Tag Archives: Schedule A

How to Prepare 2018 Form 1040NR and Treaty Income Exclusion on Form 1040, by Jean Mammen, EA

 
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Filing readiness for 2018 returns: the resources available to you are the form instructions (in draft form as of today), the 7th Classic edition of “1040NR? or 1040? U.S. Income Tax Returns for Visa Holders   + International Organization and Foreign Embassy Employees”, recent  blogposts on the website, www.1040nror1040.com., and articles on the IRS website.  Not yet available: the 2018 edition of Publication 519, U.S. Tax Guide for Aliens.

2018 Form 1040NR is relatively unchanged from 2017, compared to the changes in Form 1040. TCJA did not provoke a reorganization of Form 1040NR. Some lines were dropped. A few lines were marked “reserved” or were renumbered. Item M on use of the IRC 871(d) election was added to Schedule OI.  That’s it.

Thus, the TCJA notes in the 7th Classic edition of “1040NR? or 1040: U.S. Income Tax Returns for Visa Holders   +   International Organization Employees”, which uses 2017 forms., plus blogposts with 2018 forms are adequate guides to 2018 form preparation. The 8th edition will consolidate this information in one location.

The overall TCJA provisions apply to Form 1040NR as they do to Form 1040. There are no longer such deductions as personal exemptions, generally no moving expense deductions, and no unreimbursed employee business expense or 2106 expense deductions.

Page 1

Line 7 is now labelled Dependents. It was labelled Exemptions for 2017. You can still enter any qualifying dependents if you wish, but there is no associated exemption amount to be subtracted on Line 39. Mostly likely to be useful for people filing dual status returns, who can claim dependent related deductions or credits on Form 1040 and who are residents of Canada, Mexico, South Korea, and students who are residents of India.

Line 16 is now marled “Reserved”.

Line 17 includes both IRA distributions, which in 2017 were on Line 16, and pension and annuity distributions which were alone on Line 17 in 2017.

Line 34 in 2018 now holds the sum of the numbers in lines 24 through 33. (In 2017, line 34 had been for the Domestic Production Activities Deduction, which is gone from the form.)

Line 35 is now Adjusted Gross Income. (AGI).  In 2017, AGI had been on Line 36.

Line 39, now labelled “Exemptions for estates and trusts only”, is the equivalent of the 2017 Line 40, Exemptions, in the Tax and Credits section of form. (Now at the bottom of page 1, instead of the top of page 2.)

Page 2

Now starts with a continuation of the “Tax and Credits” section, as

Line 40, sum of deductions on lines 38-39

Remaining sections and lines on pages 1 and 2 are unchanged in 2018 from 2017.

Page 3 Schedule A

Reflects the TCJA changes

Only state and local taxes, gifts to U.S. charities, casualty and theft losses, and unusual “Other Itemized Deductions” remain.

Job expenses and “Certain Miscellaneous Itemized Deductions”, such as tax preparation fees are gone, per TCJA.

Page 4 Schedule NEC

unchanged.

Page 5 Schedule OI

Item M is new. Schedule OI is otherwise unchanged.

Item M asks if you are making, or have made, the IRC 871(d) election to treat a rental property as the taxpayer’s own U.S. trade or business, and thus reporting income and expenses on Schedule E, as ECI,. (If this election is not made, the property is treated as an investment property and taxes are paid on the gross income, entered on Schedule NEC).

I do not know if Item M is relevant if no rental income is entered on Form 1040NR. The draft instructions for Form 1040NR, posted December 26, 2018, are not clear. The draft instructions refer the reader to Publication 519 for further information. The draft of that publication was not available on January 12, 2019.

 

Treaty Benefit Income Exclusions on Form 1040

In 2018, this exclusion continues to be an adjustment to gross income that is entered on Line 21.

Line 21 moved to the new Schedule 1.

A statement is still required to be attached to Form 1040 which explains the justification for the income exclusion. Cite the treaty article and exclusion history just as was done on Form 1040NR with Schedule OI, Item L, then summarize the taxpayer’s qualification history and exclusion claim history

And that’s it!.

 

AWAY-FROM-HOME BUSINESS EXPENSES C A R E F U L !!!

 
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Most people who come to the US on a work visa (example H, L), or on a student or exchange visitor visa (ex. F, J) expect to stay longer than one year. They changed their tax home when they entered the US and do not qualify to take away-from-home business expenses.

Home for the purpose of claiming a tax deduction means your Tax Home – the area where you normally work and earn the money which will be taxed on your income tax return.

When you are temporarily away from your normal work location, you may claim some ‘ordinary and necessary’ business expenses if your employer does not reimburse you for them.

If your employer does not have an accountable plan, or if it does not include common business expenses, urge your employer to set  up or expand an accountable plan.

These deductions can be taken against wage income only through December 31, 2017. The Tax Cuts and Jobs Act of 2017 ended this type of miscellaneous deduction (subject to the 2% of adjusted gross income (AGI) floor, on Schedule A and Form 2106 through the year 2025.

Of course, on Schedule C or E, similar deductions may be business expenses.

Temporary has a time limit. Less than twelve months.

The rules are exactly the same on all the income tax forms, the 1040 forms, and the 1040NR forms.

To keep your original tax home when you leave it temporarily for a different location where you will have taxable income, you must realistically expect to spend less than one year working in that temporary location. You must either return to your original tax home (the first work location) or go to a different work location within a year’s time.

A visiting scholar coming to a university for a one or two semester program may be temporarily away from the tax home.  This scholar may claim the normal expenses that someone on a business trip might have:  lodging for one person (with receipts), one-half of meal expenses if there are receipts, or one half of the standard USG meals allowance (M) included in the standard per diem rate for that location, plus the incidental expenses amount. Plus other ordinary and necessary business expenses that are helpful and normal in that work situation.

The visitor may have rented a room, or, share an apartment with a colleague or a family member.  Only the pro-rated share of the rent and the utilities for one person may be claimed, and only if the visitor has receipts, or other proof of all payments, such as cancelled checks, and so on.

If the visitor has a cellphone on which he makes a mix of business and personal calls, or a mix of business and personal web searches, the visitor may claim a  ‘business percentage’ of the phone and data costs. This is based on actual total cost, and a careful analysis of how much of the total usage is business related and how much is personal. Again, receipts are necessary to claim a deduction.

Perhaps the visitor attends professional conferences and pays registration fees that are not reimbursed. These may be business expenses when away from home just as they would be when at home.

Someone who comes to the US with the realistic intention of spending more than a year in the US has changed their tax home.  They do not qualify to claim away-from-home expenses for lodging and food.

They do qualify to claim other business expenses, such as registration fees for professional conferences.

All types of itemized business expenses are claimed on Schedule A.  The amount that is claimable is the amount that is more than 2% of the adjusted gross income.

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