| Publication 519 |
2008 Tax Year |
After you have determined your alien status, you must determine the source of your income. This chapter will help you determine
the source of
different types of income you may receive during the tax year. This chapter also discusses special rules for married individuals
who are domiciled in
a country with community property laws.
Topics - This chapter discusses:
-
Income source rules, and
-
Community income.
A resident alien's income is generally subject to tax in the same manner as a U.S. citizen. If you are a resident alien, you
must report all
interest, dividends, wages, or other compensation for services, income from rental property or royalties, and other types
of income on your U.S. tax
return. You must report these amounts whether from sources within or outside the United States.
A nonresident alien usually is subject to U.S. income tax only on U.S. source income. Under limited circumstances, certain
foreign source income is
subject to U.S. tax. See Foreign Income in chapter 4.
The general rules for determining U.S. source income that apply to most nonresident aliens are shown in Table 2-1. The following
discussions cover the general rules as well as the exceptions to these rules.
Not all items of U.S. source income are taxable. See chapter 3.
Generally, U.S. source interest income includes the following items.
-
Interest on bonds, notes, or other interest-bearing obligations of U.S. residents or domestic corporations.
-
Interest paid by a domestic or foreign partnership or foreign corporation engaged in a U.S. trade or business at any time
during the tax
year.
-
Original issue discount.
-
Interest from a state, the District of Columbia, or the U.S. Government.
The place or manner of payment is immaterial in determining the source of the income.
A substitute interest payment made to the transferor of a security in a securities lending transaction or a sale-repurchase
transaction is sourced
in the same manner as the interest on the transferred security.
Exceptions.
U.S. source interest income does not include the following items.
-
Interest paid by a resident alien or a domestic corporation if for the 3-year period ending with the close of the payer's
tax year preceding
the interest payment, at least 80% of the payer's total gross income:
-
Is from sources outside the United States, and
-
Is attributable to the active conduct of a trade or business by the individual or corporation in a foreign country or a U.S.
possession.
-
Interest paid by a foreign branch of a domestic corporation or a domestic partnership on deposits or withdrawable accounts
with mutual
savings banks, cooperative banks, credit unions, domestic building and loan associations, and other savings institutions chartered
and supervised as
savings and loan or similar associations under federal or state law if the interest paid or credited can be deducted by the
association.
-
Interest on deposits with a foreign branch of a domestic corporation or domestic partnership, but only if the branch is in
the commercial
banking business.
In most cases, dividend income received from domestic corporations is U.S. source income. Dividend income from foreign corporations
is usually
foreign source income. Exceptions to both of these rules are discussed below.
A substitute dividend payment made to the transferor of a security in a securities lending transaction or a sale-repurchase
transaction is sourced
in the same manner as a distribution on the transferred security.
First exception.
Dividends received from a domestic corporation are not U.S. source income if the corporation elects to take the American
Samoa economic development
credit.
Second exception.
Part of the dividends received from a foreign corporation is U.S. 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.
If the corporation was formed less than 3 years before the declaration, use its total gross income from the time it was formed.
Determine the part
that is U.S. source income by multiplying the dividend by the following fraction.
All wages and any other compensation for services performed in the United States are considered to be from sources in the
United States. The only
exceptions to this rule are discussed in chapter 3 under Employees of foreign persons, organizations, or offices, and under Crew
members.
If you are an employee and receive compensation for labor or personal services performed both inside and outside the United
States, special rules
apply in determining the source of the compensation. Compensation (other than certain fringe benefits) is sourced on a time
basis. Certain fringe
benefits (such as housing and education) are sourced on a geographical basis.
Or, you may be permitted to use an alternative basis to determine the source of compensation. See Alternative Basis, later.
Self-employed individuals.
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. In many cases,
the facts and
circumstances will call for an apportionment on a time basis as explained next.
Use a time basis to figure your U.S. source compensation (other than the fringe benefits discussed later). Do this by multiplying
your total
compensation (other than the fringe benefits discussed later) by the following fraction:
You can use a unit of time less than a day in the above fraction, if appropriate. The time period for which the compensation
is made does not have
to be a year. Instead, you can use another distinct, separate, and continuous time period if you can establish to the satisfaction
of the IRS that
this other period is more appropriate.
Example 1.
Christina Brooks, a resident of the Netherlands, worked 240 days for a U.S. company during the tax year. She received $80,000
in compensation. None
of it was for fringe benefits. Christina performed services in the United States for 60 days and performed services in the
Netherlands for 180 days.
Using the time basis for determining the source of compensation, $20,000 ($80,000 × 60/240) is her U.S. source income.
Example 2.
Rob Waters, a resident of South Africa, is employed by a corporation. His annual salary is $100,000. None of it is for fringe
benefits. During the
first quarter of the year he worked entirely within the United States. On April 1, Rob was transferred to Singapore for the
remainder of the year. Rob
is able to establish that the first quarter of the year and the last 3 quarters of the year are two separate, distinct, and
continuous periods of
time. Accordingly, $25,000 of Rob's annual salary is attributable to the first quarter of the year (.25 × $100,000). All of
it is U.S. source
income because he worked entirely within the United States during that quarter. The remaining $75,000 is attributable to the
last three quarters of
the year. During those quarters, he worked 150 days in Singapore and 30 days in the United States. His periodic performance
of services in the United
States did not result in distinct, separate, and continuous periods of time. Of his $75,000 salary, $12,500 ($75,000 × 30/180)
is
U.S. source income for the year.
Multi-year compensation.
The source of multi-year compensation is generally determined on a time basis over the period to which the compensation
is attributable. 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.
You determine the period to which the compensation is attributable based on the facts and circumstances of your case.
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.
The amount of compensation treated as from U.S. sources is figured by multiplying the total multi-year compensation
by a fraction. 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. 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.
Compensation you receive as an employee in the form of the following fringe benefits is sourced on a geographical basis.
The amount of fringe benefits must be reasonable and you must substantiate them by adequate records or by sufficient evidence.
Principal place of work.
The above fringe benefits, except for tax reimbursement and hazardous or hardship duty pay, are sourced based on your
principal place of work. Your
principal place of work is usually the place where you spend most of your working time. This could be your office, plant,
store, shop, or other
location. 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.
If you have more than one job at any time, your main job location depends on the facts in each case. 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.
Housing.
The source of a housing fringe benefit is determined based on the location of your principal place of work. 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.
-
Rent.
-
Utilities (except telephone charges).
-
Real and personal property insurance.
-
Occupancy taxes not deductible under section 164 or 216(a).
-
Nonrefundable fees for securing a leasehold.
-
Rental of furniture and accessories.
-
Household repairs.
-
Residential parking.
-
Fair rental value of housing provided in kind by your employer.
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.),
-
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.
Education.
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. An education fringe benefit includes payments only for the following expenses for education at an elementary or secondary
school.
-
Tuition, fees, academic tutoring, special needs services for a special needs student, books, supplies, and other equipment.
-
Room and board and uniforms that are required or provided by the school in connection with enrollment or attendance.
Local transportation.
The source of a local transportation fringe benefit is determined based on the location of your principal place of
work. 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. 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 or your spouse or dependents for local
transportation. Actual
expenses do not include the cost (including interest) of any vehicle purchased by you on your behalf.
Tax reimbursement.
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.
Moving expense reimbursement.
The source of a moving expense reimbursement is generally based on the location of your new principal place of work.
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. 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. The written statement or agreement must state that your employer will reimburse you
for moving expenses that you
incur to return to your principal place of work regardless of whether you continue to work for your employer after returning
to that location. 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.
If you are an employee, you can determine the source of your compensation under an alternative basis if you establish to the
satisfaction of the
IRS that, under the facts and circumstances of your case, the alternative basis more properly determines the source of your
compensation than the time
or geographical basis. If you use an alternative basis, you must keep (and have available for inspection) records to document
why the alternative
basis more properly determines the source of your compensation. Also, if your total compensation is $250,000 or more, you
must check box R on page 5
of Form 1040NR, and attach a written statement to your tax return that sets forth all of the following.
-
Your name and social security number (written across the top of the statement).
-
The specific compensation income, or the specific fringe benefit, for which you are using the alternative basis.
-
For each item in (2), the alternative basis of allocation of source used.
-
For each item in (2), a computation showing how the alternative allocation was computed.
-
A comparison of the dollar amount of the U.S. compensation and foreign compensation sourced under both the alternative basis
and the time or
geographical basis discussed earlier.
Transportation income is income from the use of a vessel or aircraft or for the performance of services directly related to
the use of any vessel
or aircraft. This is true whether the vessel or aircraft is owned, hired, or leased. The term “vessel or aircraft” includes any container used in
connection with a vessel or aircraft.
All income from transportation that begins and ends in the United States is treated as derived from sources in the United
States. If the
transportation begins or ends in the United States, 50% of the transportation income is treated as derived from sources in
the United States.
For transportation income from personal services, 50% of the income is U.S. source income if the transportation is between
the United States and a
U.S. possession. For nonresident aliens, this only applies to income derived from, or in connection with, an aircraft.
For information on how U.S. source transportation income is taxed, see chapter 4.
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. However, see Activities to be performed outside the United States, later.
For example, payments for research or study in the United States made by the United States, a noncorporate U.S. resident,
or a domestic
corporation, are from U.S. sources. Similar payments from a foreign government or foreign corporation are foreign source payments
even though the
funds may be disbursed through a U.S. agent.
Payments made by an entity designated as a public international organization under the International Organizations Immunities
Act are from foreign
sources.
Activities to be performed outside the United States.
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.S. source income.
These rules do not apply to amounts paid as salary or other compensation for services. See Personal Services , earlier, for
the source
rules that apply.
If you receive a pension from a domestic trust for services performed both in and outside the United States, part of the pension
payment is from
U.S. sources. That part is the amount attributable to earnings of the pension plan and the employer contributions made for
services performed in the
United States. This applies whether the distribution is made under a qualified or nonqualified stock bonus, pension, profit-sharing,
or annuity plan
(whether or not funded).
If you performed services as an employee of the United States, you may receive a distribution from the U.S. Government under
a plan, such as the
Civil Service Retirement System, that is treated as a qualified pension plan. Your U.S. source income is the otherwise taxable
amount of the
distribution that is attributable to your total U.S. Government basic pay other than tax-exempt pay for services performed
outside the United States.
Your U.S. source income includes rent and royalty income received during the tax year from property located in the United
States or from any
interest in that property.
U.S. source income also includes rents or royalties for the use of, or for the privilege of using, in the United States, intangible
property such
as patents, copyrights, secret processes and formulas, goodwill, trademarks, franchises, and similar property.
Real property is land and buildings and generally anything built on, growing on, or attached to land.
Gross income from sources in the United States includes gains, profits, and income from the sale or other disposition of real
property located in
the United States.
Natural resources.
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.
For information on
determining that part, see section 1.863-1(b) of the regulations.
Table 2-1. 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.S. or foreign corporation*
|
|
Rents
|
Location of property
|
|
Royalties:
|
|
|
Natural resources
|
Location of property
|
|
Patents, copyrights, etc.
|
Where property is used
|
|
Sale of real property
|
Location of property
|
|
Sale of personal property
|
Seller's tax home (but see Personal Property, later, for exceptions)
|
|
Pensions
|
Where services were performed that earned the pension
|
|
Sale of natural resources
|
Allocation based on fair market value of product at export terminal. For more information, see section 1.863-1(b) of
the regulations.
|
*Exceptions include:
a) Dividends paid by a U.S. corporation are foreign source if the corporation elects the
American Samoa economic development credit.
b) Part of a dividend paid by a foreign corporation is U.S. source if at least 25% of the
corporation's gross income is effectively connected with a U.S. trade or business for the
3 tax years before the year in which the dividends are declared.
|
Personal property is property, such as machinery, equipment, or furniture, that is not real property.
Gain or loss from the sale or exchange of personal property generally has its source in the United States if you have a tax
home in the United
States. If you do not have a tax home in the United States, the gain or loss generally is considered to be from sources outside
the United States.
Tax home.
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.
Your tax home is the place where you permanently or indefinitely work as an employee or a self-employed individual. 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. If you
do not fit either of these
categories, you are considered an itinerant and your tax home is wherever you work.
Inventory property.
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. Income from the sale of inventory that you purchased is sourced where the property is sold. Generally, this is
where title to the
property passes to the buyer. For example, income from the sale of inventory in the United States is U.S. source income, whether
you purchased it in
the United States or in a foreign country.
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. For information on making this allocation,
see section 1.863-3 of the
regulations.
These rules apply even if your tax home is not in the United States.
Depreciable property.
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. You allocate this part of the gain to sources in the United States
based on the ratio of U.S.
depreciation adjustments to total depreciation adjustments. The rest of this part of the gain is considered to be from sources
outside the United
States.
For this purpose, “ U.S. depreciation adjustments” are the depreciation adjustments to the basis of the property that are allowable in figuring
taxable income from U.S. sources. 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.S. depreciation adjustments. But there are some exceptions for certain transportation,
communications, and
other property used internationally.
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.
A loss recognized after January 7, 2002, is sourced in the same way as the depreciation deductions were sourced. However,
if the property was used
predominantly in the United States, the entire loss reduces U.S. source income. You can choose to apply this rule to losses
recognized in tax years
beginning after 1986. For details about making this choice, see section 1.865-1(f)(2) of the regulations.
The basis of property usually means the cost (money plus the fair market value of other property or services) of property
you acquire. Depreciation
is an amount deducted to recover the cost or other basis of a trade or business asset. 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. A depreciation
deduction is any
deduction for depreciation or amortization or any other allowable deduction that treats a capital expenditure as a deductible
expense.
Intangible property.
Intangible property includes patents, copyrights, secret processes or formulas, goodwill, trademarks, trade names,
or other like property. 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. This is the same as the source rule for gain from the sale of depreciable
property. See
Depreciable property, earlier, for details on how to apply this rule.
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. 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. If payments for goodwill do not depend on
its productivity, use, or
disposition, their source is the country in which the goodwill was generated.
Sales through offices or fixed places of business.
Despite any of the above 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.S. source income. 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.
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.S. source income. The income is treated as U.S. source income if an income tax of less than 10% of the income
from the sale is paid to a
foreign country. This rule also applies to losses recognized after January 7, 2002, if the foreign country would have imposed
an income tax of less
than 10% had the sale resulted in a gain. You can choose to apply this rule to losses recognized in tax years beginning after
1986. For details about
making this choice, see section 1.865-1(f)(2) of the regulations. For stock losses, see section 1.865-2(e) of the regulations.
If you are married and you or your spouse is subject to the community property laws of a foreign country, a U.S. state, or
a U.S. possession, you
generally must follow those laws to determine the income of yourself and your spouse for U.S. tax purposes. But you must disregard
certain community
property laws if:
-
Both you and your spouse are nonresident aliens, or
-
One of you is a nonresident alien and the other is a U.S. citizen or resident and you do not both choose to be treated as
U.S. residents as
explained in chapter 1.
In these cases, you and your spouse must report community income as explained below.
Earned income.
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. That spouse must report all of it on his or her separate return.
Trade or business income.
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. That spouse must report all of it on his or her separate return.
Partnership income (or loss).
A partner's distributive share of partnership income (or loss) is treated as the income (or loss) of the partner.
The partner must report all of it
on his or her separate return.
Separate property income.
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. That spouse must report all of it on his or her separate return. Use
the appropriate community
property law to determine what is separate property.
Other community income.
All other community income is treated as provided by the applicable community property laws.
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