Instructions for Form 1040NR (2006)

General Instructions

This is archived information that pertains only to the 2006 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.

Table of Contents

For details on these and other changes for 2006 and 2007, see Pub. 553.

What's New for 2006

New exception from the filing requirement for nonresident alien individuals. Generally, the requirement to file a return has been eliminated for nonresident aliens who earn wages effectively connected with a U.S. trade or business that are less than the amount of one personal exemption ($3,300 for 2006). For more information, see Who Must File on
page 3.

Services performed partly inside and partly outside the United States. New rules apply in determining the source of compensation for labor or personal services performed as an employee. Under the new rules, compensation (other than fringe benefits) is sourced on a time basis. Fringe benefits are sourced on a geographical basis. However, you may be able to use an alternative basis if the alternative basis more properly determines the source of the compensation. See Services performed partly inside and partly outside the United States on page 10 for more information.

Item R. If you are an employee and your total compensation for personal services performed both inside and outside the United States was $250,000 or more, and you are using an alternative basis to determine the source of this compensation, you must check the box in item R. See the instructions for item R on page 30.

Credit for federal telephone excise tax paid. If you paid the federal excise tax on your long distance or bundled telephone service, you may be able to request a credit. See the instructions for line 69 on page 23.

Alternative minimum tax (AMT) exemption amount increased. The AMT exemption amount is increased to $42,500 ($62,550 if a qualifying widow(er); $31,275 if married filing separately). See the instructions for line 42 on page 19.

Direct deposit of refunds. If you choose direct deposit of your refund, you may be able to split the refund into two or three accounts. See the instructions for line 72a on page 24.

New credit for residential energy improvements. You may be able to take a residential energy credit for amounts paid in 2006 to have qualified energy saving items installed in connection with your home. See the instructions for line 47 on page 20.

IRA deduction expanded. If you were covered by a retirement plan, you may be able to take an IRA deduction if your 2006 modified adjusted gross income (AGI) is less than $85,000 if a qualifying widow(er). If you are age 50 or over, the amount of your catch-up contribution increased to $1,000. See the instructions for line 31 on page 16.

Elective salary deferrals. The maximum amount you can defer under all plans generally is limited to $15,000 ($10,000 if you only have SIMPLE plans; $18,000 for section 403(b) plans if you qualify for the 15-year rule). The catch-up contribution limit is increased to $5,000 ($2,500 for SIMPLE plans). See the instructions for line 8 on page 10.

Standard mileage rates. The 2006 rate for business use of your vehicle is 44½ cents a mile. The 2006 rate for use of your vehicle to move is 18 cents a mile. The 2006 rate for charitable use of your vehicle to provide relief related to Hurricane Katrina is 32 cents a mile.

Alternative motor vehicles. You may be able to take a credit if you place an alternative motor vehicle (including a qualified hybrid vehicle) or alternative fuel vehicle refueling property in service in 2006. See Forms 8910 and 8911. You no longer can take a deduction for clean-fuel vehicles or refueling property.

Personal exemption and itemized deduction phaseouts reduced. Taxpayers with adjusted gross income above a certain amount may lose part of their deduction for personal exemptions and itemized deductions. The amount by which these deductions are reduced in 2006 is only ⅔ of the amount of the reduction that otherwise would have applied.

Tax on children's income. Form 8615 must be used to figure the tax of children under age 18 with investment income of more than $1,700. See the instructions for line 41 on page 18. The election to report a child's investment income on a parent's return and the special rule for when a child must file Form 6251 also now apply to children under age 18. See page 18.

Gifts to charity. The following list highlights some of the new rules that apply to certain gifts to charity.

Distributions from your IRA to certain charitable organizations are tax free if you were at least 70½ when the distribution was made. You cannot, however, take a charitable deduction on Schedule A for the same contribution.
Stricter rules apply for contributions after August 17, 2006, of clothing and household items. See the instructions for line 5 that begin on page 26.
The special rules for contributions of food inventory are extended.
Limits are higher on deductions for contributions of capital gain real property for conservation purposes.

For more information, see Pub. 526.

Mailing your return. You will mail your return to a different address this year. See Where to File on page 4 and What and Where to File for a Dual-
Status Year on page 5.

Expiring tax benefits extended. The following tax benefits have been extended through 2007.

Deduction for educator expenses in figuring adjusted gross income.
District of Columbia first-time homebuyer credit (for homes purchased after 2005).

What's New for 2007

IRA deduction expanded for certain people. If you were covered by a retirement plan, you may be able to take an IRA deduction if your 2007 modified AGI is less than $62,000 ($103,000 if a qualifying widow(er)).

Domestic production activities deduction. The deduction rate for 2007 will be increased to 6%.

Exemption for housing a person displaced by Hurricane Katrina expires. The additional exemption amount for housing a person displaced by Hurricane Katrina will expire.

New recordkeeping requirements for contributions of money. For charitable contributions of money, regardless of the amount, you must maintain as a record of the contribution a bank record (such as a cancelled check) or a written record from the charity. The written record must include the name of the charity, date, and amount of the contribution.

Items to Note

Form 1040NR-EZ. You may be able to use Form 1040NR-EZ if your only income from U.S. sources is wages, salaries, tips, taxable refunds of state and local income taxes, and scholarship or fellowship grants. For more details, see Form 1040NR-EZ and its instructions.

Former U.S. citizens and former U.S. long-term residents. If you renounced your U.S. citizenship or terminated your long-term resident status after June 3, 2004, you will continue to be treated for federal tax purposes as a citizen or long-term resident of the United States until you (a) give notice of your expatriating act or termination of residency (with the requisite intent to relinquish citizenship or terminate such status) to the Department of State or the Department of Homeland Security, and (b) provide an initial expatriation statement (Form 8854) to the IRS. Additionally, if you are subject to the expatriation tax rules of section 877(a), you are required to file an annual expatriation information statement (Form 8854) with the IRS for 10 tax years after the date of your expatriation. For more details, see Special Rules for Former U.S. Citizens and Former U.S. Long-term Residents that begins on page 7 and Pub. 519, U.S. Tax Guide for Aliens.

Other reporting requirements. If you meet the closer connection to a foreign country exception to the substantial presence test, you must file Form 8840. If you exclude days of presence in the United States for purposes of the substantial presence test, you must file Form 8843. This rule does not apply to foreign-government-related individuals who exclude days of presence in the United States. Certain dual-resident taxpayers who claim tax treaty benefits must file Form 8833. A dual-resident taxpayer is one who is a resident of both the United States and another country under each country's tax laws.

Additional Information

If you need more information, our free publications may help you. Pub. 519 will be the most important, but the following publications may also help.

Pub. 525	Taxable and Nontaxable Income
Pub. 529	Miscellaneous Deductions
Pub. 552	Recordkeeping for Individuals
Pub. 597	Information on the United States-Canada Income Tax Treaty
Pub. 901	U.S. Tax Treaties
Pub. 910	Guide to Free Tax Services (includes a list of all publications)

These free publications and the forms and schedules you will need are available from the Internal Revenue Service. You can download them from the IRS website at www.irs.gov. Also see Taxpayer Assistance on page 31 for other ways to get them (as well as information on receiving IRS assistance in completing the forms).

Resident Alien or Nonresident Alien

If you are not a citizen of the United States, specific rules apply to determine if you are a resident alien or a nonresident alien for tax purposes. Generally, you are considered a resident alien if you meet either the green card test or the substantial presence test for 2006. (These tests are explained below.) Even if you do not meet either of these tests, you may be able to choose to be treated as a U.S. resident for part of 2006. See First-Year Choice in Pub. 519 for details.

You are generally considered a nonresident alien for the year if you are not a U.S. resident under either of these tests. However, even if you are a U.S. resident under one of these tests, you may still be considered a nonresident alien if you qualify as a resident of a treaty country within the meaning of the tax treaty between the United States and that country. You can download the complete text of most U.S. tax treaties at www.irs.gov. Technical explanations for many of those treaties are also available at that site.

For more details on resident and nonresident status, the tests for residence, and the exceptions to them, see Pub. 519.

Green Card Test

You are a resident for tax purposes if you were a lawful permanent resident (immigrant) of the United States at any time during 2006.

Substantial Presence Test

You are considered a U.S. resident if you meet the substantial presence test for 2006. You meet this test if you were physically present in the United States for at least:

31 days during 2006, and
183 days during the period 2006, 2005, and 2004, counting all the days of physical presence in 2006, but only ⅓ the number of days of presence in 2005 and only ⅙ the number of days in 2004.

Generally, you are treated as present in the United States on any day that you are physically present in the country at any time during the day. However, there are exceptions to this rule. In general, do not count the following as days of presence in the United States for the substantial presence test.

Days you commute to work in the United States from a residence in Canada or Mexico if you regularly commute from Canada or Mexico.
Days you are in the United States for less than 24 hours when you are in transit between two places outside of the United States.
Days you are in the United States as a crew member of a foreign vessel.
Days you intend, but are unable, to leave the United States because of a medical condition that arose while you were in the United States.
Days you are an exempt individual (defined below).

Exempt individual. For these purposes, an exempt individual is generally an individual who is a:

Foreign government-related individual,
Teacher or trainee,
Student, or
Professional athlete who is temporarily in the United States to compete in a charitable sports event.

Note.

Alien individuals with “Q” visas are treated as either students, teachers, or trainees and, as such, are exempt individuals for purposes of the substantial presence test if they otherwise qualify. “Q” visas are issued to aliens participating in certain international cultural exchange programs.

See Pub. 519 for more details regarding days of presence in the United States for the substantial presence test.

Closer Connection to Foreign Country

Even though you otherwise would meet the substantial presence test, you can be treated as a nonresident alien if you:

Were present in the United States for fewer than 183 days during 2006,
Establish that during 2006 you had a tax home in a foreign country, and
Establish that during 2006 you had a closer connection to one foreign country in which you had a tax home than to the United States unless you had a closer connection to two foreign countries.

See Pub. 519 for more information.

Who Must File

File Form 1040NR if any of the following four conditions applies to you.

You were a nonresident alien engaged in a trade or business in the United States during 2006. You must file even if:
1. You have no income from a trade or business conducted in the United States,
2. You have no U.S. source income, or
3. Your income is exempt from U.S. tax under a tax treaty or any section of the Internal Revenue Code.
However, if you have no gross income for 2006, do not complete the schedules for Form 1040NR. Instead, attach a list of the kinds of exclusions you claim and the amount of each.
You were a nonresident alien not engaged in a trade or business in the United States during 2006 and:
1. You received income from U.S. sources that is reportable on lines 76a through 85, and
2. Not all of the U.S. tax that you owe was withheld from that income.
You represent a deceased person who would have had to file Form 1040NR.
You represent an estate or trust that has to file Form 1040NR.

Exceptions. You do not need to file Form 1040NR if:

Your only U.S. trade or business was the performance of personal services, and
1. Your wages were less than $3,300; and
2. You have no other need to file a return to claim a refund of overwithheld taxes, to satisfy additional withholding at source, or to claim income exempt or partly exempt by treaty, or
You were a nonresident alien student, teacher, or trainee who was temporarily present in the United States under an “F,” “J,”“M,” or “Q” visa, and you have no income that is subject to tax under section 871 (that is, the income items listed on lines 8 through 21 on page 1 of Form 1040NR and on lines 76a through 85 on page 4 of Form 1040NR).

Exception for children under age 18. If your child was under age 18 at the end of 2006, had income only from interest and dividends that are effectively connected with a U.S. trade or business, and that income totaled less than $8,500, you may be able to elect to report your child's income on your return. But you must use Form 8814 to do so. If you make this election, your child does not have to file a return. For details, see Form 8814.

A child born on January 1, 1989, is considered to be age 18 at the end of 2006. Do not use Form 8814 for such a child.

Filing a deceased person's return. The personal representative must file the return for a deceased person who was required to file a return for 2006. A personal representative can be an executor, administrator, or anyone who is in charge of the deceased person's property.

Filing for an estate or trust. If you are filing Form 1040NR for a nonresident alien estate or trust, change the form to reflect the provisions of Subchapter J, Chapter 1, of the Internal Revenue Code. You may find it helpful to refer to Form 1041 and its instructions.

Former U.S. citizens and former U.S. long-term residents. If you renounced your U.S. citizenship or terminated your long-term resident status after June 3, 2004, you are required to (a) file Form 8854, and (b) notify the Department of State or the Department of Homeland Security (see the Instructions to Form 8854).

If you fail to take these two actions, you are still treated as a citizen or resident of the United States, and you must report your worldwide taxable income on Form 1040, 1040A, or 1040EZ, and figure your tax as shown in the instructions for those forms. You can only file Form 1040NR and figure your tax as a nonresident alien for the portion of the year after you have satisfied both of the requirements above. For more details, see Special Rules for Former U.S. Citizens and Former U.S. Long-term Residents that begins on page 7 and Expatriation Tax in Pub. 519.

Simplified Procedure for Claiming Certain Refunds

You can use this procedure only if you meet all of the following conditions for the tax year.

You were a nonresident alien.
You were not engaged in a trade or business in the United States at any time.
You had no income that was effectively connected with the conduct of a U.S. trade or business.
Your U.S. income tax liability was fully satisfied through withholding of tax at source.
You are filing Form 1040NR solely to claim a refund of U.S. tax withheld at source.

Example.

John is a nonresident alien individual. The only U.S. source income he received during the year was dividend income from U.S. stocks. The dividend income was reported to him on Form(s) 1042-S. On one of the dividend payments, the withholding agent incorrectly withheld at a rate of 30% (instead of 15%). John is eligible to use the simplified procedure.

If you meet all of the conditions listed earlier for the tax year, complete Form 1040NR as follows.

Page 1. Enter your name, identifying number (defined on page 8), country of citizenship, and all address information requested at the top of page 1. Leave the rest of page 1 blank.

Page 4, lines 76a through 85. Enter the amounts of gross income you received from dividends, interest, royalties, pensions, annuities, and other income. If any income you received was subject to backup withholding or withholding at source, you must include all gross income of that type that you received. The amount of each type of income should be shown in the column under the appropriate U.S. tax rate, if any, that applies to that type of income in your particular circumstances.

If you are entitled to a reduced rate of, or exemption from, withholding on the income pursuant to a tax treaty, the applicable rate of U.S. tax is the same as the treaty rate. Use column (e) if the applicable tax rate is 0%.

Example.

Mary is a nonresident alien individual. The only U.S. source income she received during the year was as follows.

4 dividend payments.
12 interest payments.

All payments were reported to Mary on Form(s) 1042-S. On one of the dividend payments, the withholding agent incorrectly withheld at a rate of 30% (instead of 15%). There were no other withholding discrepancies. Mary must report all four dividend payments. She is not required to report any of the interest payments.

Payments of gross proceeds from the sale of securities or regulated futures contracts are generally exempt from U.S. tax. If you received such payments and they were subjected to backup withholding, specify the type of payment on line 85 and show the amount in column (e).

Line 86. Enter the total amount of U.S. tax withheld at source (and not refunded by the payer or withholding agent) for the income you included on lines 76a through 85.

Lines 87 through 89. Complete these lines as instructed on the form.

Page 5. You must answer all questions that apply. For item M, you must identify the income tax treaty and treaty article(s) under which you are applying for a refund of tax. Also, enter the type of income (for example, dividends, royalties) and amount in the appropriate space. You must provide the information required for each type of income for which a treaty claim is made.

If you are claiming a reduced rate of, or exemption from, tax based on a tax treaty, you must generally be a resident of the particular treaty country within the meaning of the treaty and you cannot have a permanent establishment or fixed base in the United States.

Page 2, lines 53 and 58. Enter your total income tax liability.

Line 66. Enter the total amount of U.S. tax withheld (from line 86).

Line 70. Add lines 59 through 69. This is the total tax you have paid.

Lines 71 and 72a. Enter the difference between line 58 and line 70. This is your total refund.

You can have the refund deposited in one or more accounts. See Lines 72a through 72d—Direct deposit of refund that begins on page 23 for more details.

Signature. You must sign and date your tax return. See Reminders on page 30.

Documentation. You must attach acceptable proof of the withholding for which you are claiming a refund. If you are claiming a refund of backup withholding tax based on your status as a nonresident alien, you must attach a copy of the Form 1099 that shows the income and the amount of backup withholding. If you are claiming a refund of U.S. tax withheld at source, you must attach a copy of the Form 1042-S that shows the income and the amount of U.S. tax withheld.

Additional Information

Portfolio interest. If you are claiming a refund of U.S. tax withheld from portfolio interest, include a description of the relevant debt obligation, including the name of the issuer, CUSIP number (if any), interest rate, and the date the debt was issued.

Withholding on distributions. If you are claiming an exemption from withholding on a distribution from a U.S. corporation with respect to its stock because the corporation had insufficient earnings and profits to support dividend treatment, you must attach a statement that identifies the distributing corporation and provides the basis for the claim.

If you are claiming an exemption from withholding on a distribution from a mutual fund or real estate investment trust (REIT) with respect to its stock because the distribution was designated as long-term capital gain or a nondividend distribution, you must attach a statement that identifies the mutual fund or REIT and provides the basis for the claim.

If you are claiming an exemption from withholding on a distribution from a U.S. corporation with respect to its stock because, in your particular circumstances, the transaction qualifies as a redemption of stock under section 302, you must attach a statement that describes the transaction and presents the facts necessary to establish that the payment was (a) a complete redemption, (b) a disproportionate redemption, or (c) not essentially equivalent to a dividend.

When To File

Individuals. If you were an employee and received wages subject to U.S. income tax withholding, file Form 1040NR by the 15th day of the 4th month after your tax year ends. A return for the 2006 calendar year is due by April 16, 2007.

If you did not receive wages as an employee subject to U.S. income tax withholding, file Form 1040NR by the 15th day of the 6th month after your tax year ends. A return for the 2006 calendar year is due by June 15, 2007.

Estates and trusts. If you file for a nonresident alien estate or trust that has an office in the United States, file the return by the 15th day of the 4th month after the tax year ends. If you file for a nonresident alien estate or trust that does not have an office in the United States, file the return by the 15th day of the 6th month after the tax year ends.

If the regular due date for filing falls on a Saturday, Sunday, or legal holiday, file by the next business day.

Extension of time to file. If you cannot file your return by the due date, you should file Form 4868. You must file Form 4868 by the regular due date of the return.

Note. Form 4868 does not extend the time to pay your income tax. The tax is due by the regular due date of the return.

Where To File

File Form 1040NR with the Internal Revenue Service Center, Austin, TX 73301-0215, U.S.A.

Private Delivery Services

You can use certain private delivery services designated by the IRS to meet the “timely mailing as timely filing/paying” rule for tax returns and payments. These private delivery services include only the following.

DHL Express (DHL): DHL Same Day Service, DHL Next Day 10:30 am, DHL Next Day 12:00 pm, DHL Next Day 3:00 pm, and DHL 2nd Day Service.
Federal Express (FedEx): FedEx Priority Overnight, FedEx Standard Overnight, FedEx 2Day, FedEx International Priority, and FedEx International First.
United Parcel Service (UPS): UPS Next Day Air, UPS Next Day Air Saver, UPS 2nd Day Air, UPS 2nd Day Air A.M., UPS Worldwide Express Plus, and UPS Worldwide Express.

The private delivery service can tell you how to get written proof of the mailing date.

Private delivery services cannot deliver items to P.O. boxes. You must use the U.S. Postal Service to mail any item to an IRS P.O. box address.

Election To Be Taxed as a Resident Alien

You can elect to be taxed as a U.S. resident for the whole year if all of the following apply.

You were married.
Your spouse was a U.S. citizen or resident alien on the last day of the tax year.
You file a joint return for the year of the election using Form 1040, 1040A, or 1040EZ.

To make this election, you must attach the statement described in Pub. 519 to your return. Do not use Form 1040NR.

Your worldwide income for the whole year must be included and will be taxed under U.S. tax laws. You must agree to keep the records, books, and other information needed to figure the tax. If you made the election in an earlier year, you can file a joint return or separate return for 2006. If you file a separate return, use Form 1040 or Form 1040A. Your worldwide income for the whole year must be included whether you file a joint or separate return.

Nonresident aliens who make this election may forfeit the right to claim benefits otherwise available under a U.S. tax treaty. For more details, see the specific treaty.

Dual-Status Taxpayers

If you elect to be taxed as a resident alien (discussed earlier), the special instructions and restrictions discussed here do not apply.

Dual-Status Tax Year

A dual-status year is one in which you change status between nonresident and resident alien. Different U.S. income tax rules apply to each status.

Most dual-status years are the years of arrival or departure. Before you arrive in the United States, you are a nonresident alien. After you arrive, you may or may not be a resident, depending on the circumstances.

If you become a U.S. resident, you stay a resident until you leave the United States. You may become a nonresident alien when you leave if, after leaving (or after your last day of lawful permanent residency if you met the green card test) and for the remainder of the calendar year of your departure, you have a closer connection to a foreign country than to the United States, and, during the next calendar year, you are not a U.S. resident under either the green card test or the substantial presence test. See Pub. 519.

What and Where to File for a Dual-Status Year

If you were a U.S. resident on the last day of the tax year, file Form 1040. Enter “Dual-Status Return” across the top and attach a statement showing your income for the part of the year you were a nonresident. You can use Form 1040NR as the statement; enter “Dual-Status Statement” across the top. Do not sign Form 1040NR. File your return and statement with the Internal Revenue Service Center, Austin, TX 73301-0215, U.S.A.

If you were a nonresident on the last day of the tax year, file Form 1040NR. Enter “Dual-Status Return” across the top and attach a statement showing your income for the part of the year you were a U.S. resident. You may use Form 1040 as the statement; enter “Dual-Status Statement” across the top. Do not sign Form 1040. File your return and statement with the Internal Revenue Service Center, Austin, TX 73301-0215, U.S.A.

Statements. Any statement you file with your return must show your name, address, and identifying number (defined on page 8).

Former U.S. long-term residents are required to file Form 8854 with their dual-status return for the last year of U.S. residency. To determine if you are a former U.S. long-term resident, see the instructions on page 7.

Income Subject to Tax for Dual-Status Year

As a dual-status taxpayer not filing a joint return, you are taxed on income from all sources for the part of the year you were a resident alien. Generally, you are taxed on income only from U.S. sources for the part of the year you were a nonresident alien. However, all income effectively connected with the conduct of a trade or business in the United States is taxable.

Income you received as a dual-status taxpayer from sources outside the United States while a resident alien is taxable even if you became a nonresident alien after receiving it and before the close of the tax year. Conversely, income you received from sources outside the United States while a nonresident alien is not taxable in most cases even if you became a resident alien after receiving it and before the close of the tax year. Income from U.S. sources is taxable whether you received it while a nonresident alien or a resident alien.

Restrictions for Dual-Status Taxpayers

Standard deduction. You cannot take the standard deduction even for the part of the year you were a resident alien.

Head of household. You cannot use the Head of household Tax Table column or Section D of the Tax Computation Worksheet.

Joint return. You cannot file a joint return unless you elect to be taxed as a resident alien (see the instructions on page 4) in lieu of these dual-status taxpayer rules.

Tax rates. If you were married and a nonresident of the United States for all or part of the tax year and you do not make the election to be taxed as a resident alien as discussed on page 4, you must use the Married filing separately column in the Tax Table or Section C of the Tax Computation Worksheet to figure your tax on income effectively connected with a U.S. trade or business. If married, you cannot use the Single Tax Table column or Section A of the Tax Computation Worksheet.

Deduction for exemptions. As a dual-status taxpayer, you usually will be entitled to your own personal exemption. Subject to the general rules for qualification, you are allowed exemptions for your spouse and dependents in figuring taxable income for the part of the year you were a resident alien. The amount you can claim for these exemptions is limited to your taxable income (determined without regard to exemptions) for the part of the year you were a resident alien. You cannot use exemptions (other than your own) to reduce taxable income to below zero for that period.

Special rules apply for exemptions for the part of the tax year a dual-status taxpayer is a nonresident alien if the taxpayer is a resident of Canada, Mexico, or the Republic of Korea (South Korea); a U.S. national; or a student or business apprentice from India. See Pub. 519.

Tax credits. You cannot take the earned income credit, the credit for the elderly or disabled, or an education credit unless you elect to be taxed as a resident alien (see the instructions on page 4) in lieu of these dual-status taxpayer rules. For information on other credits, see chapter 6 of Pub. 519.

How To Figure Tax for Dual-Status Year

When you figure your U.S. tax for a dual-status year, you are subject to different rules for the part of the year you were a resident and the part of the year you were a nonresident.

All income for the period of residence and all income that is effectively connected with a trade or business in the United States for the period of nonresidence, after allowable deductions, is combined and taxed at the same rates that apply to U.S. citizens and residents. For the period of residence, allowable deductions include all deductions on Schedule A of Form 1040, including medical expenses, real property taxes, and certain interest. See the Instructions for Schedules A&B (Form 1040).

Income that is not effectively connected with a trade or business in the United States for the period of nonresidence is subject to the flat 30% rate or lower treaty rate. No deductions are allowed against this income.

If you were a resident alien on the last day of the tax year and you are filing Form 1040, include the tax on the noneffectively connected income in the total on Form 1040, line 63. To the left of line 63 enter “Tax from Form 1040NR” and the amount.

If you are filing Form 1040NR, enter the tax from the Tax Table, Tax Computation Worksheet, Qualified Dividends and Capital Gain Tax Worksheet, Schedule D Tax Worksheet, Schedule J (Form 1040), or Form 8615 on line 41 and the tax on the noneffectively connected income on line 53.

Credit for taxes paid. You are allowed a credit against your U.S. income tax liability for certain taxes you paid or are considered to have paid or that were withheld from your income. These include:

1.	Tax withheld from wages earned in the United States and taxes withheld at the source from various items of income from U.S. sources other than wages. This includes U.S. tax withheld on dispositions of U.S. real property interests.
	When filing Form 1040, show the total tax withheld on line 64. Enter amounts from the attached statement (Form 1040NR, lines 59, 66, 67a, 67b, 68a, and 68b) in the column to the right of line 64 and identify and include in the amount on line 64.
	When filing Form 1040NR, show the total tax withheld on lines 59, 66, 67a, 67b, 68a, and 68b. Enter the amount from the attached statement (Form 1040, line 64) in the column to the right of line 59 and identify and include in the amount on line 59.
2.	Estimated tax paid with Form 1040-ES or Form 1040-ES (NR).
3.	Tax paid with Form 1040-C at the time of departure from the United States. When filing Form 1040, include the tax paid with Form 1040-C with the total payments on line 72. Identify the payment in the area to the left of the entry.

How To Report Income on Form 1040NR

Community Income

If either you or your spouse (or both you and your spouse) were nonresident aliens at any time during the tax year and you had community income during the year, treat the community income according to the applicable community property laws except as follows.

Earned income of a spouse, other than trade or business income or partnership distributive share income. The spouse whose services produced the income must report it on his or her separate return.
Trade or business income, other than partnership distributive share income. Treat this income as received by the spouse carrying on the trade or business and report it on that spouse's return.
Partnership distributive share income (or loss). Treat this income (or loss) as received by the spouse who is the partner and report it on that spouse's return.
Income derived from the separate property of one spouse that is not earned income, trade or business income, or partnership distributive share income. The spouse with the separate property must report this income on his or her separate return.

See Pub. 555, Community Property, for more details.

Kinds of Income

You must divide your income for the tax year into the following three categories.

Income effectively connected with a U.S. trade or business. This income is taxed at the same rates that apply to U.S. citizens and residents. Report this income on page 1 of Form 1040NR. Pub. 519 describes this income in greater detail.
U.S. income not effectively connected with a U.S. trade or business. This income is taxed at 30% unless a treaty between your country and the United States has set a lower rate that applies to you. Report this income on page 4 of Form 1040NR. Pub. 519 describes this income more fully.

Note.

Use line 56 to report the 4% tax on U.S. source gross transportation income.
Income exempt from U.S. tax. Complete items L and/or M on page 5 of Form 1040NR and, if applicable, line 22 on page 1.

Dispositions of U.S. Real Property Interests

Gain or loss on the disposition of a U.S. real property interest (see Pub. 519 for definition) is taxed as if the gain or loss were effectively connected with the conduct of a U.S. trade or business. See section 897 and its regulations.

Report gains and losses on the disposition of U.S. real property interests on Schedule D (Form 1040) and Form 1040NR, line 14. Also, net gains may be subject to the alternative minimum tax. See the instructions for line 42.

See Pub. 519 for more details.

Income You May Elect To Treat as Effectively Connected With a U.S. Trade or Business

You can elect to treat some items of income as effectively connected with a U.S. trade or business. The election 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. This includes:

Gains from the sale or exchange of such property or an interest therein.
Gains on the disposal of timber, coal, or iron ore with a retained economic interest.
Rents and royalties from mines, oil or gas wells, or other natural resources.

The election does not apply to dispositions of U.S. real property interests discussed earlier.

To make the election, attach a statement to your return for the year of the election. Include in your statement:

That you are making the election.
A complete list of all of your real property, or any interest in real property, located in the United States (including location). Give the legal identification of U.S. timber, coal, or iron ore in which you have an interest.
The extent of your ownership in the real property.
A description of any substantial improvements to the property.
Your income from the property.
The dates you owned the property.
Whether the election is under section 871(d) or a tax treaty.
Details of any previous elections and revocations of the real property election.

Foreign Income Taxed by the United States

You may be required to report some income from foreign sources on your U.S. return if it is effectively connected with a U.S. trade or business. For this foreign income to be treated as effectively connected with a U.S. trade or business, you must have an office or other fixed place of business in the United States to which the income can be attributed. For more information, including a list of the types of foreign source income that must be treated as effectively connected with a U.S. trade or business, see Pub. 519.

Special Rules for Former U.S. Citizens and Former U.S. Long-Term Residents

Expatriation Tax

The expatriation tax provisions provide an alternative tax regime for certain nonresident aliens who lost U.S. citizenship or terminated U.S. long-term resident status. In 2004 the expatriation rules that determine whether you are subject to this alternative tax regime changed. If you expatriated on or before June 3, 2004, one set of rules applies. If you expatriated after June 3, 2004, another set of rules applies. See the rules on this page that apply to you.

Former U.S. long-term resident defined. You are a former U.S. long-term resident if you were a lawful permanent resident of the United States (green-card holder) in at least 8 of the last 15 consecutive tax years ending with the year your residency ends. In determining if you meet the 8-year requirement, do not count any year that you were treated as a resident of another country under a tax treaty and you did not waive treaty benefits.

Expatriation Before June 4, 2004

The alternative tax regime will apply to you for the 10 succeeding tax years following the year of your expatriation if one of the principal purposes of your action was to avoid U.S. taxes. You are considered 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.

The amounts above are adjusted for inflation if your expatriation action is after 1996 (see the chart on this page).

Inflation-Adjusted Amounts for Expatriation Actions Before June 4, 2004
IF you expatriated during . . .	THEN the rules outlined on this page apply if . . .
	Your 5-year average annual net income tax was more than ...	OR	Your net worth equaled or exceeded ...
1997	$106,000		$528,000
1998	109,000		543,000
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 on this page.

Although there are exceptions to these rules, you will qualify for an exception only if you are eligible to submit a ruling request to the IRS that your renunciation of U.S. citizenship or termination of U.S. residency did not have as one of its principal purposes the avoidance of U.S. tax and you submit such a ruling request in a complete and good faith manner. For more details about these exceptions, see Notice 97-19, 1997-1 C.B. 394; and Notice 98-34, 1998-2 C.B. 29. You can find Notice 97-19 on page 40 of Internal Revenue Bulletin 1997-10 at www.irs.gov/pub/irs-irbs/irb97-10.pdf. You can find Notice 98-34 on page 30 of Internal Revenue Bulletin 1998-27 at www.irs.gov/pub/irs-irbs/irb98-27.pdf.

Annual information statement. If the alternative tax regime under the expatriation tax provisions apply to you, check the “Yes” box in item P on Form 1040NR, page 5. You also must attach an annual information statement to Form 1040NR that lists by category (for example, dividends, interest, etc.) all items of U.S. and foreign source gross income (whether or not taxable in the United States). The statement must identify the source of such income (determined under section 877 as modified by Section V of Notice 97-19) and those items of income subject to tax under section 877. You must attach the statement to Form 1040NR, whether or not you owe any U.S. tax.

Expatriation After June 3, 2004

The alternative tax regime will apply to you for the 10 succeeding tax years following the year of your expatriation if any one of the following apply.

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 $124,000. This amount is adjusted for inflation if your expatriation is after 2004 (see the chart below).
Your net worth on the date of your action was $2,000,000 or more.
You fail to certify under penalties of perjury that all of your U.S. federal tax obligations for the last 5 tax years ending before the date of your action have been met.

Inflation-Adjusted Amounts for Expatriation Actions After June 3, 2004
IF you expatriated during ...		THEN the rules outlined on this page apply if your 5-year average annual net income tax was more than ...
2004 (after June 3)*		$124,000
2005		127,000
2006		131,000
*If you expatriated before June 4, 2004, see Expatriation Before June 4, 2004 on this page.

Exception for dual citizens and certain minors. Dual citizens and certain minors are not subject to the expatriation tax even if they meet (1) or (2) above. However, they must provide the certification required in (3) above. For the definitions of “dual citizens” and “certain minors,” see Pub. 519.

Exception if in the United States for more than 30 days. Generally, the alternative tax regime 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. You must file Form 1040, 1040A, or 1040EZ, and figure your tax as prescribed in the instructions for those forms. For details, see Tax consequences of presence in the United States under Expatriation After June 3, 2004, in Pub. 519.

Annual information statement. If the alternative tax regime under the expatriation tax provisions applies to you, check the “Yes” box in item P on Form 1040NR, page 5, and attach a completed Form 8854 (Parts I and III of Schedules A and B) to your tax return. You must attach the form for each of the 10 tax years beginning with the year that includes your date of expatriation, whether or not you owe U.S. tax. For more details regarding the filing of Form 8854, see the Instructions for Form 8854.

Penalty. If you fail to file a required Form 8854 for any tax year or fail to include all information required to be shown on the form, you may have to pay a penalty in the amount of $10,000 for each required Form 8854. You will not have to pay the penalty if you can show that the failure to file the completed form was due to reasonable cause.

How To Figure Your Alternative Tax Under the Expatriation Provisions

The following discussion applies to you whether you expatriated before June 4, 2004, or after June 3, 2004.

If the alternative tax regime applies to you, you are subject to tax on U.S. source gross income and gains on either (a) a net basis at the graduated rates applicable to individuals (with allowable deductions), or (b) a gross basis at a rate of 30% (or lower treaty rate) under the rules of section 871(a). See page 28 for more details on the tax imposed under section 871(a).

If you have items of U.S. source income that are subject to tax under section 871(a), you will be taxed at a rate of 30% (or lower treaty rate) on your gross income only if this tax exceeds the tax at the regular graduated rates on your net income. If the 30% (or lower treaty rate) tax on your gross income exceeds the graduated tax on your net income, report those items on the appropriate lines on page 4 of Form 1040NR. If the graduated tax on your net income exceeds the 30% (or lower treaty rate) tax on your gross income, report your income on the appropriate lines on page 1 of Form 1040NR and attach a statement describing the items and amounts of income that are subject to tax by reason of section 877.

If you have other items of U.S. source income that are not subject to tax under section 871(a), you will be taxed on a net basis at the regular graduated rates applicable to individuals. Report this income on the appropriate lines on page 1 of Form 1040NR.

For purposes of figuring the tax due under section 877, the following items of income are treated as U.S. source.

Gains on the sale or exchange of personal property located in the United States.
Gains on the sale or exchange of stock issued by a domestic corporation or debt obligations of the United States, U.S. persons, a state or political subdivision thereof, and the District of Columbia.
Income or gain derived from stock in a foreign corporation if you owned, either directly or indirectly (through the rules of sections 958(a) and 958(b)), more than 50% of the vote or value of the stock of the corporation on the date of your renunciation of citizenship or termination of residency or at any time during the 2 years preceding such date. Such income or gain is considered U.S. source only to the extent of your share of the earnings and profits earned or accumulated prior to the date of renunciation of U.S. citizenship or termination of residency.

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.S. source gross income in the tax year of the exchange unless you enter into a gain recognition agreement under Notice 97-19.

Most U.S. tax treaties do not prevent the United States from continuing to tax former citizens and former LTRs under domestic law. Unless the treaty prevents it, you will be subject to the rules of section 877.