Table 1-1 gives an overview of the forms and schedules to use to report some common types of investment income. Form 1040nr But see the rest of this publication for detailed information about reporting investment income. Form 1040nr Joint accounts. Form 1040nr   If two or more persons hold property (such as a savings account, bond, or stock) as joint tenants, tenants by the entirety, or tenants in common, each person's share of any interest or dividends from the property is determined by local law. Form 1040nr Community property states. Form 1040nr   If you are married and receive a distribution that is community income, one-half of the distribution is generally considered to be received by each spouse. Form 1040nr If you file separate returns, you must each report one-half of any taxable distribution. Form 1040nr See Publication 555, Community Property, for more information on community income. Form 1040nr   If the distribution is not considered community property and you and your spouse file separate returns, each of you must report your separate taxable distributions. Form 1040nr Example. Form 1040nr You and your spouse have a joint money market account. Form 1040nr Under state law, half the income from the account belongs to you, and half belongs to your spouse. Form 1040nr If you file separate returns, you each report half the income. Form 1040nr Income from property given to a child. Form 1040nr   Property you give as a parent to your child under the Model Gifts of Securities to Minors Act, the Uniform Gifts to Minors Act, or any similar law becomes the child's property. Form 1040nr   Income from the property is taxable to the child, except that any part used to satisfy a legal obligation to support the child is taxable to the parent or guardian having that legal obligation. Form 1040nr Savings account with parent as trustee. Form 1040nr   Interest income from a savings account opened for a minor child, but placed in the name and subject to the order of the parents as trustees, is taxable to the child if, under the law of the state in which the child resides, both of the following are true. Form 1040nr The savings account legally belongs to the child. Form 1040nr The parents are not legally permitted to use any of the funds to support the child. Form 1040nr Table 1-1. Form 1040nr Where To Report Common Types of Investment Income (For detailed information about reporting investment income, see the rest of this publication, especially How To Report Interest Income and How To Report Dividend Income in chapter 1. Form 1040nr ) Type of Income If you file Form 1040, report on . Form 1040nr . Form 1040nr . Form 1040nr If you can file Form 1040A, report on . Form 1040nr . Form 1040nr . Form 1040nr If you can file Form 1040EZ, report on . Form 1040nr . Form 1040nr . Form 1040nr Tax-exempt interest (Form 1099-INT, box 8) Line 8b Line 8b Space to the left of line 2 (enter “TEI” and the amount) Taxable interest that totals $1,500 or less Line 8a (You may need to file Schedule B as well. Form 1040nr ) Line 8a (You may need to file Schedule B as well. Form 1040nr ) Line 2 Taxable interest that totals more than $1,500 Line 8a; also use Schedule B, line 1 Line 8a; also use Schedule B, line 1   Savings bond interest you will exclude because of higher education expenses Schedule B; also use Form 8815 Schedule B; also use Form 8815   Ordinary dividends that total $1,500 or less Line 9a (You may need to file Schedule B as well. Form 1040nr ) Line 9a (You may need to file Schedule B as well. Form 1040nr )   Ordinary dividends that total more than $1,500 Line 9a; also use Schedule B, line 5 Line 9a; also use Schedule B, line 5   Qualified dividends (if you do not have to file Schedule D) Line 9b; also use the Qualified Dividends and Capital Gain Tax Worksheet, line 2 Line 9b; also use the Qualified Dividends and Capital Gain Tax Worksheet, line 2   Qualified dividends (if you have to file Schedule D) Line 9b; also use the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet, line 2 You cannot use Form 1040A    You cannot use Form 1040EZ Capital gain distributions (if you do not have to file Schedule D) Line 13; also use the Qualified Dividends and Capital Gain Tax Worksheet, line 3 Line 10; also use the Qualified Dividends and Capital Gain Tax Worksheet, line 3   Capital gain distributions (if you have to file Schedule D) Schedule D, line 13; also use the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet     Section 1250, 1202, or collectibles gain (Form 1099-DIV, box 2b, 2c, or 2d) Form 8949 and Schedule D     Nondividend distributions (Form 1099-DIV, box 3) Generally not reported*     Undistributed capital gains (Form 2439, boxes 1a - 1d) Schedule D     Gain or loss from sales of stocks or bonds Line 13; also use Form 8949, Schedule D, and the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet You cannot use Form 1040A   Gain or loss from exchanges of like-kind investment property Line 13; also use Schedule D, Form 8824, and the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet     *Report any amounts in excess of your basis in your mutual fund shares on Form 8949. Form 1040nr Use Part II if you held the shares more than 1 year. Form 1040nr Use Part I if you held your mutual fund shares 1 year or less. Form 1040nr For details on Form 8949, see Reporting Capital Gains and Losses in chapter 4, and the Instructions for Form 8949. Form 1040nr Accuracy-related penalty. Form 1040nr   An accuracy-related penalty of 20% can be charged for underpayments of tax due to negligence or disregard of rules or regulations or substantial understatement of tax. Form 1040nr For information on the penalty and any interest that applies, see Penalties in chapter 2. Form 1040nr Interest Income This section discusses the tax treatment of different types of interest income. Form 1040nr In general, any interest that you receive or that is credited to your account and can be withdrawn is taxable income. Form 1040nr (It does not have to be entered in your passbook. Form 1040nr ) Exceptions to this rule are discussed later. Form 1040nr Form 1099-INT. Form 1040nr   Interest income is generally reported to you on Form 1099-INT, or a similar statement, by banks, savings and loans, and other payers of interest. Form 1040nr This form shows you the interest you received during the year. Form 1040nr Keep this form for your records. Form 1040nr You do not have to attach it to your tax return. Form 1040nr   Report on your tax return the total interest income you receive for the tax year. Form 1040nr Interest not reported on Form 1099-INT. Form 1040nr   Even if you do not receive Form 1099-INT, you must still report all of your interest income. Form 1040nr For example, you may receive distributive shares of interest from partnerships or S corporations. Form 1040nr This interest is reported to you on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. Form 1040nr , and Schedule K-1 (Form 1120S), Shareholder's Share of Income, Deductions, Credits, etc. Form 1040nr Nominees. Form 1040nr   Generally, if someone receives interest as a nominee for you, that person must give you a Form 1099-INT showing the interest received on your behalf. Form 1040nr   If you receive a Form 1099-INT that includes amounts belonging to another person, see the discussion on Nominee distributions , later, under How To Report Interest Income. Form 1040nr Incorrect amount. Form 1040nr   If you receive a Form 1099-INT that shows an incorrect amount (or other incorrect information), you should ask the issuer for a corrected form. Form 1040nr The new Form 1099-INT you receive will be marked “Corrected. Form 1040nr ” Form 1099-OID. Form 1040nr   Reportable interest income also may be shown on Form 1099-OID, Original Issue Discount. Form 1040nr For more information about amounts shown on this form, see Original Issue Discount (OID) , later in this chapter. Form 1040nr Exempt-interest dividends. Form 1040nr   Exempt-interest dividends you receive from a mutual fund or other regulated investment company, including those received from a qualified fund of funds in any tax year beginning after December 22, 2010, are not included in your taxable income. Form 1040nr (However, see Information reporting requirement , next. Form 1040nr ) Exempt-interest dividends should be shown in box 10 of Form 1099-DIV. Form 1040nr You do not reduce your basis for distributions that are exempt-interest dividends. Form 1040nr Information reporting requirement. Form 1040nr   Although exempt-interest dividends are not taxable, you must show them on your tax return if you have to file. Form 1040nr This is an information reporting requirement and does not change the exempt-interest dividends into taxable income. Form 1040nr See How To Report Interest Income , later. Form 1040nr Note. Form 1040nr Exempt-interest dividends paid from specified private activity bonds may be subject to the alternative minimum tax. Form 1040nr The exempt-interest dividends subject to the alternative minimum tax are shown in box 11 of Form 1099-DIV. Form 1040nr See Form 6251 and its instructions for more information about this tax. Form 1040nr Private activity bonds are discussed later under State or Local Government Obligations. Form 1040nr Interest on VA dividends. Form 1040nr   Interest on insurance dividends left on deposit with the Department of Veterans Affairs (VA) is not taxable. Form 1040nr This includes interest paid on dividends on converted United States Government Life Insurance policies and on National Service Life Insurance policies. Form 1040nr Individual retirement arrangements (IRAs). Form 1040nr   Interest on a Roth IRA generally is not taxable. Form 1040nr Interest on a traditional IRA is tax deferred. Form 1040nr You generally do not include it in your income until you make withdrawals from the IRA. Form 1040nr See Publication 590 for more information. Form 1040nr Taxable Interest — General Taxable interest includes interest you receive from bank accounts, loans you make to others, and other sources. Form 1040nr The following are some sources of taxable interest. Form 1040nr Dividends that are actually interest. Form 1040nr   Certain distributions commonly called dividends are actually interest. Form 1040nr You must report as interest so-called “dividends” on deposits or on share accounts in: Cooperative banks, Credit unions, Domestic building and loan associations, Domestic savings and loan associations, Federal savings and loan associations, and Mutual savings banks. Form 1040nr  The “dividends” will be shown as interest income on Form 1099-INT. Form 1040nr Money market funds. Form 1040nr   Money market funds are offered by nonbank financial institutions such as mutual funds and stock brokerage houses, and pay dividends. Form 1040nr Generally, amounts you receive from money market funds should be reported as dividends, not as interest. Form 1040nr Certificates of deposit and other deferred interest accounts. Form 1040nr   If you open any of these accounts, interest may be paid at fixed intervals of 1 year or less during the term of the account. Form 1040nr You generally must include this interest in your income when you actually receive it or are entitled to receive it without paying a substantial penalty. Form 1040nr The same is true for accounts that mature in 1 year or less and pay interest in a single payment at maturity. Form 1040nr If interest is deferred for more than 1 year, see Original Issue Discount (OID) , later. Form 1040nr Interest subject to penalty for early withdrawal. Form 1040nr   If you withdraw funds from a deferred interest account before maturity, you may have to pay a penalty. Form 1040nr You must report the total amount of interest paid or credited to your account during the year, without subtracting the penalty. Form 1040nr See Penalty on early withdrawal of savings under How To Report Interest Income, later, for more information on how to report the interest and deduct the penalty. Form 1040nr Money borrowed to invest in certificate of deposit. Form 1040nr   The interest you pay on money borrowed from a bank or savings institution to meet the minimum deposit required for a certificate of deposit from the institution and the interest you earn on the certificate are two separate items. Form 1040nr You must report the total interest you earn on the certificate in your income. Form 1040nr If you itemize deductions, you can deduct the interest you pay as investment interest, up to the amount of your net investment income. Form 1040nr See Interest Expenses in chapter 3. Form 1040nr Example. Form 1040nr You deposited $5,000 with a bank and borrowed $5,000 from the bank to make up the $10,000 minimum deposit required to buy a 6-month certificate of deposit. Form 1040nr The certificate earned $575 at maturity in 2013, but you received only $265, which represented the $575 you earned minus $310 interest charged on your $5,000 loan. Form 1040nr The bank gives you a Form 1099-INT for 2013 showing the $575 interest you earned. Form 1040nr The bank also gives you a statement showing that you paid $310 interest for 2013. Form 1040nr You must include the $575 in your income. Form 1040nr If you itemize your deductions on Schedule A (Form 1040), Itemized Deductions, you can deduct $310, subject to the net investment income limit. Form 1040nr Gift for opening account. Form 1040nr   If you receive noncash gifts or services for making deposits or for opening an account in a savings institution, you may have to report the value as interest. Form 1040nr   For deposits of less than $5,000, gifts or services valued at more than $10 must be reported as interest. Form 1040nr For deposits of $5,000 or more, gifts or services valued at more than $20 must be reported as interest. Form 1040nr The value is determined by the cost to the financial institution. Form 1040nr Example. Form 1040nr You open a savings account at your local bank and deposit $800. Form 1040nr The account earns $20 interest. Form 1040nr You also receive a $15 calculator. Form 1040nr If no other interest is credited to your account during the year, the Form 1099-INT you receive will show $35 interest for the year. Form 1040nr You must report $35 interest income on your tax return. Form 1040nr Interest on insurance dividends. Form 1040nr   Interest on insurance dividends left on deposit with an insurance company that can be withdrawn annually is taxable to you in the year it is credited to your account. Form 1040nr However, if you can withdraw it only on the anniversary date of the policy (or other specified date), the interest is taxable in the year that date occurs. Form 1040nr Prepaid insurance premiums. Form 1040nr   Any increase in the value of prepaid insurance premiums, advance premiums, or premium deposit funds is interest if it is applied to the payment of premiums due on insurance policies or made available for you to withdraw. Form 1040nr U. Form 1040nr S. Form 1040nr obligations. Form 1040nr   Interest on U. Form 1040nr S. Form 1040nr obligations, such as U. Form 1040nr S. Form 1040nr Treasury bills, notes, and bonds, issued by any agency or instrumentality of the United States is taxable for federal income tax purposes. Form 1040nr Interest on tax refunds. Form 1040nr   Interest you receive on tax refunds is taxable income. Form 1040nr Interest on condemnation award. Form 1040nr   If the condemning authority pays you interest to compensate you for a delay in payment of an award, the interest is taxable. Form 1040nr Installment sale payments. Form 1040nr   If a contract for the sale or exchange of property provides for deferred payments, it also usually provides for interest payable with the deferred payments. Form 1040nr That interest is taxable when you receive it. Form 1040nr If little or no interest is provided for in a deferred payment contract, part of each payment may be treated as interest. Form 1040nr See Unstated Interest and Original Issue Discount (OID) in Publication 537. Form 1040nr Interest on annuity contract. Form 1040nr   Accumulated interest on an annuity contract you sell before its maturity date is taxable. Form 1040nr Usurious interest. Form 1040nr   Usurious interest is interest charged at an illegal rate. Form 1040nr This is taxable as interest unless state law automatically changes it to a payment on the principal. Form 1040nr Interest income on frozen deposits. Form 1040nr   Exclude from your gross income interest on frozen deposits. Form 1040nr A deposit is frozen if, at the end of the year, you cannot withdraw any part of the deposit because: The financial institution is bankrupt or insolvent, or The state in which the institution is located has placed limits on withdrawals because other financial institutions in the state are bankrupt or insolvent. Form 1040nr   The amount of interest you must exclude is the interest that was credited on the frozen deposits minus the sum of: The net amount you withdrew from these deposits during the year, and The amount you could have withdrawn as of the end of the year (not reduced by any penalty for premature withdrawals of a time deposit). Form 1040nr If you receive a Form 1099-INT for interest income on deposits that were frozen at the end of 2013, see Frozen deposits under How To Report Interest Income for information about reporting this interest income exclusion on your tax return. Form 1040nr   The interest you exclude is treated as credited to your account in the following year. Form 1040nr You must include it in income in the year you can withdraw it. Form 1040nr Example. Form 1040nr $100 of interest was credited on your frozen deposit during the year. Form 1040nr You withdrew $80 but could not withdraw any more as of the end of the year. Form 1040nr You must include $80 in your income and exclude $20 from your income for the year. Form 1040nr You must include the $20 in your income for the year you can withdraw it. Form 1040nr Bonds traded flat. Form 1040nr    If you buy a bond at a discount when interest has been defaulted or when the interest has accrued but has not been paid, the transaction is described as trading a bond flat. Form 1040nr The defaulted or unpaid interest is not income and is not taxable as interest if paid later. Form 1040nr When you receive a payment of that interest, it is a return of capital that reduces the remaining cost basis of your bond. Form 1040nr Interest that accrues after the date of purchase, however, is taxable interest income for the year received or accrued. Form 1040nr See Bonds Sold Between Interest Dates , later in this chapter. Form 1040nr Below-Market Loans If you make a below-market gift or demand loan, you must report as interest income any forgone interest (defined later) from that loan. Form 1040nr The below-market loan rules and exceptions are described in this section. Form 1040nr For more information, see section 7872 of the Internal Revenue Code and its regulations. Form 1040nr If you receive a below-market loan, you may be able to deduct the forgone interest as well as any interest you actually paid, but not if it is personal interest. Form 1040nr Loans subject to the rules. Form 1040nr   The rules for below-market loans apply to: Gift loans, Pay-related loans, Corporation-shareholder loans, Tax avoidance loans, and Certain loans made to qualified continuing care facilities under a continuing care contract. Form 1040nr A pay-related loan is any below-market loan between an employer and an employee or between an independent contractor and a person for whom the contractor provides services. Form 1040nr A tax avoidance loan is any below-market loan where the avoidance of federal tax is one of the main purposes of the interest arrangement. Form 1040nr Forgone interest. Form 1040nr   For any period, forgone interest is: The amount of interest that would be payable for that period if interest accrued on the loan at the applicable federal rate and was payable annually on December 31, minus Any interest actually payable on the loan for the period. Form 1040nr Applicable federal rate. Form 1040nr   Applicable federal rates are published by the IRS each month in the Internal Revenue Bulletin. Form 1040nr Some IRS offices have these bulletins available for research. Form 1040nr See chapter 5, How To Get Tax Help , for other ways to get this information. Form 1040nr Rules for below-market loans. Form 1040nr   The rules that apply to a below-market loan depend on whether the loan is a gift loan, demand loan, or term loan. Form 1040nr Gift and demand loans. Form 1040nr   A gift loan is any below-market loan where the forgone interest is in the nature of a gift. Form 1040nr   A demand loan is a loan payable in full at any time upon demand by the lender. Form 1040nr A demand loan is a below-market loan if no interest is charged or if interest is charged at a rate below the applicable federal rate. Form 1040nr   A demand loan or gift loan that is a below-market loan is generally treated as an arm's-length transaction in which the lender is treated as having made: A loan to the borrower in exchange for a note that requires the payment of interest at the applicable federal rate, and An additional payment to the borrower in an amount equal to the forgone interest. Form 1040nr The borrower is generally treated as transferring the additional payment back to the lender as interest. Form 1040nr The lender must report that amount as interest income. Form 1040nr   The lender's additional payment to the borrower is treated as a gift, dividend, contribution to capital, pay for services, or other payment, depending on the substance of the transaction. Form 1040nr The borrower may have to report this payment as taxable income, depending on its classification. Form 1040nr These transfers are considered to occur annually, generally on December 31. Form 1040nr Term loans. Form 1040nr   A term loan is any loan that is not a demand loan. Form 1040nr A term loan is a below-market loan if the amount of the loan is more than the present value of all payments due under the loan. Form 1040nr   A lender who makes a below-market term loan other than a gift loan is treated as transferring an additional lump-sum cash payment to the borrower (as a dividend, contribution to capital, etc. Form 1040nr ) on the date the loan is made. Form 1040nr The amount of this payment is the amount of the loan minus the present value, at the applicable federal rate, of all payments due under the loan. Form 1040nr An equal amount is treated as original issue discount (OID). Form 1040nr The lender must report the annual part of the OID as interest income. Form 1040nr The borrower may be able to deduct the OID as interest expense. Form 1040nr See Original Issue Discount (OID) , later. Form 1040nr Exceptions to the below-market loan rules. Form 1040nr   Exceptions to the below-market loan rules are discussed here. Form 1040nr Exception for loans of $10,000 or less. Form 1040nr   The rules for below-market loans do not apply to any day on which the total outstanding amount of loans between the borrower and lender is $10,000 or less. Form 1040nr This exception applies only to: Gift loans between individuals if the gift loan is not directly used to buy or carry income-producing assets, and Pay-related loans or corporation-shareholder loans if the avoidance of federal tax is not a principal purpose of the interest arrangement. Form 1040nr This exception does not apply to a term loan described in (2) earlier that previously has been subject to the below-market loan rules. Form 1040nr Those rules will continue to apply even if the outstanding balance is reduced to $10,000 or less. Form 1040nr Exception for loans to continuing care facilities. Form 1040nr   Loans to qualified continuing care facilities under continuing care contracts are not subject to the rules for below-market loans for the calendar year if the lender or the lender's spouse is age 62 or older at the end of the year. Form 1040nr For the definitions of qualified continuing care facility and continuing care contract, see Internal Revenue Code section 7872(h). Form 1040nr Exception for loans without significant tax effect. Form 1040nr   Loans are excluded from the below-market loan rules if their interest arrangements do not have a significant effect on the federal tax liability of the borrower or the lender. Form 1040nr These loans include: Loans made available by the lender to the general public on the same terms and conditions that are consistent with the lender's customary business practice; Loans subsidized by a federal, state, or municipal government that are made available under a program of general application to the public; Certain employee-relocation loans; Certain loans from a foreign person, unless the interest income would be effectively connected with the conduct of a U. Form 1040nr S. Form 1040nr trade or business and would not be exempt from U. Form 1040nr S. Form 1040nr tax under an income tax treaty; Gift loans to a charitable organization, contributions to which are deductible, if the total outstanding amount of loans between the organization and lender is $250,000 or less at all times during the tax year; and Other loans on which the interest arrangement can be shown to have no significant effect on the federal tax liability of the lender or the borrower. Form 1040nr For a loan described in (6) above, all the facts and circumstances are used to determine if the interest arrangement has a significant effect on the federal tax liability of the lender or borrower. Form 1040nr Some factors to be considered are: Whether items of income and deduction generated by the loan offset each other; The amount of these items; The cost to you of complying with the below-market loan rules, if they were to apply; and Any reasons other than taxes for structuring the transaction as a below-market loan. Form 1040nr If you structure a transaction to meet this exception and one of the principal purposes of that structure is the avoidance of federal tax, the loan will be considered a tax-avoidance loan, and this exception will not apply. Form 1040nr Limit on forgone interest for gift loans of $100,000 or less. Form 1040nr   For gift loans between individuals, if the outstanding loans between the lender and borrower total $100,000 or less, the forgone interest to be included in income by the lender and deducted by the borrower is limited to the amount of the borrower's net investment income for the year. Form 1040nr If the borrower's net investment income is $1,000 or less, it is treated as zero. Form 1040nr This limit does not apply to a loan if the avoidance of federal tax is one of the main purposes of the interest arrangement. Form 1040nr Effective dates. Form 1040nr    These rules apply to term loans made after June 6, 1984, and to demand loans outstanding after that date. Form 1040nr U. Form 1040nr S. Form 1040nr Savings Bonds This section provides tax information on U. Form 1040nr S. Form 1040nr savings bonds. Form 1040nr It explains how to report the interest income on these bonds and how to treat transfers of these bonds. Form 1040nr U. Form 1040nr S. Form 1040nr savings bonds currently offered to individuals include Series EE bonds and Series I bonds. Form 1040nr For other information on U. Form 1040nr S. Form 1040nr savings bonds, write to:  For Series HH/H: Bureau of the Fiscal Service Division of Customer Assistance P. Form 1040nr O. Form 1040nr Box 2186 Parkersburg, WV 26106-2186  For Series EE and I paper savings bonds: Bureau of the Fiscal Service Division of Customer Assistance P. Form 1040nr O. Form 1040nr Box 7012 Parkersburg, WV 26106-7012  For Series EE and I electronic bonds: Bureau of the Fiscal Service  Division of Customer Assistance P. Form 1040nr O. Form 1040nr Box 7015 Parkersburg, WV 26106-7015 Or, on the Internet, visit: www. Form 1040nr treasurydirect. Form 1040nr gov/indiv/indiv. Form 1040nr htm. Form 1040nr Accrual method taxpayers. Form 1040nr   If you use an accrual method of accounting, you must report interest on U. Form 1040nr S. Form 1040nr savings bonds each year as it accrues. Form 1040nr You cannot postpone reporting interest until you receive it or until the bonds mature. Form 1040nr Cash method taxpayers. Form 1040nr   If you use the cash method of accounting, as most individual taxpayers do, you generally report the interest on U. Form 1040nr S. Form 1040nr savings bonds when you receive it. Form 1040nr But see Reporting options for cash method taxpayers , later. Form 1040nr Series HH bonds. Form 1040nr   These bonds were issued at face value. Form 1040nr Interest is paid twice a year by direct deposit to your bank account. Form 1040nr If you are a cash method taxpayer, you must report interest on these bonds as income in the year you receive it. Form 1040nr   Series HH bonds were first offered in 1980 and last offered in August 2004. Form 1040nr Before 1980, series H bonds were issued. Form 1040nr Series H bonds are treated the same as series HH bonds. Form 1040nr If you are a cash method taxpayer, you must report the interest when you receive it. Form 1040nr   Series H bonds have a maturity period of 30 years. Form 1040nr Series HH bonds mature in 20 years. Form 1040nr The last series H bonds matured in 2009. Form 1040nr The last series HH bonds will mature in 2024. Form 1040nr Series EE and series I bonds. Form 1040nr   Interest on these bonds is payable when you redeem the bonds. Form 1040nr The difference between the purchase price and the redemption value is taxable interest. Form 1040nr Series EE bonds. Form 1040nr   Series EE bonds were first offered in January 1980 and have a maturity period of 30 years. Form 1040nr Before July 1980, series E bonds were issued. Form 1040nr The original 10-year maturity period of series E bonds has been extended to 40 years for bonds issued before December 1965 and 30 years for bonds issued after November 1965. Form 1040nr Paper series EE and series E bonds are issued at a discount. Form 1040nr The face value is payable to you at maturity. Form 1040nr Electronic series EE bonds are issued at their face value. Form 1040nr The face value plus accrued interest is payable to you at maturity. Form 1040nr As of January 1, 2012, paper savings bonds were no longer sold at financial institutions. Form 1040nr    Owners of paper series EE bonds can convert them to electronic bonds. Form 1040nr These converted bonds do not retain the denomination listed on the paper certificate but are posted at their purchase price (with accrued interest). Form 1040nr Series I bonds. Form 1040nr   Series I bonds were first offered in 1998. Form 1040nr These are inflation-indexed bonds issued at their face amount with a maturity period of 30 years. Form 1040nr The face value plus all accrued interest is payable to you at maturity. Form 1040nr Reporting options for cash method taxpayers. Form 1040nr   If you use the cash method of reporting income, you can report the interest on series EE, series E, and series I bonds in either of the following ways. Form 1040nr Method 1. Form 1040nr Postpone reporting the interest until the earlier of the year you cash or dispose of the bonds or the year in which they mature. Form 1040nr (However, see Savings bonds traded , later. Form 1040nr )  Note. Form 1040nr Series EE bonds issued in 1983 matured in 2013. Form 1040nr If you have used method 1, you generally must report the interest on these bonds on your 2013 return. Form 1040nr The last series E bonds were issued in 1980 and matured in 2010. Form 1040nr If you used method 1, you generally should have reported the interest on these bonds on your 2010 return. Form 1040nr Method 2. Form 1040nr Choose to report the increase in redemption value as interest each year. Form 1040nr  You must use the same method for all series EE, series E, and series I bonds you own. Form 1040nr If you do not choose method 2 by reporting the increase in redemption value as interest each year, you must use method 1. Form 1040nr If you plan to cash your bonds in the same year you will pay for higher educational expenses, you may want to use method 1 because you may be able to exclude the interest from your income. Form 1040nr To learn how, see Education Savings Bond Program, later. Form 1040nr Change from method 1. Form 1040nr   If you want to change your method of reporting the interest from method 1 to method 2, you can do so without permission from the IRS. Form 1040nr In the year of change, you must report all interest accrued to date and not previously reported for all your bonds. Form 1040nr   Once you choose to report the interest each year, you must continue to do so for all series EE, series E, and series I bonds you own and for any you get later, unless you request permission to change, as explained next. Form 1040nr Change from method 2. Form 1040nr   To change from method 2 to method 1, you must request permission from the IRS. Form 1040nr Permission for the change is automatically granted if you send the IRS a statement that meets all the following requirements. Form 1040nr You have typed or printed the following number at the top: “131. Form 1040nr ” It includes your name and social security number under “131. Form 1040nr ” It includes the year of change (both the beginning and ending dates). Form 1040nr It identifies the savings bonds for which you are requesting this change. Form 1040nr It includes your agreement to: Report all interest on any bonds acquired during or after the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest; and Report all interest on the bonds acquired before the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest, with the exception of the interest reported in prior tax years. Form 1040nr   You must attach this statement to your tax return for the year of change, which you must file by the due date (including extensions). Form 1040nr   You can have an automatic extension of 6 months from the due date of your return for the year of change (excluding extensions) to file the statement with an amended return. Form 1040nr On the statement, type or print “Filed pursuant to section 301. Form 1040nr 9100-2. Form 1040nr ” To get this extension, you must have filed your original return for the year of the change by the due date (including extensions). Form 1040nr    By the date you file the original statement with your return, you must also send a signed copy to the address below. Form 1040nr    Internal Revenue Service Attention: CC:IT&A (Automatic Rulings Branch) P. Form 1040nr O. Form 1040nr Box 7604 Benjamin Franklin Station Washington, DC 20044   If you use a private delivery service, send the signed copy to the address below. Form 1040nr Internal Revenue Service Attention: CC:IT&A  (Automatic Rulings Branch) Room 5336 1111 Constitution Avenue, NW Washington, DC 20224    Instead of filing this statement, you can request permission to change from method 2 to method 1 by filing Form 3115. Form 1040nr In that case, follow the form instructions for an automatic change. Form 1040nr No user fee is required. Form 1040nr Co-owners. Form 1040nr   If a U. Form 1040nr S. Form 1040nr savings bond is issued in the names of co-owners, such as you and your child or you and your spouse, interest on the bond is generally taxable to the co-owner who bought the bond. Form 1040nr One co-owner's funds used. Form 1040nr   If you used your funds to buy the bond, you must pay the tax on the interest. Form 1040nr This is true even if you let the other co-owner redeem the bond and keep all the proceeds. Form 1040nr Under these circumstances, the co-owner who redeemed the bond will receive a Form 1099-INT at the time of redemption and must provide you with another Form 1099-INT showing the amount of interest from the bond taxable to you. Form 1040nr The co-owner who redeemed the bond is a “nominee. Form 1040nr ” See Nominee distributions under How To Report Interest Income, later, for more information about how a person who is a nominee reports interest income belonging to another person. Form 1040nr Both co-owners' funds used. Form 1040nr   If you and the other co-owner each contribute part of the bond's purchase price, the interest is generally taxable to each of you, in proportion to the amount each of you paid. Form 1040nr Community property. Form 1040nr   If you and your spouse live in a community property state and hold bonds as community property, one-half of the interest is considered received by each of you. Form 1040nr If you file separate returns, each of you generally must report one-half of the bond interest. Form 1040nr For more information about community property, see Publication 555. Form 1040nr Table 1-2. Form 1040nr   These rules are also shown in Table 1-2. Form 1040nr Child as only owner. Form 1040nr   Interest on U. Form 1040nr S. Form 1040nr savings bonds bought for and registered only in the name of your child is income to your child, even if you paid for the bonds and are named as beneficiary. Form 1040nr If the bonds are series EE, series E, or series I bonds, the interest on the bonds is income to your child in the earlier of the year the bonds are cashed or disposed of or the year the bonds mature, unless your child chooses to report the interest income each year. Form 1040nr Choice to report interest each year. Form 1040nr   The choice to report the accrued interest each year can be made either by your child or by you for your child. Form 1040nr This choice is made by filing an income tax return that shows all the interest earned to date, and by stating on the return that your child chooses to report the interest each year. Form 1040nr Either you or your child should keep a copy of this return. Form 1040nr   Unless your child is otherwise required to file a tax return for any year after making this choice, your child does not have to file a return only to report the annual accrual of U. Form 1040nr S. Form 1040nr savings bond interest under this choice. Form 1040nr However, see Tax on unearned income of certain children , earlier, under General Information. Form 1040nr Neither you nor your child can change the way you report the interest unless you request permission from the IRS, as discussed earlier under Change from method 2 . Form 1040nr Ownership transferred. Form 1040nr   If you bought series E, series EE, or series I bonds entirely with your own funds and had them reissued in your co-owner's name or beneficiary's name alone, you must include in your gross income for the year of reissue all interest that you earned on these bonds and have not previously reported. Form 1040nr But, if the bonds were reissued in your name alone, you do not have to report the interest accrued at that time. Form 1040nr   This same rule applies when bonds (other than bonds held as community property) are transferred between spouses or incident to divorce. Form 1040nr Example. Form 1040nr You bought series EE bonds entirely with your own funds. Form 1040nr You did not choose to report the accrued interest each year. Form 1040nr Later, you transfer the bonds to your former spouse under a divorce agreement. Form 1040nr You must include the deferred accrued interest, from the date of the original issue of the bonds to the date of transfer, in your income in the year of transfer. Form 1040nr Your former spouse includes in income the interest on the bonds from the date of transfer to the date of redemption. Form 1040nr Table 1-2. Form 1040nr Who Pays the Tax on U. Form 1040nr S. Form 1040nr Savings Bond Interest IF . Form 1040nr . Form 1040nr . Form 1040nr THEN the interest must be reported by . Form 1040nr . Form 1040nr . Form 1040nr you buy a bond in your name and the name of another person as co-owners, using only your own funds you. Form 1040nr you buy a bond in the name of another person, who is the sole owner of the bond the person for whom you bought the bond. Form 1040nr you and another person buy a bond as co-owners, each contributing part of the purchase price both you and the other co-owner, in proportion to the amount each paid for the bond. Form 1040nr you and your spouse, who live in a community property state, buy a bond that is community property you and your spouse. Form 1040nr If you file separate returns, both you and your spouse generally report one-half of the interest. Form 1040nr Purchased jointly. Form 1040nr   If you and a co-owner each contributed funds to buy series E, series EE, or series I bonds jointly and later have the bonds reissued in the co-owner's name alone, you must include in your gross income for the year of reissue your share of all the interest earned on the bonds that you have not previously reported. Form 1040nr The former co-owner does not have to include in gross income at the time of reissue his or her share of the interest earned that was not reported before the transfer. Form 1040nr This interest, however, as well as all interest earned after the reissue, is income to the former co-owner. Form 1040nr   This income-reporting rule also applies when the bonds are reissued in the name of your former co-owner and a new co-owner. Form 1040nr But the new co-owner will report only his or her share of the interest earned after the transfer. Form 1040nr   If bonds that you and a co-owner bought jointly are reissued to each of you separately in the same proportion as your contribution to the purchase price, neither you nor your co-owner has to report at that time the interest earned before the bonds were reissued. Form 1040nr Example 1. Form 1040nr You and your spouse each spent an equal amount to buy a $1,000 series EE savings bond. Form 1040nr The bond was issued to you and your spouse as co-owners. Form 1040nr You both postpone reporting interest on the bond. Form 1040nr You later have the bond reissued as two $500 bonds, one in your name and one in your spouse's name. Form 1040nr At that time neither you nor your spouse has to report the interest earned to the date of reissue. Form 1040nr Example 2. Form 1040nr You bought a $1,000 series EE savings bond entirely with your own funds. Form 1040nr The bond was issued to you and your spouse as co-owners. Form 1040nr You both postponed reporting interest on the bond. Form 1040nr You later have the bond reissued as two $500 bonds, one in your name and one in your spouse's name. Form 1040nr You must report half the interest earned to the date of reissue. Form 1040nr Transfer to a trust. Form 1040nr   If you own series E, series EE, or series I bonds and transfer them to a trust, giving up all rights of ownership, you must include in your income for that year the interest earned to the date of transfer if you have not already reported it. Form 1040nr However, if you are considered the owner of the trust and if the increase in value both before and after the transfer continues to be taxable to you, you can continue to defer reporting the interest earned each year. Form 1040nr You must include the total interest in your income in the year you cash or dispose of the bonds or the year the bonds finally mature, whichever is earlier. Form 1040nr   The same rules apply to previously unreported interest on series EE or series E bonds if the transfer to a trust consisted of series HH or series H bonds you acquired in a trade for the series EE or series E bonds. Form 1040nr See Savings bonds traded , later. Form 1040nr Decedents. Form 1040nr   The manner of reporting interest income on series E, series EE, or series I bonds, after the death of the owner (decedent), depends on the accounting and income-reporting methods previously used by the decedent. Form 1040nr Decedent who reported interest each year. Form 1040nr   If the bonds transferred because of death were owned by a person who used an accrual method, or who used the cash method and had chosen to report the interest each year, the interest earned in the year of death up to the date of death must be reported on that person's final return. Form 1040nr The person who acquires the bonds includes in income only interest earned after the date of death. Form 1040nr Decedent who postponed reporting interest. Form 1040nr   If the transferred bonds were owned by a decedent who had used the cash method and had not chosen to report the interest each year, and who had bought the bonds entirely with his or her own funds, all interest earned before death must be reported in one of the following ways. Form 1040nr The surviving spouse or personal representative (executor, administrator, etc. Form 1040nr ) who files the final income tax return of the decedent can choose to include on that return all interest earned on the bonds before the decedent's death. Form 1040nr The person who acquires the bonds then includes in income only interest earned after the date of death. Form 1040nr If the choice in (1) is not made, the interest earned up to the date of death is income in respect of the decedent and should not be included in the decedent's final return. Form 1040nr All interest earned both before and after the decedent's death (except any part reported by the estate on its income tax return) is income to the person who acquires the bonds. Form 1040nr If that person uses the cash method and does not choose to report the interest each year, he or she can postpone reporting it until the year the bonds are cashed or disposed of or the year they mature, whichever is earlier. Form 1040nr In the year that person reports the interest, he or she can claim a deduction for any federal estate tax paid on the part of the interest included in the decedent's estate. Form 1040nr For more information on income in respect of a decedent, see Publication 559, Survivors, Executors, and Administrators. Form 1040nr Example 1. Form 1040nr Your uncle, a cash method taxpayer, died and left you a $1,000 series EE bond. Form 1040nr He had bought the bond for $500 and had not chosen to report the interest each year. Form 1040nr At the date of death, interest of $200 had accrued on the bond, and its value of $700 was included in your uncle's estate. Form 1040nr Your uncle's executor chose not to include the $200 accrued interest in your uncle's final income tax return. Form 1040nr The $200 is income in respect of the decedent. Form 1040nr You are a cash method taxpayer and do not choose to report the interest each year as it is earned. Form 1040nr If you cash the bond when it reaches maturity value of $1,000, you report $500 interest income—the difference between maturity value of $1,000 and the original cost of $500. Form 1040nr For that year, you can deduct (as a miscellaneous itemized deduction not subject to the 2%-of-adjusted-gross-income limit) any federal estate tax paid because the $200 interest was included in your uncle's estate. Form 1040nr Example 2. Form 1040nr If, in Example 1 , the executor had chosen to include the $200 accrued interest in your uncle's final return, you would report only $300 as interest when you cashed the bond at maturity. Form 1040nr $300 is the interest earned after your uncle's death. Form 1040nr Example 3. Form 1040nr If, in Example 1 , you make or have made the choice to report the increase in redemption value as interest each year, you include in gross income for the year you acquire the bond all of the unreported increase in value of all series E, series EE, and series I bonds you hold, including the $200 on the bond you inherited from your uncle. Form 1040nr Example 4. Form 1040nr When your aunt died, she owned series HH bonds that she had acquired in a trade for series EE bonds. Form 1040nr You were the beneficiary of these bonds. Form 1040nr Your aunt used the cash method and did not choose to report the interest on the series EE bonds each year as it accrued. Form 1040nr Your aunt's executor chose not to include any interest earned before your aunt's death on her final return. Form 1040nr The income in respect of the decedent is the sum of the unreported interest on the series EE bonds and the interest, if any, payable on the series HH bonds but not received as of the date of your aunt's death. Form 1040nr You must report any interest received during the year as income on your return. Form 1040nr The part of the interest payable but not received before your aunt's death is income in respect of the decedent and may qualify for the estate tax deduction. Form 1040nr For information on when to report the interest on the series EE bonds traded, see Savings bonds traded , later. Form 1040nr Savings bonds distributed from a retirement or profit-sharing plan. Form 1040nr   If you acquire a U. Form 1040nr S. Form 1040nr savings bond in a taxable distribution from a retirement or profit-sharing plan, your income for the year of distribution includes the bond's redemption value (its cost plus the interest accrued before the distribution). Form 1040nr When you redeem the bond (whether in the year of distribution or later), your interest income includes only the interest accrued after the bond was distributed. Form 1040nr To figure the interest reported as a taxable distribution and your interest income when you redeem the bond, see Worksheet for savings bonds distributed from a retirement or profit-sharing plan under How To Report Interest Income, later. Form 1040nr Savings bonds traded. Form 1040nr   If you postponed reporting the interest on your series EE or series E bonds, you did not recognize taxable income when you traded the bonds for series HH or series H bonds, unless you received cash in the trade. Form 1040nr (You cannot trade series I bonds for series HH bonds. Form 1040nr After August 31, 2004, you cannot trade any other series of bonds for series HH bonds. Form 1040nr ) Any cash you received is income up to the amount of the interest earned on the bonds traded. Form 1040nr When your series HH or series H bonds mature, or if you dispose of them before maturity, you report as interest the difference between their redemption value and your cost. Form 1040nr Your cost is the sum of the amount you paid for the traded series EE or series E bonds plus any amount you had to pay at the time of the trade. Form 1040nr Example. Form 1040nr You traded series EE bonds (on which you postponed reporting the interest) for $2,500 in series HH bonds and $223 in cash. Form 1040nr You reported the $223 as taxable income on your tax return. Form 1040nr At the time of the trade, the series EE bonds had accrued interest of $523 and a redemption value of $2,723. Form 1040nr You hold the series HH bonds until maturity, when you receive $2,500. Form 1040nr You must report $300 as interest income in the year of maturity. Form 1040nr This is the difference between their redemption value, $2,500, and your cost, $2,200 (the amount you paid for the series EE bonds). Form 1040nr (It is also the difference between the accrued interest of $523 on the series EE bonds and the $223 cash received on the trade. Form 1040nr ) Choice to report interest in year of trade. Form 1040nr   You could have chosen to treat all of the previously unreported accrued interest on series EE or series E bonds traded for series HH bonds as income in the year of the trade. Form 1040nr If you made this choice, it is treated as a change from method 1. Form 1040nr See Change from method 1 under Series EE and series I bonds, earlier. Form 1040nr Form 1099-INT for U. Form 1040nr S. Form 1040nr savings bond interest. Form 1040nr   When you cash a bond, the bank or other payer that redeems it must give you a Form 1099-INT if the interest part of the payment you receive is $10 or more. Form 1040nr Box 3 of your Form 1099-INT should show the interest as the difference between the amount you received and the amount paid for the bond. Form 1040nr However, your Form 1099-INT may show more interest than you have to include on your income tax return. Form 1040nr For example, this may happen if any of the following are true. Form 1040nr You chose to report the increase in the redemption value of the bond each year. Form 1040nr The interest shown on your Form 1099-INT will not be reduced by amounts previously included in income. Form 1040nr You received the bond from a decedent. Form 1040nr The interest shown on your Form 1099-INT will not be reduced by any interest reported by the decedent before death, or on the decedent's final return, or by the estate on the estate's income tax return. Form 1040nr Ownership of the bond was transferred. Form 1040nr The interest shown on your Form 1099-INT will not be reduced by interest that accrued before the transfer. Form 1040nr You were named as a co-owner, and the other co-owner contributed funds to buy the bond. Form 1040nr The interest shown on your Form 1099-INT will not be reduced by the amount you received as nominee for the other co-owner. Form 1040nr (See Co-owners , earlier in this section, for more information about the reporting requirements. Form 1040nr ) You received the bond in a taxable distribution from a retirement or profit-sharing plan. Form 1040nr The interest shown on your Form 1099-INT will not be reduced by the interest portion of the amount taxable as a distribution from the plan and not taxable as interest. Form 1040nr (This amount is generally shown on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Form 1040nr , for the year of distribution. Form 1040nr )   For more information on including the correct amount of interest on your return, see U. Form 1040nr S. Form 1040nr savings bond interest previously reported or Nominee distributions under How To Report Interest Income, later. Form 1040nr    Interest on U. Form 1040nr S. Form 1040nr savings bonds is exempt from state and local taxes. Form 1040nr The Form 1099-INT you receive will indicate the amount that is for U. Form 1040nr S. Form 1040nr savings bonds interest in box 3. Form 1040nr Do not include this income on your state or local income tax return. Form 1040nr Education Savings Bond Program You may be able to exclude from income all or part of the interest you receive on the redemption of qualified U. Form 1040nr S. Form 1040nr savings bonds during the year if you pay qualified higher educational expenses during the same year. Form 1040nr This exclusion is known as the Education Savings Bond Program. Form 1040nr You do not qualify for this exclusion if your filing status is married filing separately. Form 1040nr Form 8815. Form 1040nr   Use Form 8815 to figure your exclusion. Form 1040nr Attach the form to your Form 1040 or Form 1040A. Form 1040nr Qualified U. Form 1040nr S. Form 1040nr savings bonds. Form 1040nr   A qualified U. Form 1040nr S. Form 1040nr savings bond is a series EE bond issued after 1989 or a series I bond. Form 1040nr The bond must be issued either in your name (sole owner) or in your and your spouse's names (co-owners). Form 1040nr You must be at least 24 years old before the bond's issue date. Form 1040nr For example, a bond bought by a parent and issued in the name of his or her child under age 24 does not qualify for the exclusion by the parent or child. Form 1040nr    The issue date of a bond may be earlier than the date the bond is purchased because the issue date assigned to a bond is the first day of the month in which it is purchased. Form 1040nr Beneficiary. Form 1040nr   You can designate any individual (including a child) as a beneficiary of the bond. Form 1040nr Verification by IRS. Form 1040nr   If you claim the exclusion, the IRS will check it by using bond redemption information from the Department of Treasury. Form 1040nr Qualified expenses. Form 1040nr   Qualified higher educational expenses are tuition and fees required for you, your spouse, or your dependent (for whom you claim an exemption) to attend an eligible educational institution. Form 1040nr   Qualified expenses include any contribution you make to a qualified tuition program or to a Coverdell education savings account. Form 1040nr For information about these programs, see Publication 970, Tax Benefits for Education. Form 1040nr   Qualified expenses do not include expenses for room and board or for courses involving sports, games, or hobbies that are not part of a degree or certificate granting program. Form 1040nr Eligible educational institutions. Form 1040nr   These institutions include most public, private, and nonprofit universities, colleges, and vocational schools that are accredited and eligible to participate in student aid programs run by the Department of Education. Form 1040nr Reduction for certain benefits. Form 1040nr   You must reduce your qualified higher educational expenses by all of the following tax-free benefits. Form 1040nr Tax-free part of scholarships and fellowships. Form 1040nr Expenses used to figure the tax-free portion of distributions from a Coverdell ESA. Form 1040nr Expenses used to figure the tax-free portion of distributions from a qualified tuition program. Form 1040nr Any tax-free payments (other than gifts or inheritances) received as educational assistance, such as: Veterans' educational assistance benefits, Qualified tuition reductions, or Employer-provided educational assistance. Form 1040nr Any expense used in figuring the American Opportunity and lifetime learning credits. Form 1040nr For information about these benefits, see Publication 970. Form 1040nr Amount excludable. Form 1040nr   If the total proceeds (interest and principal) from the qualified U. Form 1040nr S. Form 1040nr savings bonds you redeem during the year are not more than your adjusted qualified higher educational expenses for the year, you may be able to exclude all of the interest. Form 1040nr If the proceeds are more than the expenses, you may be able to exclude only part of the interest. Form 1040nr   To determine the excludable amount, multiply the interest part of the proceeds by a fraction. Form 1040nr The numer
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The Form 1040nr

Form 1040nr 4. Form 1040nr   How Income of Aliens Is Taxed Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Resident Aliens Nonresident AliensTrade or Business in the United States Effectively Connected Income The 30% Tax Income From Real Property Transportation Tax Interrupted Period of Residence Expatriation TaxExpatriation Before June 4, 2004 Expatriation After June 3, 2004, and Before June 17, 2008 Expatriation After June 16, 2008 Introduction Resident and nonresident aliens are taxed in different ways. Form 1040nr Resident aliens are generally taxed in the same way as U. Form 1040nr S. Form 1040nr citizens. Form 1040nr Nonresident aliens are taxed based on the source of their income and whether or not their income is effectively connected with a U. Form 1040nr S. Form 1040nr trade or business. Form 1040nr The following discussions will help you determine if income you receive during the tax year is effectively connected with a U. Form 1040nr S. Form 1040nr trade or business and how it is taxed. Form 1040nr Topics - This chapter discusses: Income that is effectively connected with a U. Form 1040nr S. Form 1040nr trade or business. Form 1040nr Income that is not effectively connected with a U. Form 1040nr S. Form 1040nr trade or business. Form 1040nr Interrupted period of residence. Form 1040nr Expatriation tax. Form 1040nr Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets 1212 List of Original Issue Discount Instruments Form (and Instructions) 6251 Alternative Minimum Tax—Individuals Schedule D (Form 1040) Capital Gains and Losses See chapter 12 for information about getting these publications and forms. Form 1040nr Resident Aliens Resident aliens are generally taxed in the same way as U. Form 1040nr S. Form 1040nr citizens. Form 1040nr This means that their worldwide income is subject to U. Form 1040nr S. Form 1040nr tax and must be reported on their U. Form 1040nr S. Form 1040nr tax return. Form 1040nr Income of resident aliens is subject to the graduated tax rates that apply to U. Form 1040nr S. Form 1040nr citizens. Form 1040nr Resident aliens use the Tax Table or Tax Computation Worksheets located in the Form 1040 instructions, which apply to U. Form 1040nr S. Form 1040nr citizens. Form 1040nr Nonresident Aliens A nonresident alien's income that is subject to U. Form 1040nr S. Form 1040nr 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). Form 1040nr The difference between these two categories is that effectively connected income, after allowable deductions, is taxed at graduated rates. Form 1040nr These are the same rates that apply to U. Form 1040nr S. Form 1040nr citizens and residents. Form 1040nr Income that is not effectively connected is taxed at a flat 30% (or lower treaty) rate. Form 1040nr If you were formerly a U. Form 1040nr S. Form 1040nr citizen or resident alien, these rules may not apply. Form 1040nr See Expatriation Tax, later, in this chapter. Form 1040nr 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. Form 1040nr Whether you are engaged in a trade or business in the United States depends on the nature of your activities. Form 1040nr The discussions that follow will help you determine whether you are engaged in a trade or business in the United States. Form 1040nr Personal Services 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. Form 1040nr Certain compensation paid to a nonresident alien by a foreign employer is not included in gross income. Form 1040nr For more information, see Services Performed for Foreign Employer in chapter 3. Form 1040nr Other Trade or Business Activities Other examples of being engaged in a trade or business in the United States follow. Form 1040nr Students and trainees. Form 1040nr   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. Form 1040nr 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. Form 1040nr The taxable part of any scholarship or fellowship grant that is U. Form 1040nr S. Form 1040nr source income is treated as effectively connected with a trade or business in the United States. Form 1040nr Business operations. Form 1040nr   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. Form 1040nr Partnerships. Form 1040nr   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. Form 1040nr Beneficiary of an estate or trust. Form 1040nr   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. Form 1040nr Trading in stocks, securities, and commodities. Form 1040nr   If your only U. Form 1040nr S. Form 1040nr business activity is trading in stocks, securities, or commodities (including hedging transactions) through a U. Form 1040nr S. Form 1040nr resident broker or other agent, you are not engaged in a trade or business in the United States. Form 1040nr   For transactions in stocks or securities, this applies to any nonresident alien, including a dealer or broker in stocks and securities. Form 1040nr   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. Form 1040nr   This discussion does not apply if you have a U. Form 1040nr S. Form 1040nr 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. Form 1040nr Trading for a nonresident alien's own account. Form 1040nr   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. Form 1040nr S. Form 1040nr business activity. Form 1040nr 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. Form 1040nr   This does not apply to trading for your own account if you are a dealer in stocks, securities, or commodities. Form 1040nr 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. Form 1040nr Determine that based on the facts and circumstances in each case or under the rules given above in Trading in stocks, securities, and commodities . Form 1040nr Effectively Connected Income If you are engaged in a U. Form 1040nr S. Form 1040nr 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. Form 1040nr 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. Form 1040nr 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. Form 1040nr In limited circumstances, some kinds of foreign source income may be treated as effectively connected with a trade or business in the United States. Form 1040nr For a discussion of these rules, see Foreign Income , later. Form 1040nr Investment Income Investment income from U. Form 1040nr S. Form 1040nr sources that may or may not be treated as effectively connected with a U. Form 1040nr S. Form 1040nr trade or business generally falls into the following three categories. Form 1040nr Fixed or determinable income (interest, dividends, rents, royalties, premiums, annuities, etc. Form 1040nr ). Form 1040nr Gains (some of which are considered capital gains) from the sale or exchange of the following types of property. Form 1040nr Timber, coal, or domestic iron ore with a retained economic interest. Form 1040nr Patents, copyrights, and similar property on which you receive contingent payments after October 4, 1966. Form 1040nr Patents transferred before October 5, 1966. Form 1040nr Original issue discount obligations. Form 1040nr Capital gains (and losses). Form 1040nr Use the two tests, described next, to determine whether an item of U. Form 1040nr S. Form 1040nr source income falling in one of the three categories above and received during the tax year is effectively connected with your U. Form 1040nr S. Form 1040nr trade or business. Form 1040nr If the tests indicate that the item of income is effectively connected, you must include it with your other effectively connected income. Form 1040nr If the item of income is not effectively connected, include it with all other income discussed under The 30% Tax later, in this chapter. Form 1040nr Asset-use test. Form 1040nr   This test usually applies to income that is not directly produced by trade or business activities. Form 1040nr 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. Form 1040nr   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. Form 1040nr 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. Form 1040nr Business-activities test. Form 1040nr   This test usually applies when income, gain, or loss comes directly from the active conduct of the trade or business. Form 1040nr 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. Form 1040nr Under this test, if the conduct of the U. Form 1040nr S. Form 1040nr trade or business was a material factor in producing the income, the income is considered effectively connected. Form 1040nr Personal Service Income You usually are engaged in a U. Form 1040nr S. Form 1040nr trade or business when you perform personal services in the United States. Form 1040nr Personal service income you receive in a tax year in which you are engaged in a U. Form 1040nr S. Form 1040nr trade or business is effectively connected with a U. Form 1040nr S. Form 1040nr trade or business. Form 1040nr 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. Form 1040nr Personal service income includes wages, salaries, commissions, fees, per diem allowances, and employee allowances and bonuses. Form 1040nr The income may be paid to you in the form of cash, services, or property. Form 1040nr If you are engaged in a U. Form 1040nr S. Form 1040nr 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. Form 1040nr 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. Form 1040nr Pensions. Form 1040nr   If you were a nonresident alien engaged in a U. Form 1040nr S. Form 1040nr 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. Form 1040nr This is true whether or not you are engaged in a U. Form 1040nr S. Form 1040nr trade or business in the year you receive the retirement pay. Form 1040nr Transportation Income Transportation income (defined in chapter 2) is effectively connected if you meet both of the following conditions. Form 1040nr You had a fixed place of business in the United States involved in earning the income. Form 1040nr At least 90% of your U. Form 1040nr S. Form 1040nr source transportation income is attributable to regularly scheduled transportation. Form 1040nr “Fixed place of business” generally means a place, site, structure, or other similar facility through which you engage in a trade or business. Form 1040nr “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. Form 1040nr This definition applies to both scheduled and chartered air transportation. Form 1040nr If you do not meet the two conditions above, the income is not effectively connected and is taxed at a 4% rate. Form 1040nr See Transportation Tax, later, in this chapter. Form 1040nr Business Profits and Losses and Sales Transactions All profits or losses from U. Form 1040nr S. Form 1040nr 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. Form 1040nr 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. Form 1040nr A share of U. Form 1040nr S. Form 1040nr 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. Form 1040nr Real Property Gain or Loss Gains and losses from the sale or exchange of U. Form 1040nr S. Form 1040nr 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. Form 1040nr You must treat the gain or loss as effectively connected with that trade or business. Form 1040nr U. Form 1040nr S. Form 1040nr real property interest. Form 1040nr   This is any interest in real property located in the United States or the U. Form 1040nr S. Form 1040nr Virgin Islands or any interest (other than as a creditor) in a domestic corporation that is a U. Form 1040nr S. Form 1040nr real property holding corporation. Form 1040nr Real property includes the following. Form 1040nr Land and unsevered natural products of the land, such as growing crops and timber, and mines, wells, and other natural deposits. Form 1040nr Improvements on land, including buildings, other permanent structures, and their structural components. Form 1040nr 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. Form 1040nr U. Form 1040nr S. Form 1040nr real property holding corporation. Form 1040nr   A corporation is a U. Form 1040nr S. Form 1040nr real property holding corporation if the fair market value of the corporation's U. Form 1040nr S. Form 1040nr real property interests are at least 50% of the total fair market value of: The corporation's U. Form 1040nr S. Form 1040nr 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. Form 1040nr   Gain or loss on the sale of the stock in any domestic corporation is taxed as if you are engaged in a U. Form 1040nr S. Form 1040nr trade or business unless you establish that the corporation is not a U. Form 1040nr S. Form 1040nr real property holding corporation. Form 1040nr   A U. Form 1040nr S. Form 1040nr 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. Form 1040nr An interest in a foreign corporation owning U. Form 1040nr S. Form 1040nr real property generally is not a U. Form 1040nr S. Form 1040nr real property interest unless the corporation chooses to be treated as a domestic corporation. Form 1040nr Qualified investment entities. Form 1040nr   Special rules apply to qualified investment entities (QIEs). Form 1040nr A QIE is any real estate investment trust (REIT) or any regulated investment company (RIC) that is a U. Form 1040nr S. Form 1040nr real property holding corporation. Form 1040nr    Generally, any distribution from a QIE to a shareholder that is attributable to gain from the sale or exchange of a U. Form 1040nr S. Form 1040nr real property interest is treated as a U. Form 1040nr S. Form 1040nr real property gain by the shareholder receiving the distribution. Form 1040nr A distribution by a QIE on stock regularly traded on an established securities market in the United States is not treated as gain from the sale or exchange of a U. Form 1040nr S. Form 1040nr real property interest if you did not own more than 5% of that stock at any time during the 1-year period ending on the date of the distribution. Form 1040nr A distribution that you do not treat as gain from the sale or exchange of a U. Form 1040nr S. Form 1040nr real property interest is included in your gross income as a regular dividend. Form 1040nr Note. Form 1040nr Beginning January 1, 2014 (unless extended by legislation), a RIC that is a U. Form 1040nr S. Form 1040nr real property holding corporation will only be treated as a QIE for certain distributions from the RIC that are directly or indirectly attributable to distributions received by the RIC from a REIT. Form 1040nr Domestically controlled QIE. Form 1040nr   The sale of an interest in a domestically controlled QIE is not the sale of a U. Form 1040nr S. Form 1040nr real property interest. Form 1040nr The entity is domestically controlled if at all times during the testing period less than 50% in value of its stock was held, directly or indirectly, by foreign persons. Form 1040nr The testing period is the shorter of (a) the 5-year period ending on the date of disposition, or (b) the period during which the entity was in existence. Form 1040nr Wash sale. Form 1040nr    If you dispose of an interest in a domestically controlled QIE in an applicable wash sale transaction, special rules apply. Form 1040nr An applicable wash sale transaction is one in which you: Dispose of an interest in the domestically controlled QIE during the 30-day period before the ex-dividend date of a distribution that you would (but for the disposition) have treated as gain from the sale or exchange of a U. Form 1040nr S. Form 1040nr real property interest, and Acquire, or enter into a contract or option to acquire, a substantially identical interest in that entity during the 61-day period that began on the first day of the 30-day period. Form 1040nr If this occurs, you are treated as having gain from the sale or exchange of a U. Form 1040nr S. Form 1040nr real property interest in an amount equal to the distribution made after June 15, 2006, that would have been treated as such gain. Form 1040nr This also applies to any substitute dividend payment. Form 1040nr   A transaction is not treated as an applicable wash sale transaction if: You actually receive the distribution from the domestically controlled QIE related to the interest disposed of, or acquired, in the transaction, or You dispose of any class of stock in a QIE that is regularly traded on an established securities market in the United States but only if you did not own more than 5% of that class of stock at any time during the 1-year period ending on the date of the distribution. Form 1040nr Alternative minimum tax. Form 1040nr   There may be a minimum tax on your net gain from the disposition of U. Form 1040nr S. Form 1040nr real property interests. Form 1040nr Figure the amount of this tax, if any, on Form 6251. Form 1040nr Withholding of tax. Form 1040nr   If you dispose of a U. Form 1040nr S. Form 1040nr real property interest, the buyer may have to withhold tax. Form 1040nr See the discussion of Tax Withheld on Real Property Sales in chapter 8. Form 1040nr Foreign Income You must treat three kinds of foreign source income as effectively connected with a trade or business in the United States if: 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. Form 1040nr 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. Form 1040nr The three kinds of foreign source income are listed below. Form 1040nr 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. Form 1040nr 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. Form 1040nr Dividends, interest, or amounts received for the provision of a guarantee of indebtedness issued after September 27, 2010, from the active conduct of a banking, financing, or similar business in the United States. Form 1040nr 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. Form 1040nr Income, gain, or loss from the sale outside the United States, through the U. Form 1040nr S. Form 1040nr 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. Form 1040nr Item (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. Form 1040nr Any foreign source income that is equivalent to any item of income described above is treated as effectively connected with a U. Form 1040nr S. Form 1040nr trade or business. Form 1040nr For example, foreign source interest and dividend equivalents are treated as U. Form 1040nr S. Form 1040nr 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. Form 1040nr 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. Form 1040nr S. Form 1040nr citizens and residents. Form 1040nr 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. Form 1040nr 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. Form 1040nr Example. Form 1040nr Ted Richards, a nonresident alien, entered the United States in August 2012, to perform personal services in the U. Form 1040nr S. Form 1040nr office of his overseas employer. Form 1040nr He worked in the U. Form 1040nr S. Form 1040nr office until December 25, 2012, but did not leave this country until January 11, 2013. Form 1040nr On January 8, 2013, he received his final paycheck for services performed in the United States during 2012. Form 1040nr All of Ted's income during his stay here is U. Form 1040nr S. Form 1040nr source income. Form 1040nr During 2012, Ted was engaged in the trade or business of performing personal services in the United States. Form 1040nr Therefore, all amounts paid to him in 2012 for services performed in the United States during 2012 are effectively connected with that trade or business during 2012. Form 1040nr The salary payment Ted received in January 2013 is U. Form 1040nr S. Form 1040nr source income to him in 2013. Form 1040nr 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 2012 when he performed the services that earned the income. Form 1040nr Real property income. Form 1040nr   You may be able to choose to treat all income from real property as effectively connected. Form 1040nr See Income From Real Property , later, in this chapter. Form 1040nr The 30% Tax Tax at a 30% (or lower treaty) rate applies to certain items of income or gains from U. Form 1040nr S. Form 1040nr sources but only if the items are not effectively connected with your U. Form 1040nr S. Form 1040nr trade or business. Form 1040nr Fixed or Determinable Income The 30% (or lower treaty) rate applies to the gross amount of U. Form 1040nr S. Form 1040nr source fixed or determinable annual or periodic gains, profits, or income. Form 1040nr Income is fixed when it is paid in amounts known ahead of time. Form 1040nr Income is determinable whenever there is a basis for figuring the amount to be paid. Form 1040nr Income can be periodic if it is paid from time to time. Form 1040nr It does not have to be paid annually or at regular intervals. Form 1040nr Income can be determinable or periodic even if the length of time during which the payments are made is increased or decreased. Form 1040nr Items specifically included as fixed or determinable income are interest (other than original issue discount), dividends, dividend equivalent payments (defined in chapter 2), rents, premiums, annuities, salaries, wages, and other compensation. Form 1040nr 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. Form 1040nr Other items of income, such as royalties, also may be subject to the 30% tax. Form 1040nr Some fixed or determinable income may be exempt from U. Form 1040nr S. Form 1040nr tax. Form 1040nr See chapter 3 if you are not sure whether the income is taxable. Form 1040nr Original issue discount (OID). Form 1040nr   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. Form 1040nr The amount of OID is the difference between the stated redemption price at maturity and the issue price of the debt instrument. Form 1040nr The 30% tax applies in the following circumstances. Form 1040nr You received a payment on a debt instrument. Form 1040nr 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. Form 1040nr But the tax on the OID cannot be more than the payment minus the tax on the interest payment on the debt instrument. Form 1040nr You sold or exchanged the debt instrument. Form 1040nr 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. Form 1040nr   Report on your return the amount of OID shown on Form 1042-S, Foreign Person's U. Form 1040nr S. Form 1040nr Source Income Subject to Withholding, if you bought the debt instrument at original issue. Form 1040nr However, you must recompute your proper share of OID shown on Form 1042-S if any of the following apply. Form 1040nr You bought the debt instrument at a premium or paid an acquisition premium. Form 1040nr The debt instrument is a stripped bond or a stripped coupon (including zero coupon instruments backed by U. Form 1040nr S. Form 1040nr Treasury securities). Form 1040nr The debt instrument is a contingent payment or inflation-indexed debt instrument. Form 1040nr For the definition of premium and acquisition premium and instructions on how to recompute OID, get Publication 1212. Form 1040nr   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. Form 1040nr See chapter 12. Form 1040nr Gambling Winnings In general, nonresident aliens are subject to the 30% tax on the gross proceeds from gambling won in the United States if that income is not effectively connected with a U. Form 1040nr S. Form 1040nr trade or business and is not exempted by treaty. Form 1040nr However, no tax is imposed on nonbusiness gambling income a nonresident alien wins playing blackjack, baccarat, craps, roulette, or big-6 wheel in the United States. Form 1040nr Nonresident aliens are taxed at graduated rates on net gambling income won in the United States that is effectively connected with a U. Form 1040nr S. Form 1040nr trade or business. Form 1040nr Social Security Benefits A nonresident alien must include 85% of any U. Form 1040nr S. Form 1040nr social security benefit (and the social security equivalent part of a tier 1 railroad retirement benefit) in U. Form 1040nr S. Form 1040nr source fixed or determinable annual or periodic income. Form 1040nr Social security benefits include monthly retirement, survivor, and disability benefits. Form 1040nr This income is exempt under some tax treaties. Form 1040nr See Table 1 in Publication 901, U. Form 1040nr S. Form 1040nr Tax Treaties, for a list of tax treaties that exempt U. Form 1040nr S. Form 1040nr social security benefits from U. Form 1040nr S. Form 1040nr tax. Form 1040nr 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. Form 1040nr They apply even if you are engaged in a trade or business in the United States. Form 1040nr These rules do not apply to the sale or exchange of a U. Form 1040nr S. Form 1040nr real property interest or to the sale of any property that is effectively connected with a trade or business in the United States. Form 1040nr See Real Property Gain or Loss , earlier, under Effectively Connected Income. Form 1040nr A capital asset is everything you own except: Inventory. Form 1040nr Business accounts or notes receivable. Form 1040nr Depreciable property used in a trade or business. Form 1040nr Real property used in a trade or business. Form 1040nr Supplies regularly used in a trade or business. Form 1040nr Certain copyrights, literary or musical or artistic compositions, letters or memoranda, or similar property. Form 1040nr Certain U. Form 1040nr S. Form 1040nr government publications. Form 1040nr Certain commodities derivative financial instruments held by a commodities derivatives dealer. Form 1040nr Hedging transactions. Form 1040nr A capital gain is a gain on the sale or exchange of a capital asset. Form 1040nr A capital loss is a loss on the sale or exchange of a capital asset. Form 1040nr 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. Form 1040nr S. Form 1040nr currency at the rate of exchange prevailing as of the date of the purchase and date of the sale, respectively. Form 1040nr You may want to read Publication 544. Form 1040nr However, use Publication 544 only to determine what is a sale or exchange of a capital asset, or what is treated as such. Form 1040nr Specific tax treatment that applies to U. Form 1040nr S. Form 1040nr citizens or residents generally does not apply to you. Form 1040nr The following gains are subject to the 30% (or lower treaty) rate without regard to the 183-day rule, discussed later. Form 1040nr Gains on the disposal of timber, coal, or domestic iron ore with a retained economic interest. Form 1040nr Gains on contingent payments received from the sale or exchange of patents, copyrights, and similar property after October 4, 1966. Form 1040nr Gains on certain transfers of all substantial rights to, or an undivided interest in, patents if the transfers were made before October 5, 1966. Form 1040nr Gains on the sale or exchange of original issue discount obligations. Form 1040nr 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. Form 1040nr S. Form 1040nr trade or business. Form 1040nr See Income From Real Property , later. Form 1040nr 183-day rule. Form 1040nr   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. Form 1040nr For purposes of the 30% (or lower treaty) rate, net gain is the excess of your capital gains from U. Form 1040nr S. Form 1040nr sources over your capital losses from U. Form 1040nr S. Form 1040nr sources. Form 1040nr This rule applies even if any of the transactions occurred while you were not in the United States. Form 1040nr   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. Form 1040nr S. Form 1040nr trade or business during the year and the gains and losses were effectively connected with that trade or business during the tax year. Form 1040nr   In arriving at your net gain, do not take the following into consideration. Form 1040nr The four types of gains listed earlier. Form 1040nr The deduction for a capital loss carryover. Form 1040nr Capital losses in excess of capital gains. Form 1040nr Exclusion for gain from the sale or exchange of qualified small business stock (section 1202 exclusion). Form 1040nr Losses from the sale or exchange of property held for personal use. Form 1040nr However, losses resulting from casualties or thefts may be deductible on Schedule A (Form 1040NR). Form 1040nr See Itemized Deductions in chapter 5. Form 1040nr   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. Form 1040nr Also, you must file your tax return on a calendar-year basis. Form 1040nr   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. Form 1040nr Reporting. Form 1040nr   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. 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. Form 1040nr Attach them to Form 1040NR. 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. Form 1040nr 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. Form 1040nr This includes income from rents, royalties from mines, oil or gas wells, or other natural resources. Form 1040nr It also includes gains from the sale or exchange of timber, coal, or domestic iron ore with a retained economic interest. Form 1040nr You can make this choice only for real property income that is not otherwise effectively connected with your U. Form 1040nr S. Form 1040nr trade or business. Form 1040nr 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. Form 1040nr This choice does not treat a nonresident alien, who is not otherwise engaged in a U. Form 1040nr S. Form 1040nr trade or business, as being engaged in a trade or business in the United States during the year. Form 1040nr Example. Form 1040nr You are a nonresident alien and are not engaged in a U. Form 1040nr S. Form 1040nr trade or business. Form 1040nr You own a single-family house in the United States that you rent out. Form 1040nr Your rental income for the year is $10,000. Form 1040nr This is your only U. Form 1040nr S. Form 1040nr source income. Form 1040nr As discussed earlier under The 30% Tax, the rental income is subject to a tax at a 30% (or lower treaty) rate. Form 1040nr You received a Form 1042-S showing that your tenants properly withheld this tax from the rental income. Form 1040nr You do not have to file a U. Form 1040nr S. Form 1040nr tax return (Form 1040NR) because your U. Form 1040nr S. Form 1040nr tax liability is satisfied by the withholding of tax. Form 1040nr If you make the choice discussed earlier, you can offset the $10,000 income by certain rental expenses. Form 1040nr (See Publication 527, Residential Rental Property, for information on rental expenses. Form 1040nr ) Any resulting net income is taxed at graduated rates. Form 1040nr If you make this choice, report the rental income and expenses on Schedule E (Form 1040) and attach the schedule to Form 1040NR. Form 1040nr For the first year you make the choice, also attach the statement discussed next. Form 1040nr Making the choice. Form 1040nr   Make the initial choice by attaching a statement to your return, or amended return, for the year of the choice. Form 1040nr Include the following in your statement. Form 1040nr That you are making the choice. Form 1040nr Whether the choice is under Internal Revenue Code section 871(d) (explained earlier) or a tax treaty. Form 1040nr A complete list of all your real property, or any interest in real property, located in the United States. Form 1040nr Give the legal identification of U. Form 1040nr S. Form 1040nr timber, coal, or iron ore in which you have an interest. Form 1040nr The extent of your ownership in the property. Form 1040nr The location of the property. Form 1040nr A description of any major improvements to the property. Form 1040nr The dates you owned the property. Form 1040nr Your income from the property. Form 1040nr Details of any previous choices and revocations of the real property income choice. Form 1040nr   This choice stays in effect for all later tax years unless you revoke it. Form 1040nr Revoking the choice. Form 1040nr   You can revoke the choice without IRS approval by filing Form 1040X, Amended U. Form 1040nr S. Form 1040nr Individual Income Tax Return, for the year you made the choice and for later tax years. Form 1040nr 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. Form 1040nr If this time period has expired for the year of choice, you cannot revoke the choice for that year. Form 1040nr However, you may revoke the choice for later tax years only if you have IRS approval. Form 1040nr For information on how to get IRS approval, see Regulation section 1. Form 1040nr 871-10(d)(2). Form 1040nr Transportation Tax 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 . Form 1040nr If you receive transportation income subject to the 4% tax, you should figure the tax and show it on line 57 of Form 1040NR. Form 1040nr Attach a statement to your return that includes the following information (if applicable). Form 1040nr Your name, taxpayer identification number, and tax year. Form 1040nr A description of the types of services performed (whether on or off board). Form 1040nr Names of vessels or registration numbers of aircraft on which you performed the services. Form 1040nr Amount of U. Form 1040nr S. Form 1040nr source transportation income derived from each type of service for each vessel or aircraft for the calendar year. Form 1040nr Total amount of U. Form 1040nr S. Form 1040nr source transportation income derived from all types of services for the calendar year. Form 1040nr This 4% tax applies to your U. Form 1040nr S. Form 1040nr source gross transportation income. Form 1040nr 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. Form 1040nr For transportation income from personal services, the transportation must be between the United States and a U. Form 1040nr S. Form 1040nr possession. Form 1040nr For personal services of a nonresident alien, this only applies to income derived from, or in connection with, an aircraft. Form 1040nr Interrupted Period of Residence You are subject to tax under a special rule if you interrupt your period of U. Form 1040nr S. Form 1040nr residence with a period of nonresidence. Form 1040nr The special rule applies if you meet all of the following conditions. Form 1040nr You were a U. Form 1040nr S. Form 1040nr resident for a period that includes at least 3 consecutive calendar years. Form 1040nr You were a U. Form 1040nr S. Form 1040nr resident for at least 183 days in each of those years. Form 1040nr You ceased to be treated as a U. Form 1040nr S. Form 1040nr resident. Form 1040nr You then again became a U. Form 1040nr S. Form 1040nr resident before the end of the third calendar year after the end of the period described in (1) above. Form 1040nr Under this special rule, you are subject to tax on your U. Form 1040nr S. Form 1040nr 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. Form 1040nr S. Form 1040nr trade or business. Form 1040nr For information on how to figure the special tax, see How To Figure the Expatriation Tax (If You Expatriated Before June 17, 2008) under Expatriation Tax , below. Form 1040nr Example. Form 1040nr John Willow, a citizen of New Zealand, entered the United States on April 1, 2008, as a lawful permanent resident. Form 1040nr On August 1, 2010, John ceased to be a lawful permanent resident and returned to New Zealand. Form 1040nr During his period of residence, he was present in the United States for at least 183 days in each of three consecutive years (2008, 2009, and 2010). Form 1040nr He returned to the United States on October 5, 2013, as a lawful permanent resident. Form 1040nr He became a resident before the close of the third calendar year (2013) beginning after the end of his first period of residence (August 1, 2010). Form 1040nr Therefore, he is subject to tax under the special rule for the period of nonresidence (August 2, 2010, through October 4, 2013) if it is more than the tax that would normally apply to him as a nonresident alien. Form 1040nr Reporting requirements. Form 1040nr   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. Form 1040nr The return is due by the due date (including extensions) for filing your U. Form 1040nr S. Form 1040nr income tax return for the year that you again become a U. Form 1040nr S. Form 1040nr resident. Form 1040nr If you already filed returns for that period, you must file amended returns. Form 1040nr You must attach a statement to your return that identifies the source of all of your U. Form 1040nr S. Form 1040nr and foreign gross income and the items of income subject to this special rule. Form 1040nr Expatriation Tax The expatriation tax provisions apply to U. Form 1040nr S. Form 1040nr citizens who have renounced their citizenship and long-term residents who have ended their residency. Form 1040nr The rules that apply are based on the dates of expatriation, which are described in the following sections. Form 1040nr Expatriation Before June 4, 2004. Form 1040nr Expatriation After June 3, 2004, and Before June 17, 2008. Form 1040nr Expatriation After June 16, 2008. Form 1040nr Long-term resident defined. Form 1040nr   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. Form 1040nr 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. Form 1040nr Expatriation Before June 4, 2004 If you expatriated before June 4, 2004, the expatriation rules apply if one of the principal purposes of the action is the avoidance of U. Form 1040nr S. Form 1040nr taxes. Form 1040nr Unless you received a ruling from the IRS that you did not expatriate to avoid U. Form 1040nr S. Form 1040nr 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 your action to relinquish your citizenship or terminate your residency was more than $100,000, or Your net worth on the date of your action was $500,000 or more. Form 1040nr The amounts above are adjusted for inflation if your expatriation action is after 1997 (see Table 4-1). Form 1040nr Table 4-1. Form 1040nr Inflation-Adjusted Amounts for Expatriation Actions Before June 4, 2004 IF you expatriated during . Form 1040nr . Form 1040nr . Form 1040nr   THEN the rules outlined on this page apply if . Form 1040nr . Form 1040nr . Form 1040nr     Your 5-year average annual net income tax was more than . Form 1040nr . Form 1040nr . Form 1040nr OR Your net worth equaled or exceeded . Form 1040nr . Form 1040nr . Form 1040nr 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 2004 (before June 4)*   124,000   622,000 *If you expatriated after June 3, 2004, see Expatriation After June 3, 2004, and Before June 17, 2008 or Expatriation After June 16, 2008. Form 1040nr Reporting requirements. Form 1040nr   If you lost your U. Form 1040nr S. Form 1040nr citizenship, you should have filed Form 8854 with a consular office or a federal court at the time of loss of citizenship. Form 1040nr If you ended your long-term residency, you should have filed Form 8854 with the Internal Revenue Service when you filed your dual-status tax return for the year your residency ended. Form 1040nr   Your U. Form 1040nr S. Form 1040nr residency is considered to have ended when you ceased to be a lawful permanent resident or you began to be treated as a resident of another country under a tax treaty and do not waive treaty benefits. Form 1040nr Penalties. Form 1040nr   If you failed to file Form 8854, you may have to pay a penalty equal to the greater of 5% of the expatriation tax or $1,000. Form 1040nr The penalty will be assessed for each year of the 10-year period beginning on the date of expatriation during which your failure to file continues. Form 1040nr The penalty will not be imposed if you can show that the failure is due to reasonable cause and not willful neglect. Form 1040nr Expatriation tax. Form 1040nr   The expatriation tax applies to the 10-year period following the date of expatriation or termination of residency. Form 1040nr It is figured in the same way as for those expatriating after June 3, 2004, and before June 17, 2008. Form 1040nr See How To Figure the Expatriation Tax (If You Expatriated Before June 17, 2008) in the next section. Form 1040nr Expatriation After June 3, 2004, and Before June 17, 2008 If you expatriated after June 3, 2004, and before June 17, 2008, the expatriation rules apply to you if any of the following statements apply. Form 1040nr Your average annual net income tax for the 5 tax years ending before the date of expatriation or termination of residency is more than: $124,000 if you expatriated or terminated residency in 2004. Form 1040nr $127,000 if you expatriated or terminated residency in 2005. Form 1040nr $131,000 if you expatriated or terminated residency in 2006. Form 1040nr $136,000 if you expatriated or terminated residency in 2007. Form 1040nr $139,000 if you expatriated or terminated residency in 2008. Form 1040nr Your net worth is $2 million or more on the date of your expatriation or termination of residency. Form 1040nr You fail to certify on Form 8854 that you have complied with all U. Form 1040nr S. Form 1040nr federal tax obligations for the 5 tax years preceding the date of your expatriation or termination of residency. Form 1040nr Exception for dual-citizens and certain minors. Form 1040nr   Certain dual-citizens and certain minors (defined next) are not subject to the expatriation tax even if they meet (1) or (2) earlier. Form 1040nr However, they still must provide the certification required in (3). Form 1040nr Certain dual-citizens. Form 1040nr   You may qualify for the exception described above if all of the following apply. Form 1040nr You became at birth a U. Form 1040nr S. Form 1040nr citizen and a citizen of another country and you continue to be a citizen of that other country. Form 1040nr You were never a resident alien of the United States (as defined in chapter 1). Form 1040nr You never held a U. Form 1040nr S. Form 1040nr passport. Form 1040nr 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. Form 1040nr S. Form 1040nr citizenship. Form 1040nr Certain minors. Form 1040nr   You may qualify for the exception described above if you meet all of the following requirements. Form 1040nr You became a U. Form 1040nr S. Form 1040nr citizen at birth. Form 1040nr Neither of your parents was a U. Form 1040nr S. Form 1040nr citizen at the time of your birth. Form 1040nr You expatriated before you were 18½. Form 1040nr You were present in the United States for not more than 30 days during any calendar year that is 1 of the 10 calendar years preceding your expatriation. Form 1040nr Tax consequences of presence in the United States. Form 1040nr   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. Form 1040nr   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. Form 1040nr Instead, you are treated as a U. Form 1040nr S. Form 1040nr citizen or resident and taxed on your worldwide income for that tax year. Form 1040nr You must file Form 1040, 1040A, or 1040EZ and figure your tax as prescribed in the instructions for those forms. Form 1040nr   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. Form 1040nr 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. Form 1040nr You have ties with other countries. Form 1040nr 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. Form 1040nr 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. Form 1040nr 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. Form 1040nr See Exempt individual and Medical condition in chapter 1 under Substantial Presence Test, but disregard the information about Form 8843. Form 1040nr Related employer. Form 1040nr   If your employer in the United States is any of the following, then your employer is related to you. Form 1040nr You must count any days you performed services in the United States for that employer as days of presence in the United States. Form 1040nr Members of your family. Form 1040nr This includes only your brothers and sisters, half-brothers and half-sisters, spouse, ancestors (parents, grandparents, etc. Form 1040nr ), and lineal descendants (children, grandchildren, etc. Form 1040nr ). Form 1040nr A partnership in which you directly or indirectly own more than 50% of the capital interest or the profits interest. Form 1040nr A corporation in which you directly or indirectly own more than 50% in value of the outstanding stock. Form 1040nr (See Publication 550, chapter 4, Constructive ownership of stock, for how to determine whether you directly or indirectly own outstanding stock. Form 1040nr ) 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. Form 1040nr Date of tax expatriation. Form 1040nr   For purposes of U. Form 1040nr S. Form 1040nr tax rules, the date of your expatriation or termination of residency is the later of the dates on which you perform the following actions. Form 1040nr You notify either the Department of State or the Department of Homeland Security (whichever is appropriate) of your expatriating act or termination of residency. Form 1040nr You file Form 8854 in accordance with the form instructions. Form 1040nr Annual return. Form 1040nr   If the expatriation tax applies to you, you must file Form 8854 each year during the 10-year period following the date of expatriation. Form 1040nr You must file this form even if you owe no U. Form 1040nr S. Form 1040nr tax. Form 1040nr Penalty. Form 1040nr   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. Form 1040nr You will not have to pay a penalty if you show that the failure is due to reasonable cause and not to willful neglect. Form 1040nr How To Figure the Expatriation Tax (If You Expatriated Before June 17, 2008) If the expatriation tax applies to you, you are generally subject to tax on your U. Form 1040nr S. Form 1040nr 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. Form 1040nr S. Form 1040nr trade or business. Form 1040nr For this purpose, U. Form 1040nr S. Form 1040nr 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. Form 1040nr S. Form 1040nr domestic corporation, and Debt obligations of U. Form 1040nr S. Form 1040nr persons or of the United States, a state or political subdivision thereof, or the District of Columbia. Form 1040nr U. Form 1040nr S. Form 1040nr 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. Form 1040nr The income or gain is considered U. Form 1040nr S. Form 1040nr 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. Form 1040nr 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. Form 1040nr S. Form 1040nr source gross income in the tax year of the exchange unless you enter into a gain recognition agreement under Notice 97-19. Form 1040nr Other information. Form 1040nr   For more information on the expatriation tax provisions, including exceptions to the tax and special U. Form 1040nr S. Form 1040nr source rules, see section 877 of the Internal Revenue Code. Form 1040nr Expatriation Tax Return If you expatriated or terminated your U. Form 1040nr S. Form 1040nr residency, or you are subject to the expatriation tax, you must file Form 8854, Initial and Annual Expatriation Statement. Form 1040nr Attach it to Form 1040NR if you are required to file that form. Form 1040nr If you are present in the United States following your expatriation and are subject to tax as a U. Form 1040nr S. Form 1040nr citizen or resident, file Form 8854 with Form 1040. Form 1040nr Expatriation After June 16, 2008 If you expatriated after June 16, 2008, the expatriation rules apply to you if you meet any of the following conditions. Form 1040nr Your average annual net income tax for the 5 years ending before the date of expatriation or termination of residency is more than: $139,000 if you expatriated or terminated residency in 2008. Form 1040nr $145,000 if you expatriated or terminated residency in 2009 or 2010. Form 1040nr $147,000 if you expatriated or terminated residency in 2011. Form 1040nr $151,000 if you expatriated or terminated residency in 2012. Form 1040nr $155,000 if you expatriated or terminated residency in 2013. Form 1040nr Your net worth is $2 million or more on the date of your expatriation or termination of residency. Form 1040nr You fail to certify on Form 8854 that you have complied with all U. Form 1040nr S. Form 1040nr federal tax obligations for the 5 years preceding the date of your expatriation or termination of residency. Form 1040nr Exception for dual-citizens and certain minors. Form 1040nr   Certain dual-citizens and certain minors (defined next) are not subject to the expatriation tax even if they meet (1) or (2) above. Form 1040nr However, they still must provide the certification required in (3) above. Form 1040nr Certain dual-citizens. Form 1040nr   You may qualify for the exception described above if both of the following apply. Form 1040nr You became at birth a U. Form 1040nr S. Form 1040nr citizen and a citizen of another country and you continue to be a citizen of, and are taxed as a resident of, that other country. Form 1040nr You have been a resident of the United States for not more than 10 years during the 15-year tax period ending with the tax year during which the expatriation occurs. Form 1040nr For the purpose of determining U. Form 1040nr S. Form 1040nr residency, use the substantial presence test described in chapter 1. Form 1040nr Certain minors. Form 1040nr   You may qualify for the exception described earlier if you meet both of the following requirements. Form 1040nr You expatriated before you were 18½. Form 1040nr You have been a resident of the United States for not more than 10 tax years before the expatriation occurs. Form 1040nr For the purpose of determining U. Form 1040nr S. Form 1040nr residency, use the substantial presence test described in chapter 1. Form 1040nr Expatriation date. Form 1040nr   Your expatriation date is the date you relinquish U. Form 1040nr S. Form 1040nr citizenship (in the case of a former citizen) or terminate your long-term residency (in the case of a former U. Form 1040nr S. Form 1040nr resident). Form 1040nr Former U. Form 1040nr S. Form 1040nr citizen. Form 1040nr   You are considered to have relinquished your U. Form 1040nr S. Form 1040nr citizenship on the earliest of the following dates. Form 1040nr The date you renounced U. Form 1040nr S. Form 1040nr citizenship before a diplomatic or consular officer of the United States (provided that the voluntary renouncement was later confirmed by the issuance of a certificate of loss of nationality). Form 1040nr The date you furnished to the State Department a signed statement of voluntary relinquishment of U. Form 1040nr S. Form 1040nr nationality confirming the performance of an expatriating act (provided that the voluntary relinquishment was later confirmed by the issuance of a certificate of loss of nationality). Form 1040nr The date the State Department issued a certificate of loss of nationality. Form 1040nr The date that a U. Form 1040nr S. Form 1040nr court canceled your certificate of naturalization. Form 1040nr Former long-term resident. Form 1040nr   You are considered to have terminated your long-term residency on the earliest of the following dates. Form 1040nr The date you voluntarily relinquished your lawful permanent resident status by filing Department of Homeland Security Form I-407 with a U. Form 1040nr S. Form 1040nr consular or immigration officer, and the Department of Homeland Security determined that you have, in fact, abandoned your lawful permanent resident status. Form 1040nr The date you became subject to a final administrative order for your removal from the United States under the Immigration and Nationality Act and you actually left the United States as a result of that order. Form 1040nr If you were a dual resident of the United States and a country with which the United States has an income tax treaty, the date you began to be treated as a resident of that country and you determined that, for purposes of the treaty, you are a resident of the treaty country and notify the IRS of that treatment on Forms 8833 and 8854. Form 1040nr See Effect of Tax Treaties in chapter 1 for more information about dual residents. Form 1040nr How To Figure the Expatriation Tax (If You Expatriate After June 16, 2008) In the year you expatriate, you are subject to income tax on the net unrealized gain (or loss) in your property as if the property had been sold for its fair market value on the day before your expatriation date (“mark-to-market tax”). Form 1040nr This applies to most types of property interests you held on the date of relinquishment of citizenship or termination of residency. Form 1040nr But see Exceptions , later. Form 1040nr Gains arising from deemed sales must be taken into account for the tax year of the deemed sale without regard to other U. Form 1040nr S. Form 1040nr internal revenue laws. Form 1040nr Losses from deemed sales must be taken into account to the extent otherwise provided under U. Form 1040nr S. Form 1040nr internal revenue laws. Form 1040nr However, Internal Revenue Code section 1091 (relating to the disallowance of losses on wash sales of stock and securities) does not apply. Form 1040nr The net gain that you otherwise must include in your income is reduced (but not below zero) by: $600,000 if you expatriated or terminated residency before January 1, 2009. Form 1040nr $626,000 if you expatriated or terminated residency in 2009. Form 1040nr $627,000 if you expatriated or terminated residency in 2010. Form 1040nr $636,000 if you expatriated or terminated residency in 2011. Form 1040nr $651,000 if you expatriated or terminated residency in 2012. Form 1040nr $668,000 if you expatriated or terminated residency in 2013. Form 1040nr Exceptions. Form 1040nr   The mark-to-market tax does not apply to the following. Form 1040nr Eligible deferred compensation items. Form 1040nr Ineligible deferred compensation items. Form 1040nr Interests in nongrantor trusts. Form 1040nr Specified tax deferred accounts. Form 1040nr Instead, items (1) and (3) may be subject to withholding at source. Form 1040nr In the case of item (2), you are treated as receiving the present value of your accrued benefit as of the day before the expatriation date. Form 1040nr In the case of item (4), you are treated as receiving a distribution of your entire interest in the account on the day before your expatriation date. Form 1040nr See paragraphs (d), (e), and (f) of section 877A for more information. Form 1040nr Expatriation Tax Return If you expatriated or terminated your U. Form 1040nr S. Form 1040nr residency, or you are subject to the expatriation rules (as discussed earlier in the first paragraph under Expatriation After June 16, 2008), you must file Form 8854. Form 1040nr Attach it to Form 1040 or Form 1040NR if you are required to file either of those forms. Form 1040nr Deferral of payment of mark-to-market tax. Form 1040nr   You can make an irrevocable election to defer payment of the mark-to-market tax imposed on the deemed sale of property. Form 1040nr If you make this election, the following rules apply. Form 1040nr You can make the election on a property-by-property basis. Form 1040nr The deferred tax attributable to a particular property is due on the return for the tax year in which you dispose of the property. Form 1040nr Interest is charged for the period the tax is deferred. Form 1040nr The due date for the payment of the deferred tax cannot be extended beyond the earlier of the following dates. Form 1040nr The due date of the return required for the year of death. Form 1040nr The time that the security provided for the property fails to be adequate. Form 1040nr See item (6) below. Form 1040nr You make the election on Form 8854. Form 1040nr You must provide adequate security (such as a bond). Form 1040nr You must make an irrevocable waiver of any right under any treaty of the United States which would preclude assessment or collection of the mark-to-market tax. Form 1040nr   For more information about the deferral of payment, see the Instructions for Form 8854. Form 1040nr Prev  Up  Next   Home   More Online Publications