Tag Archives: Schedule OI

Substantial Presence Test, Treaty Income Exclusion and Covid-19

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IRS has issued a revenue procedure that allows the use of the medical condition exception on Form 8843 to except 60 consecutive days spent in the U.S.  from counting towards presence in the U.S.  during the “COVID-19 Emergency Period”. The sixty-day time period that may be excepted may start on a date of the individual’s choice during a time period between February 1, 2020, and on or before April 1, 2020.

The same procedure provides for an individual to exclude those days of presence in order to claim benefits under an income tax treaty with respect to services income.

This revenue procedure, Rev. Proc. 2020-20 will be published in Internal Revenue Bulletin to be issued on May 11, 2020.

This might affect withholding for 2020, the income tax form to be filed for 2020 (1040NR or 1040).  As appropriate, individuals may want to adjust their tax planning and notify employers. Some individuals are eager to meet the SPT and file on Form 1040, others prefer not to become tax residents filing on Form 1040 any sooner than required.

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!.

 

Small Changes on Draft 2018 Forms 1040NR-EZ and 1040NR, by Jean Mammen, EA

 
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There are few changes in the IRS draft forms 1040NR-EZ and 1040NR published on August 22, 2018.

The most important changes reflect the suspension of the personal exemptions  for tax years 2018-2025, in TCJA (Tax Cuts and Jobs Act), and the changes in filing status available and the new “credit for other dependent” (Form 1040NR only),

Schedule OI of Form 1040NR has a new question, Item M, about the 871(d) election. A filer declaring income from real property can treat that income in the usual manner, as investment income that is Not Effectively Connected to the taxpayer’s own U.S. trade or business, or elect to declare it as ECI, effectively connected income. Item M has two check boxes, which state in (1) that this is the first year you are making this election, or, (2) you have made this election in the past and not revoked it.

Dependents: The remaining possible  benefit from entering a dependent on Form 1040NR would be if either the child tax credit or the credit for other dependent could be claimed.

The non-resident alien taxpayer must qualify to claim a dependent – i.e. meet qualifications as a resident of Canada, Mexico, South Korea and the dependent resided in the same household for part of the tax year,  or is a student or business apprentice with residency in India.

By TCJA, the dependent must:

  • Be a U.S. citizen, a U.S. resident alien (SPT or green card) or a U.S. national
  • Have an SSN or ITIN before the due date of the return

(If an ITIN application will accompany the return, be sure to file early enough for the ITIN to be processed before the due date of the return)

Form 1040NR-EZ Draft 2018

First change comes at Line 12.

The heading, filing status, and Lines 1-11 are the same for the 2017 form and the August, 2018 draft forms.

For 2018, the 2017 1040NR-EZ lines 12 and 13 have been dropped

2017 Line 12 was a subtraction line

2017 Line 13 was Exemption

For 2018, the lines after Line 11 are simply moved up two line numbers from what they were on 2017 Form 1040NR-EZ.

For 2018, Line 12 is Taxable Income. On the 2017 form, Taxable Income was line 14

For 2018, the final line number on the first page is Line 24, estimated tax penalty. In 2017, that was Line 26.

Schedule OI remains the same on Form 1040NR-EZ.

https://www.irs.gov/pub/irs-dft/f1040nre–dft.pdf

Form 1040NR Draft 2018

Most changes here are  layout adjustments. Also, one line was dropped, on Domestic Production Activities Deduction (from Form 8903). Item M, on an IRC 871(d) election was added.

Line numbers on Page 1 are essentially unchanged from Line 1 through Line 33

Filing Status section

Checkboxes 1, 3, and 4 are greyed out and those lines are marked “Reserved”.

2017 Box 1 was single resident of Canada or Mexico or single U.S. national

2017 Box 3 was married resident of Canada or Mexico or married U.S. national

2017 Box 4 was married resident of South Korea

Dependents is the new 2018 name of the next section, instead of Exemptions

Line 7 Dependents is now the only line in this section. In 2017 this was 7(c).

Columns (1), (2), (3) are unchanged.

Column (4) is split in half, between “Child tax credit” and “Credit for other dependents”

Adjusted Gross Income 2018 section drops the 2017 line 34 Domestic Production…

The Adjusted Gross income amount is on Line 35 for 2018, not the 2017 Line 36

Tax and Credits section for 2018 now starts on Page 1, not the 2017 Page 2

2018 Line 40 is now an addition line, not the 2017 exemption line

Line 41 is Taxable Income in 2018, just as it was in 2017.

The 2018 and 2017 Form 1040NR page 2 are identical from Line 41 through the end of page 2.

Schedule A – Itemized Deductions Page 3

The TCJA changes are reflected on the NR Schedule A

Taxes You Paid Now has :

  • 1a Taxes
  • 1b smaller of line 1a and $10,000 ($5,000 if married)

The “$5,000 if married” reflects the fact that a Married Non-resident is filing as Married Filing Separately, and so the deduction is limited to ½ of the $10,000.

Line 7 “Other Itemized Deductions” does not include miscellaneous job expenses. They are not claimable in 2018, under TCJA.

Be sure to read the instructions for this line, when they are issued.

Schedule NEC (Page 4) is unchanged

Schedule OI (Page 5)

Item M is a new item on Form 1040NR. It concerns the 871(d) election

  • M1 should be checked if this is the first year the taxpayer is making the 871(d) election (net election) to treat income from U.S. real property as ECI – income effectively connected to the taxpayer’s own U.S. trade or business.
  • M2 should be checked if the taxpayer made this election in a previous year and it has not been revoked.

This election is made by attaching a statement to the Form 1040NR that the election is being made for a real property and lists all real property owned by the taxpayer. It is revoked in similar fashion.

https://www.irs.gov/pub/irs-dft/f1040nr–dft.pdf

Answering the New Q on Form 1040NR Schedule OI, Line 3, By Jean Mammen, EA

 
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Line 3 on Schedule OI asks:

Are you claiming treaty benefits pursuant to a Competent Authority determination? Y/N
If “Yes”, attach a copy of the Competent Authority determination letter to your return.

“No” is most likely going to be your answer. But a Competent Authority Agreement (CAA), which sounds similar, just might have been a factor. If so, it could be helpful to attach a statement explaining the facts and circumstances. See China example, below.

If “Yes” is your answer, attach the determination letter. This will have been provided in answer to a request for competent authority assistance, perhaps a ruling, by a taxpayer resident in a country covered by a bilateral income tax treaty. The determination took many months and much effort to obtain. The taxpayer will have the letter.

A U.S. taxpayer would request assistance from the U.S. Competent Authority or the Competent Authority of a treaty country, if they thought that the actions of the U.S., a treaty country, or both, cause or will cause a tax situation (such as harm to the taxpayer) not intended by the treaty between the two countries. The U.S. Competent Authority representative is the Deputy Commissioner (International) of the IRS’ Large Business and International Division. The Deputy Commissioner may delegate action to another official. For how a taxpayer requests assistance, see IRS Rev. Proc. 2015-40, dated August 31, 2015.

A list of tax authorities with CAA with the U.S., and hyperlinks to the text of each CAA is posted on the IRS website under Competent Authority Agreements.  See list of countries below. Each tax authority designates an office or individual to whom questions may be addressed, and from whom specific determinations or rulings may be sought.

A Competent Authority Agreement (CAA) might be negotiated to:

– set a general framework for addressing tax treaty issues, including the interaction with treaty articles on Mutual Agreement Procedures (MAP) and arbitration,

– specify how an Intergovernmental Agreement (IGA) on information exchanges that meet the provisions of FATCA (Foreign Account Tax Compliance Act) will be implemented,

– give a general answer on an issue that comes up repeatedly about an article in a bilateral tax treaty, as some issues on fellowships, scholarships, pensions, and exempt/exclusion periods. These situations might benefit from a statement attached to the income tax return that explains how the general explanation in the CAA applies to the taxpayer’s situation.

Examples of situations where a statement linking the CAA to the taxpayer’s situation could be helpful:

The U.S.-China CAA concerns Professors and Teachers covered by Article 19. If they meet the conditions, their remuneration for teaching, lectures, and research is exempt from taxation for three years from their date of arrival in the host country. The CAA specifies that the three-year exemption period may be interrupted by a suspension if the individual discontinues the activity and departs the host state; if the individual then returns and again meets the conditions, the suspension ends and the three-year exemption period continues to run.

An attached statement might cite the CAA and the Article (19) it clarifies, and then present the dates: The date the exemption period started and the date it would have ended three years later. The dates between which the three-year period was suspended because the individual had departed the U.S. and ceased the activity. The new scheduled end date for the exemption period, that is, the date reached when the suspended days are added to the original end date.

The U.S.- Belgium CAA on fellowship payments seeks to clarify which treaty article applies to tax treatment of the payments.

The U.S. – Austria CAA on scholarships seeks to clarify what rules apply to determining if a treaty exemption applies.

Some CAA on pensions are of interest mainly to the pension plans, rather than individuals. The U.S. – U.K. CAA discusses U.K. plans where certain dividends received by the plan qualify for tax exemption. A U.S. – Belgium CAA names certain types of Belgian retirement plans which correspond to certain U.S. plan types, and thus would have the same tax treatment in the U.S. on contributions to the plan, or distributions from the plan. Specific non-U.S. pension plans may have applied for and received a letter of determination. If they have one, they might so inform members of their retirement plan.

Countries/Entities which have a CAA with the U.S. in January 2016
Note: There are many fewer CAA than bilateral income tax treaties. The number of CAA will grow as more countries and entities negotiate a CAA on the operations of a FATCA-related IGA.

Australia, Austria, Belgium, Canada, Cayman Islands, China, Czech Republic, Denmark, Finland, Germany, Gibraltar, Guernsey, Hungary, Iceland, India, Ireland, Isle of Man, Jamaica, Japan, Latvia, Liechtenstein, Luxembourg, Malta, Mauritius, Mexico, Netherlands, New Zealand, Norway, Republic of Estonia, Slovenia, Spain, South Africa, Sweden, Switzerland, United Kingdom.