Where to Find Treaty Information
An income tax treaty is an agreement between two countries under
which each country agrees to limit the application of its domestic
tax laws for residents of the other country. Therefore, if you
have come to the United States from a country with which the U.S.
has a tax treaty in effect, you should check the provisions of
the treaty to see if any of your income is exempt from U.S. tax
under the treaty, or is subject to a reduced rate. A treaty provision
will generally override U.S. statutory law.
IRS Publication 901, U.S. Tax Treaties, contains summaries of
all the U.S. tax treaties in effect. It can be printed from the
U.S. Treasury's Forms and Publications site. New income tax treaties
with the republics of Estonia, Latvia, Lithuania and Venezuela
entered into force on December 30, 1999, and a new treaty with
Slovenia is generally effective beginning in 2002. For updates
from the U.S. Treasury on current treaty ratifications, see its
International Taxpayer site. For the complete text of all tax
treaties in effect with the United States go to the IRS Income
Tax Treaties page.
In Publication 901, summary information on special treaty rates
for dividends, capital gains, and other non-wage income is in
Table 1 beginning on page 31. These rates relate to income that
is not effectively connected with a U.S. trade or business, reported
on page 4 of Form 1040NR. Summary information on treaty exempt
wages and scholarship payments is in Table 2 beginning on page
34. More detailed information is provided for each country in
the first part of Publication 901.
For more Tax Treaty information click here: http://www.unclefed.com/ForTaxProfs/Treaties/index.html
Treaty Benefits for Resident Aliens
Generally, all of the tax treaties to which the U.S. is a party
contain a "saving clause," which is meant to prevent
residents of the treaty partner who are also citizens or residents
of the U.S. from using the treaty to reduce their U.S. tax liability.
Therefore, as a general rule, those individuals who qualify as
a U.S. resident, under either the green card test or the substantial
presence test, are not eligible for treaty benefits. However,
most tax treaties contain an exception to the "saving clause"
provision for individuals who claim tax treaty benefits as students,
trainees, teachers and researchers. Therefore, if you are no longer
an exempt individual, income you receive as an F, J, M or Q visa
holder might be exempt from U.S. taxation under the treaty with
your home country, even if you are classified as a resident for
U.S. tax purposes. Treaty benefits could also be available to
H, O and other visa holders who become residents for tax purposes
during the first year they enter the United States.
How to file your return
As a resident, you will file Form 1040, Form 1040A or Form 1040-EZ,
whichever applies to you. Attach Form 8833 to explain the treaty
benefit being claimed as well as the reliance on an exception
to the saving clause. On Form 8833, check the box indicating disclosure
under section 301.7701(b) - 7 of the Treasury regulations. You
are required to report worldwide income on the return, but may
claim the standard deduction, dependency exemptions, and any other
deductions and credits to which a resident alien may be entitled.
Mail the return to the Internal Revenue Service Center, Philadelphia,
PA 19255.
Some Treaty Provision Examples
Following are some examples that demonstrate the procedures
you should use to determine your treaty benefits from IRS Publication
901. First, however, here are some definitions of treaty terms:
• Independent personal services: Self-employment income
• Dependent personal services: Wages of employees
• Scholarship or fellowship: Does not include compensation
for services
Sue from Belgium
Sue is a nonresident who came to the U.S. from Belgium in 1998
on an F-1 visa to study for her master's degree. Sue remained
in the U.S. for all of 2001. In 2001 she received a $6,000 scholarship
from her university that pays her room and board. She was not
required to perform services to receive the money. She also recognized
$5,000 in capital gains from the sale of U.S. stocks. How should
Sue treat the scholarship and the capital gains for U.S. tax purposes?
Answer: First, Sue must file Form 1040NR rather
than Form 1040NR-EZ because she has capital gain income, which
is not effectively connected with Sue's U.S. trade or business.
Tax on this income is computed on page 4 of Form 1040NR, and cannot
be shown on Form 1040NR-EZ. Sue should receive a Form 1042-S from
the university indicating the tax status of her scholarship payments.
However, she should check IRS Publication 901 to determine if
the university is treating it correctly.
She will look in Table 2 in Publication 901 and find the summary
of the U.S./Belgium treaty for effectively connected income on
page 34. Income code 15 (column 2), under which scholarship income
is reported on Form 1042-S, shows that scholarship income received
by an individual who has been in the U.S. for no more than 5 years
(column 4) which is paid by any U.S. or foreign resident (column
5) is exempt from tax under Article 21(1) of the treaty (column
7). The maximum amount exempt is unlimited (column 6), so all
of her scholarship income is exempt from tax.
With respect to her capital gain income from the sale of stocks,
Sue should look in Table 1 in Publication 901 which begins on
page 31. Table 1 indicates that capital gains received by a Belgium
resident are not taxed (column 9). Sue should report her capital
gains on page 4 of Form 1040NR and show that a zero tax rate applies
to capital gains. Sue should also also report the treaty rate
on capital gains in Item M on page 5 of Form 1040NR.
Julie from France
Julie is an F-1 student from France who arrived in the U.S.
in 1998. In 2002 she received a $10,000 fellowship from the University
of Minnesota to serve as a teaching assistant. How is her income
treated on her U.S. tax return?
Answer: A look at Table 2 in Publication 901
indicates that scholarship and fellowship grants received by French
residents are tax exempt for up to five years. However, because
Julie is performing services for her fellowship, it does not constitute
a scholarship or fellowship for treaty purposes. Because Julie
is a student, she should look under "studying and training"
to see if an exclusion applies. Note that compensation during
study or training received for up to five years from a U.S. (or
other foreign) resident in the amount of $5,000 annually (p.a.)
is excluded under Article 21(1). This should be shown as code
19 on her Form 1042-S.
Frederick from Germany
Frederick is visiting on a J-1 visa from Germany to teach and
do research at the University of Minnesota. He plans to stay three
years and is paid $15,000 per year. How is his income treated
on his U.S. tax return?
Answer: Looking at Table 2 in Publication 901,
it appears that Frederick would qualify for the first two years
for the exemption under code 18 (an exemption for teaching generally
applies to research too). However, note the limit for the stay
in the U.S. is two years. It says on page 15 of Publication 901
that if the stay exceeds two years, the exemption is lost for
the entire period. That means Frederick's income would be taxable
for the entire period if he stays for his intended duration. He
should not submit to the university Form 8233, Exemption From
Withholding on Compensation for Independent Personal Services
of a Nonresident Alien Individual, but should instead have the
university withhold tax from his wages. If Frederick's stay in
the U.S. does not exceed two years, he can file amended returns
to claim refunds.
Ed from Canada
Ed is a J-1 nonresident from Canada doing post-doctorate work
at the University of Minnesota. In 2002 he received $12,000 in
wages as a teaching assistant. How is his income treated on his
U.S. tax return?
Answer: Note that Table 2 of Publication 901
says that up to $10,000 of dependent personal services compensation
paid by a U.S. resident (or foreign resident) to a Canadian resident
is excludable under Article XV of the U.S./Canada treaty. That
might imply that Ed can exclude $10,000 of his $12,000 of wages
from income. However, under the explanation on page 3 of Publication
901, if the taxpayer earns more than $10,000 the total amount
is taxable. Therefore, Ed can not exclude any income under the
treaty.
