A nonresident alien's treaty income is the gross income on which
the tax is limited by a tax treaty. Treaty income includes, for
example, dividends from sources in the United States that are subject
to tax at a tax treaty rate not to exceed 15%. Nontreaty income is the
gross income of a nonresident alien on which the tax is not limited by
a tax treaty.
Figure the tax on treaty income on each separate item of income at
the reduced rate that applies to that item under the treaty.
To determine tax on nontreaty income, figure the tax at either the
flat 30% rate or the graduated rate, depending upon whether or not the
income is effectively connected with your trade or business in the
United States.
Your tax liability is the sum of the tax on treaty income plus the
tax on nontreaty income, but cannot be more than the tax liability
figured as if the tax treaty had not come into effect.
Example.
Arthur Banks is a nonresident alien who is single and a resident of
a foreign country that has a tax treaty with the United States. He
received gross income of $25,500 during the tax year from sources
within the United States, consisting of the following items:
| Dividends on which the tax is limited to a 15%
rate by the tax treaty |
$1,400 |
| Compensation for personal services on
which the tax is not limited
by the tax treaty |
24,100 |
| Total gross income |
$25,500 |
Arthur was engaged in business in the United States during the tax
year. His dividends are not effectively connected with that business.
He has no deductions other than his own personal exemption.
His tax liability, figured as though the tax treaty had not come
into effect, is $3,619, determined as follows:
| Total compensation |
$24,100 |
| Less: Personal exemption |
2,800 |
| Taxable income |
$21,300 |
| Tax determined by graduated rate (Tax Table
column for single taxpayers) |
$3,199 |
| Plus: Tax on gross dividends ($1,400 x
30%) |
420 |
| Tax determined as though treaty had not
come into effect |
$3,619 |
Arthur's tax liability, figured by taking into account the reduced
rate on dividend income as provided by the tax treaty, is $3,409,
determined as follows:
| Tax determined by graduated rate (same as
figured above) |
$3,199 |
| Plus: Tax on gross dividends ($1,400 x
15%) |
210 |
| Tax on compensation and dividends
|
$3,409 |
His tax liability, therefore, is limited to $3,409, the tax
liability figured using the tax treaty rate on the dividends.
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