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Tax Amendments

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Tax Amendments

Tax amendments 2. Tax amendments   Source of Income Table of Contents Introduction Topics - This chapter discusses: Resident Aliens Nonresident AliensInterest Income Dividends Guarantee of Indebtedness Personal Services Transportation Income Scholarships, Grants, Prizes, and Awards Pensions and Annuities Rents or Royalties Real Property Personal Property Community Income Introduction After you have determined your alien status, you must determine the source of your income. Tax amendments This chapter will help you determine the source of different types of income you may receive during the tax year. Tax amendments This chapter also discusses special rules for married individuals who are domiciled in a country with community property laws. Tax amendments Topics - This chapter discusses: Income source rules, and Community income. Tax amendments Resident Aliens A resident alien's income is generally subject to tax in the same manner as a U. Tax amendments S. Tax amendments citizen. Tax amendments If you are a resident alien, you must report all interest, dividends, wages, or other compensation for services, income from rental property or royalties, and other types of income on your U. Tax amendments S. Tax amendments tax return. Tax amendments You must report these amounts from sources within and outside the United States. Tax amendments Nonresident Aliens A nonresident alien usually is subject to U. Tax amendments S. Tax amendments income tax only on U. Tax amendments S. Tax amendments source income. Tax amendments Under limited circumstances, certain foreign source income is subject to U. Tax amendments S. Tax amendments tax. Tax amendments See Foreign Income in chapter 4. Tax amendments The general rules for determining U. Tax amendments S. Tax amendments source income that apply to most nonresident aliens are shown in Table 2-1. Tax amendments The following discussions cover the general rules as well as the exceptions to these rules. Tax amendments Not all items of U. Tax amendments S. Tax amendments source income are taxable. Tax amendments See chapter 3. Tax amendments Interest Income Generally, U. Tax amendments S. Tax amendments source interest income includes the following items. Tax amendments Interest on bonds, notes, or other interest-bearing obligations of U. Tax amendments S. Tax amendments residents or domestic corporations. Tax amendments Interest paid by a domestic or foreign partnership or foreign corporation engaged in a U. Tax amendments S. Tax amendments trade or business at any time during the tax year. Tax amendments Original issue discount. Tax amendments Interest from a state, the District of Columbia, or the U. Tax amendments S. Tax amendments Government. Tax amendments The place or manner of payment is immaterial in determining the source of the income. Tax amendments A substitute interest payment made to the transferor of a security in a securities lending transaction or a sale-repurchase transaction is sourced in the same manner as the interest on the transferred security. Tax amendments Exceptions. Tax amendments   U. Tax amendments S. Tax amendments source interest income does not include the following items. Tax amendments Interest paid by a resident alien or a domestic corporation on obligations issued before August 10, 2010, if for the 3-year period ending with the close of the payer's tax year preceding the interest payment, at least 80% of the payer's total gross income: Is from sources outside the United States, and Is attributable to the active conduct of a trade or business by the individual or corporation in a foreign country or a U. Tax amendments S. Tax amendments possession. Tax amendments However, the interest will be considered U. Tax amendments S. Tax amendments source interest income if either of the following apply. Tax amendments The recipient of the interest is related to the resident alien or domestic corporation. Tax amendments See section 954(d)(3) for the definition of related person. Tax amendments The terms of the obligation are significantly modified after August 9, 2010. Tax amendments Any extension of the term of the obligation is considered a significant modification. Tax amendments Interest paid by a foreign branch of a domestic corporation or a domestic partnership on deposits or withdrawable accounts with mutual savings banks, cooperative banks, credit unions, domestic building and loan associations, and other savings institutions chartered and supervised as savings and loan or similar associations under federal or state law if the interest paid or credited can be deducted by the association. Tax amendments Interest on deposits with a foreign branch of a domestic corporation or domestic partnership, but only if the branch is in the commercial banking business. Tax amendments Dividends In most cases, dividend income received from domestic corporations is U. Tax amendments S. Tax amendments source income. Tax amendments Dividend income from foreign corporations is usually foreign source income. Tax amendments Exceptions to both of these rules are discussed below. Tax amendments A substitute dividend payment made to the transferor of a security in a securities lending transaction or a sale-repurchase transaction is sourced in the same manner as a distribution on the transferred security. Tax amendments Dividend equivalent payments. Tax amendments   U. Tax amendments S. Tax amendments source dividends also include all dividend equivalent payments. Tax amendments Dividend equivalent payments include substitute dividends, payments made pursuant to a specified notional principal contract, and all similar payments that, directly or indirectly, are contingent on or determined by reference to, the payment of a dividend from U. Tax amendments S. Tax amendments sources. Tax amendments    The Internal Revenue Service has issued final regulations that would affect the treatment of dividend equivalent payments and specified notional principal contracts. Tax amendments You can view this regulation at www. Tax amendments irs. Tax amendments gov/irb/2013-52_IRB/ar08. Tax amendments html. Tax amendments First exception. Tax amendments   Dividends received from a domestic corporation are not U. Tax amendments S. Tax amendments source income if the corporation elects to take the American Samoa economic development credit. Tax amendments Second exception. Tax amendments   Part of the dividends received from a foreign corporation is U. Tax amendments S. Tax amendments source income if 25% or more of its total gross income for the 3-year period ending with the close of its tax year preceding the declaration of dividends was effectively connected with a trade or business in the United States. Tax amendments If the corporation was formed less than 3 years before the declaration, use its total gross income from the time it was formed. Tax amendments Determine the part that is U. Tax amendments S. Tax amendments source income by multiplying the dividend by the following fraction. Tax amendments   Foreign corporation's gross income connected with a U. Tax amendments S. Tax amendments trade or business for the 3-year period     Foreign corporation's gross income from all sources for that period   Guarantee of Indebtedness Certain amounts received directly or indirectly, for the provision of a guarantee of indebtedness issued after September 27, 2010, are U. Tax amendments S. Tax amendments source income. Tax amendments They must be paid by a noncorporate resident or U. Tax amendments S. Tax amendments corporation or by any foreign person if the amounts are effectively connected with the conduct of a U. Tax amendments S. Tax amendments trade or business. Tax amendments For more information, see Internal Revenue Code sections 861(a)(9) and 862(a)(9). Tax amendments Personal Services All wages and any other compensation for services performed in the United States are considered to be from sources in the United States. Tax amendments The only exceptions to this rule are discussed in chapter 3 under Employees of foreign persons, organizations, or offices, and under Crew members. Tax amendments If you are an employee and receive compensation for labor or personal services performed both inside and outside the United States, special rules apply in determining the source of the compensation. Tax amendments Compensation (other than certain fringe benefits) is sourced on a time basis. Tax amendments Certain fringe benefits (such as housing and education) are sourced on a geographical basis. Tax amendments Or, you may be permitted to use an alternative basis to determine the source of compensation. Tax amendments See Alternative Basis , later. Tax amendments Multi-level marketing. Tax amendments   Certain companies sell products through a multi-level marketing arrangement, such that an upper-tier distributor, who has sponsored a lower-tier distributor, is entitled to a payment from the company based on certain activities of that lower-tier distributor. Tax amendments Generally, depending on the facts, payments from such multi-level marketing companies to independent (non-employee) distributors (upper-tier distributors) that are based on the sales or purchases of persons whom they have sponsored (lower-tier distributors) constitute income for the performance of personal services in recruiting, training, and supporting the lower-tier distributors. Tax amendments The source of such income is generally based on where the services of the upper-tier distributor are performed, and may, depending on the facts, be considered multi-year compensation, with the source of income determined over the period to which such compensation is attributable. Tax amendments Self-employed individuals. Tax amendments   If you are self-employed, you determine the source of compensation for labor or personal services from self-employment on the basis that most correctly reflects the proper source of that income under the facts and circumstances of your particular case. Tax amendments In many cases, the facts and circumstances will call for an apportionment on a time basis as explained next. Tax amendments Time Basis Use a time basis to figure your U. Tax amendments S. Tax amendments source compensation (other than the fringe benefits discussed later). Tax amendments Do this by multiplying your total compensation (other than the fringe benefits discussed later) by the following fraction:   Number of days you performed services in the United States during the year     Total number of days you performed services during the year   You can use a unit of time less than a day in the above fraction, if appropriate. Tax amendments The time period for which the compensation is made does not have to be a year. Tax amendments Instead, you can use another distinct, separate, and continuous time period if you can establish to the satisfaction of the IRS that this other period is more appropriate. Tax amendments Example 1. Tax amendments Christina Brooks, a resident of the Netherlands, worked 240 days for a U. Tax amendments S. Tax amendments company during the tax year. Tax amendments She received $80,000 in compensation. Tax amendments None of it was for fringe benefits. Tax amendments Christina performed services in the United States for 60 days and performed services in the Netherlands for 180 days. Tax amendments Using the time basis for determining the source of compensation, $20,000 ($80,000 × 60/240) is her U. Tax amendments S. Tax amendments source income. Tax amendments Example 2. Tax amendments Rob Waters, a resident of South Africa, is employed by a corporation. Tax amendments His annual salary is $100,000. Tax amendments None of it is for fringe benefits. Tax amendments During the first quarter of the year he worked entirely within the United States. Tax amendments On April 1, Rob was transferred to Singapore for the remainder of the year. Tax amendments Rob is able to establish that the first quarter of the year and the last 3 quarters of the year are two separate, distinct, and continuous periods of time. Tax amendments Accordingly, $25,000 of Rob's annual salary is attributable to the first quarter of the year (. Tax amendments 25 × $100,000). Tax amendments All of it is U. Tax amendments S. Tax amendments source income because he worked entirely within the United States during that quarter. Tax amendments The remaining $75,000 is attributable to the last three quarters of the year. Tax amendments During those quarters, he worked 150 days in Singapore and 30 days in the United States. Tax amendments His periodic performance of services in the United States did not result in distinct, separate, and continuous periods of time. Tax amendments Of this $75,000, $12,500 ($75,000 × 30/180) is U. Tax amendments S. Tax amendments source income. Tax amendments Multi-year compensation. Tax amendments   The source of multi-year compensation is generally determined on a time basis over the period to which the compensation is attributable. Tax amendments Multi-year compensation is compensation that is included in your income in one tax year but that is attributable to a period that includes two or more tax years. Tax amendments   You determine the period to which the compensation is attributable based on the facts and circumstances of your case. Tax amendments For example, an amount of compensation that specifically relates to a period of time that includes several calendar years is attributable to the entire multi-year period. Tax amendments   The amount of compensation treated as from U. Tax amendments S. Tax amendments sources is figured by multiplying the total multi-year compensation by a fraction. Tax amendments The numerator of the fraction is the number of days (or unit of time less than a day, if appropriate) that you performed labor or personal services in the United States in connection with the project. Tax amendments The denominator of the fraction is the total number of days (or unit of time less than a day, if appropriate) that you performed labor or personal services in connection with the project. Tax amendments Geographical Basis Compensation you receive as an employee in the form of the following fringe benefits is sourced on a geographical basis. Tax amendments Housing. Tax amendments Education. Tax amendments Local transportation. Tax amendments Tax reimbursement. Tax amendments Hazardous or hardship duty pay as defined in Regulations section 1. Tax amendments 861-4(b)(2)(ii)(D)(5). Tax amendments Moving expense reimbursement. Tax amendments The amount of fringe benefits must be reasonable and you must substantiate them by adequate records or by sufficient evidence. Tax amendments Principal place of work. Tax amendments   The above fringe benefits, except for tax reimbursement and hazardous or hardship duty pay, are sourced based on your principal place of work. Tax amendments Your principal place of work is usually the place where you spend most of your working time. Tax amendments This could be your office, plant, store, shop, or other location. Tax amendments If there is no one place where you spend most of your working time, your main job location is the place where your work is centered, such as where you report for work or are otherwise required to “base” your work. Tax amendments   If you have more than one job at any time, your main job location depends on the facts in each case. Tax amendments The more important factors to be considered are: The total time you spend at each place, The amount of work you do at each place, and How much money you earn at each place. Tax amendments Housing. Tax amendments   The source of a housing fringe benefit is determined based on the location of your principal place of work. Tax amendments A housing fringe benefit includes payments to you or on your behalf (and your family's if your family resides with you) only for the following. Tax amendments Rent. Tax amendments Utilities (except telephone charges). Tax amendments Real and personal property insurance. Tax amendments Occupancy taxes not deductible under section 164 or 216(a). Tax amendments Nonrefundable fees for securing a leasehold. Tax amendments Rental of furniture and accessories. Tax amendments Household repairs. Tax amendments Residential parking. Tax amendments Fair rental value of housing provided in kind by your employer. Tax amendments   A housing fringe benefit does not include: Deductible interest and taxes (including deductible interest and taxes of a tenant-stockholder in a cooperative housing corporation), The cost of buying property, including principal payments on a mortgage, The cost of domestic labor (maids, gardeners, etc. Tax amendments ), Pay television subscriptions, Improvements and other expenses that increase the value or appreciably prolong the life of property, Purchased furniture or accessories, Depreciation or amortization of property or improvements, The value of meals or lodging that you exclude from gross income, or The value of meals or lodging that you deduct as moving expenses. Tax amendments Education. Tax amendments   The source of an education fringe benefit for the education expenses of your dependents is determined based on the location of your principal place of work. Tax amendments An education fringe benefit includes payments only for the following expenses for education at an elementary or secondary school. Tax amendments Tuition, fees, academic tutoring, special needs services for a special needs student, books, supplies, and other equipment. Tax amendments Room and board and uniforms that are required or provided by the school in connection with enrollment or attendance. Tax amendments Local transportation. Tax amendments   The source of a local transportation fringe benefit is determined based on the location of your principal place of work. Tax amendments Your local transportation fringe benefit is the amount that you receive as compensation for local transportation for you or your spouse or dependents at the location of your principal place of work. Tax amendments The amount treated as a local transportation fringe benefit is limited to actual expenses incurred for local transportation and the fair rental value of any employer-provided vehicle used predominantly by you, your spouse, or your dependents for local transportation. Tax amendments Actual expenses do not include the cost (including interest) of any vehicle purchased by you or on your behalf. Tax amendments Tax reimbursement. Tax amendments   The source of a tax reimbursement fringe benefit is determined based on the location of the jurisdiction that imposed the tax for which you are reimbursed. Tax amendments Moving expense reimbursement. Tax amendments   The source of a moving expense reimbursement is generally based on the location of your new principal place of work. Tax amendments However, the source is determined based on the location of your former principal place of work if you provide sufficient evidence that such determination of source is more appropriate under the facts and circumstances of your case. Tax amendments Sufficient evidence generally requires an agreement between you and your employer, or a written statement of company policy, which is reduced to writing before the move and which is entered into or established to induce you or other employees to move to another country. Tax amendments The written statement or agreement must state that your employer will reimburse you for moving expenses that you incur to return to your former principal place of work regardless of whether you continue to work for your employer after returning to that location. Tax amendments It may contain certain conditions upon which the right to reimbursement is determined as long as those conditions set forth standards that are definitely ascertainable and can only be fulfilled prior to, or through completion of, your return move to your former principal place of work. Tax amendments Alternative Basis If you are an employee, you can determine the source of your compensation under an alternative basis if you establish to the satisfaction of the IRS that, under the facts and circumstances of your case, the alternative basis more properly determines the source of your compensation than the time or geographical basis. Tax amendments If you use an alternative basis, you must keep (and have available for inspection) records to document why the alternative basis more properly determines the source of your compensation. Tax amendments Also, if your total compensation from all sources is $250,000 or more, check “Yes” to both questions on line K on page 5 of Form 1040NR, and attach a written statement to your tax return that sets forth all of the following. Tax amendments Your name and social security number (written across the top of the statement). Tax amendments The specific compensation income, or the specific fringe benefit, for which you are using the alternative basis. Tax amendments For each item in (2), the alternative basis of allocation of source used. Tax amendments For each item in (2), a computation showing how the alternative allocation was computed. Tax amendments A comparison of the dollar amount of the U. Tax amendments S. Tax amendments compensation and foreign compensation sourced under both the alternative basis and the time or geographical basis discussed earlier. Tax amendments Transportation Income Transportation income is income from the use of a vessel or aircraft or for the performance of services directly related to the use of any vessel or aircraft. Tax amendments This is true whether the vessel or aircraft is owned, hired, or leased. Tax amendments The term “vessel or aircraft” includes any container used in connection with a vessel or aircraft. Tax amendments All income from transportation that begins and ends in the United States is treated as derived from sources in the United States. Tax amendments If the transportation begins or ends in the United States, 50% of the transportation income is treated as derived from sources in the United States. Tax amendments For transportation income from personal services, 50% of the income is U. Tax amendments S. Tax amendments source income if the transportation is between the United States and a U. Tax amendments S. Tax amendments possession. Tax amendments For nonresident aliens, this only applies to income derived from, or in connection with, an aircraft. Tax amendments For information on how U. Tax amendments S. Tax amendments source transportation income is taxed, see chapter 4. Tax amendments Scholarships, Grants, Prizes, and Awards Generally, the source of scholarships, fellowship grants, grants, prizes, and awards is the residence of the payer regardless of who actually disburses the funds. Tax amendments However, see Activities to be performed outside the United States , later. Tax amendments For example, payments for research or study in the United States made by the United States, a noncorporate U. Tax amendments S. Tax amendments resident, or a domestic corporation, are from U. Tax amendments S. Tax amendments sources. Tax amendments Similar payments from a foreign government or foreign corporation are foreign source payments even though the funds may be disbursed through a U. Tax amendments S. Tax amendments agent. Tax amendments Payments made by an entity designated as a public international organization under the International Organizations Immunities Act are from foreign sources. Tax amendments Activities to be performed outside the United States. Tax amendments   Scholarships, fellowship grants, targeted grants, and achievement awards received by nonresident aliens for activities performed, or to be performed, outside the United States are not U. Tax amendments S. Tax amendments source income. Tax amendments    These rules do not apply to amounts paid as salary or other compensation for services. Tax amendments See Personal Services, earlier, for the source rules that apply. Tax amendments Pensions and Annuities If you receive a pension from a domestic trust for services performed both in and outside the United States, part of the pension payment is from U. Tax amendments S. Tax amendments sources. Tax amendments That part is the amount attributable to earnings of the pension plan and the employer contributions made for services performed in the United States. Tax amendments This applies whether the distribution is made under a qualified or nonqualified stock bonus, pension, profit-sharing, or annuity plan (whether or not funded). Tax amendments If you performed services as an employee of the United States, you may receive a distribution from the U. Tax amendments S. Tax amendments Government under a plan, such as the Civil Service Retirement System, that is treated as a qualified pension plan. Tax amendments Your U. Tax amendments S. Tax amendments source income is the otherwise taxable amount of the distribution that is attributable to your total U. Tax amendments S. Tax amendments Government basic pay other than tax-exempt pay for services performed outside the United States. Tax amendments Rents or Royalties Your U. Tax amendments S. Tax amendments source income includes rent and royalty income received during the tax year from property located in the United States or from any interest in that property. Tax amendments U. Tax amendments S. Tax amendments source income also includes rents or royalties for the use of, or for the privilege of using, in the United States, intangible property such as patents, copyrights, secret processes and formulas, goodwill, trademarks, franchises, and similar property. Tax amendments Real Property Real property is land and buildings and generally anything built on, growing on, or attached to land. Tax amendments Gross income from sources in the United States includes gains, profits, and income from the sale or other disposition of real property located in the United States. Tax amendments Natural resources. Tax amendments   The income from the sale of products of any farm, mine, oil or gas well, other natural deposit, or timber located in the United States and sold in a foreign country, or located in a foreign country and sold in the United States, is partly from sources in the United States. Tax amendments For information on determining that part, see section 1. Tax amendments 863-1(b) of the regulations. Tax amendments Table 2-1. Tax amendments Summary of Source Rules for Income of Nonresident Aliens Item of income Factor determining source Salaries, wages, other compensation Where services performed Business income:   Personal services Where services performed Sale of inventory—purchased Where sold Sale of inventory—produced Allocation Interest Residence of payer Dividends Whether a U. Tax amendments S. Tax amendments or foreign corporation* Rents Location of property Royalties:   Natural resources Location of property Patents, copyrights, etc. Tax amendments Where property is used Sale of real property Location of property Sale of personal property Seller's tax home (but see Personal Property , later, for exceptions) Pension distributions attributable to contributions Where services were performed that earned the pension Investment earnings on pension contributions Location of pension trust Sale of natural resources Allocation based on fair market value of product at export terminal. Tax amendments For more information, see section 1. Tax amendments 863-1(b) of the regulations. Tax amendments *Exceptions include: a) Dividends paid by a U. Tax amendments S. Tax amendments corporation are foreign source if the corporation elects the  American Samoa economic development credit. Tax amendments  b) Part of a dividend paid by a foreign corporation is U. Tax amendments S. Tax amendments source if at least 25% of the  corporation's gross income is effectively connected with a U. Tax amendments S. Tax amendments trade or business for the  3 tax years before the year in which the dividends are declared. Tax amendments Personal Property Personal property is property, such as machinery, equipment, or furniture, that is not real property. Tax amendments Gain or loss from the sale or exchange of personal property generally has its source in the United States if you have a tax home in the United States. Tax amendments If you do not have a tax home in the United States, the gain or loss generally is considered to be from sources outside the United States. Tax amendments Tax home. Tax amendments   Your tax home is the general area of your main place of business, employment, or post of duty, regardless of where you maintain your family home. Tax amendments Your tax home is the place where you permanently or indefinitely work as an employee or a self-employed individual. Tax amendments If you do not have a regular or main place of business because of the nature of your work, then your tax home is the place where you regularly live. Tax amendments If you do not fit either of these categories, you are considered an itinerant and your tax home is wherever you work. Tax amendments Inventory property. Tax amendments   Inventory property is personal property that is stock in trade or that is held primarily for sale to customers in the ordinary course of your trade or business. Tax amendments Income from the sale of inventory that you purchased is sourced where the property is sold. Tax amendments Generally, this is where title to the property passes to the buyer. Tax amendments For example, income from the sale of inventory in the United States is U. Tax amendments S. Tax amendments source income, whether you purchased it in the United States or in a foreign country. Tax amendments   Income from the sale of inventory property that you produced in the United States and sold outside the United States (or vice versa) is partly from sources in the United States and partly from sources outside the United States. Tax amendments For information on making this allocation, see section 1. Tax amendments 863-3 of the regulations. Tax amendments   These rules apply even if your tax home is not in the United States. Tax amendments Depreciable property. Tax amendments   To determine the source of any gain from the sale of depreciable personal property, you must first figure the part of the gain that is not more than the total depreciation adjustments on the property. Tax amendments You allocate this part of the gain to sources in the United States based on the ratio of U. Tax amendments S. Tax amendments depreciation adjustments to total depreciation adjustments. Tax amendments The rest of this part of the gain is considered to be from sources outside the United States. Tax amendments   For this purpose, “U. Tax amendments S. Tax amendments depreciation adjustments” are the depreciation adjustments to the basis of the property that are allowable in figuring taxable income from U. Tax amendments S. Tax amendments sources. Tax amendments However, if the property is used predominantly in the United States during a tax year, all depreciation deductions allowable for that year are treated as U. Tax amendments S. Tax amendments depreciation adjustments. Tax amendments But there are some exceptions for certain transportation, communications, and other property used internationally. Tax amendments   Gain from the sale of depreciable property that is more than the total depreciation adjustments on the property is sourced as if the property were inventory property, as discussed above. Tax amendments   A loss is sourced in the same way as the depreciation deductions were sourced. Tax amendments However, if the property was used predominantly in the United States, the entire loss reduces U. Tax amendments S. Tax amendments source income. Tax amendments   The basis of property usually means the cost (money plus the fair market value of other property or services) of property you acquire. Tax amendments Depreciation is an amount deducted to recover the cost or other basis of a trade or business asset. Tax amendments The amount you can deduct depends on the property's cost, when you began using the property, how long it will take to recover your cost, and which depreciation method you use. Tax amendments A depreciation deduction is any deduction for depreciation or amortization or any other allowable deduction that treats a capital expenditure as a deductible expense. Tax amendments Intangible property. Tax amendments   Intangible property includes patents, copyrights, secret processes or formulas, goodwill, trademarks, trade names, or other like property. Tax amendments The gain from the sale of amortizable or depreciable intangible property, up to the previously allowable amortization or depreciation deductions, is sourced in the same way as the original deductions were sourced. Tax amendments This is the same as the source rule for gain from the sale of depreciable property. Tax amendments See Depreciable property , earlier, for details on how to apply this rule. Tax amendments   Gain in excess of the amortization or depreciation deductions is sourced in the country where the property is used if the income from the sale is contingent on the productivity, use, or disposition of that property. Tax amendments If the income is not contingent on the productivity, use, or disposition of the property, the income is sourced according to your tax home as discussed earlier. Tax amendments If payments for goodwill do not depend on its productivity, use, or disposition, their source is the country in which the goodwill was generated. Tax amendments Sales through offices or fixed places of business. Tax amendments   Despite any of the earlier rules, if you do not have a tax home in the United States, but you maintain an office or other fixed place of business in the United States, treat the income from any sale of personal property (including inventory property) that is attributable to that office or place of business as U. Tax amendments S. Tax amendments source income. Tax amendments However, this rule does not apply to sales of inventory property for use, disposition, or consumption outside the United States if your office or other fixed place of business outside the United States materially participated in the sale. Tax amendments   If you have a tax home in the United States but maintain an office or other fixed place of business outside the United States, income from sales of personal property, other than inventory, depreciable property, or intangibles, that is attributable to that foreign office or place of business may be treated as U. Tax amendments S. Tax amendments source income. Tax amendments The income is treated as U. Tax amendments S. Tax amendments source income if an income tax of less than 10% of the income from the sale is paid to a foreign country. Tax amendments This rule also applies to losses if the foreign country would have imposed an income tax of less than 10% had the sale resulted in a gain. Tax amendments Community Income If you are married and you or your spouse is subject to the community property laws of a foreign country, a U. Tax amendments S. Tax amendments state, or a U. Tax amendments S. Tax amendments possession, you generally must follow those laws to determine the income of yourself and your spouse for U. Tax amendments S. Tax amendments tax purposes. Tax amendments But you must disregard certain community property laws if: Both you and your spouse are nonresident aliens, or One of you is a nonresident alien and the other is a U. Tax amendments S. Tax amendments citizen or resident and you do not both choose to be treated as U. Tax amendments S. Tax amendments residents as explained in chapter 1. Tax amendments In these cases, you and your spouse must report community income as explained later. Tax amendments Earned income. Tax amendments   Earned income of a spouse, other than trade or business income and a partner's distributive share of partnership income, is treated as the income of the spouse whose services produced the income. Tax amendments That spouse must report all of it on his or her separate return. Tax amendments Trade or business income. Tax amendments   Trade or business income, other than a partner's distributive share of partnership income, is treated as the income of the spouse carrying on the trade or business. Tax amendments That spouse must report all of it on his or her separate return. Tax amendments Partnership income (or loss). Tax amendments   A partner's distributive share of partnership income (or loss) is treated as the income (or loss) of the partner. Tax amendments The partner must report all of it on his or her separate return. Tax amendments Separate property income. Tax amendments   Income derived from the separate property of one spouse (and which is not earned income, trade or business income, or partnership distributive share income) is treated as the income of that spouse. Tax amendments That spouse must report all of it on his or her separate return. Tax amendments Use the appropriate community property law to determine what is separate property. Tax amendments Other community income. Tax amendments   All other community income is treated as provided by the applicable community property laws. Tax amendments Prev  Up  Next   Home   More Online Publications
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Estimated Taxes

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Estimated tax is the method used to pay tax on income that is not subject to withholding. This includes income from self-employment, interest, dividends, alimony, rent, gains from the sale of assets, prizes and awards. You also may have to pay estimated tax if the amount of income tax being withheld from your salary, pension, or other income is not enough.

Estimated tax is used to pay income tax and self-employment tax, as well as other taxes and amounts reported on your tax return. If you do not pay enough through withholding or estimated tax payments, you may be charged a penalty. If you do not pay enough by the due date of each payment period you may be charged a penalty even if you are due a refund when you file your tax return.

How to Pay Estimated Tax

If you are filing as a sole proprietor, partner, S corporation shareholder and/or a self-employed individual, you should use Form 1040-ES, Estimated Tax for Individuals (PDF), to figure and pay your estimated tax. For additional information on filing for a sole proprietor, partners, and/or S corporation shareholder, refer to Publication 505, Tax Withholding and Estimated Tax.

If you are filing as a corporation you should use Form 1120-W, Estimated Tax for Corporations (PDF), to figure the estimated tax. You must deposit the payments. For additional information on filing for a corporation, refer to Publication 542, Corporations.

Who Must Pay Estimated Tax

If you are filing as a sole proprietor, partner, S corporation shareholder, and/or a self-employed individual, you generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return.

If you are filing as a corporation you generally have to make estimated tax payments for your corporation if you expect it to owe tax of $500 or more when you file its return.

If you had a tax liability for the prior year, you may have to pay estimated tax for the current year. See the worksheet in Form 1040-ES (PDF) for more details on who must pay estimated tax.

Who Does Not Have To Pay Estimated Tax

If you receive salaries and wages, you can avoid having to pay estimated tax by asking your employer to withhold more tax from your earnings. To do this, file a new Form W-4 (PDF) with your employer. There is a special line on Form W-4 for you to enter the additional amount you want your employer to withhold.

You do not have to pay estimated tax for the current year if you meet all three of the following conditions.

  • You had no tax liability for the prior year
  • You were a U.S. citizen or resident for the whole year
  • Your prior tax year covered a 12 month period

You had no tax liability for the prior year if your total tax was zero or you did not have to file an income tax return. For additional information on how to figure your estimated tax, refer to Publication 505, Tax Withholding and Estimated Tax.

Estimated tax requirements are different for farmers and fishermen. Publication 505, Tax Withholding and Estimated Tax, provides more information about these special estimated tax rules.

How To Figure Estimated Tax

To figure your estimated tax, you must figure your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year.

When figuring your estimated tax for the current year, it may be helpful to use your income, deductions, and credits for prior year as a starting point. Use your prior year's federal tax return as a guide. You can use the worksheet in Form 1040-ES (PDF) to figure your estimated tax. You will need to estimate the amount of income you expect to earn for the year. If you estimated your earnings too high, simply complete another Form 1040-ES worksheet to refigure your estimated tax for the next quarter. If you estimated your earnings too low, again complete another Form 1040-ES worksheet to recalculate your estimated tax for the next quarter. You want to estimate your income as accurately as you can to avoid penalties.

You must make adjustments both for changes in your own situation and for recent changes in the tax law.

When To Pay Estimated Taxes

For estimated tax purposes, the year is divided into four payment periods. Each period has a specific payment due date. If you do not pay enough tax by the due date of each of the payment periods, you may be charged a penalty even if you are due a refund when you file your income tax return, see underpayment of tax below for more information.

Using the EFTPS system is the easiest way to pay your federal taxes for individuals as well as businesses. Make ALL of your federal tax payments including federal tax deposits (FTDs), installment agreement and estimated tax payments using Electronic Federal Tax Payment System (EFTPS). If it is easier to pay your estimated taxes weekly, bi-weekly, monthly, etc. you can, as long as you have paid enough in by the end of the quarter. Using EFTPS, you can access a history of your payments, so you know how much and when you made your estimated tax payments.

Underpayment of Estimated Tax

If you did not pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller. There are special rules for farmers and fishermen. Please refer to Publication 505 Tax Withholding and Estimated Tax, for additional information.

However, if your income is received unevenly during the year, you may be able to avoid or lower the penalty by annualizing your income and making unequal payments. Use Form 2210 (PDF), Underpayment of Estimated Tax by Individuals, Estates, and Trusts, to see if you owe a penalty for underpaying your estimated tax. Please refer to the Form 1040 Instructions (PDF) or the Form 1040A Instructions for where to report the estimated tax penalty on your return.

The penalty may also be waived if:

  1. The failure to make estimated payments was caused by a casualty, disaster, or other unusual circumstance and it would be inequitable to impose the penalty, or
  2. You retired (after reaching age 62) or became disabled during the tax year for which estimated payments were required to be made or in the preceding tax year, and the underpayment was due to reasonable cause and not willful neglect.

You should also use Form 2210 (PDF) to request a waiver of the penalty for the reasons shown above.

Page Last Reviewed or Updated: 31-Oct-2013

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