1040NR capital gains 1099B useful information to satisfy IRS

1040NR  IRS wants tax paid on capital gains, dividends  from U.S. stocks and mutual funds

By Jeffrey Brooks, CPA, CFP, MBA for Jbrooks Wealth Advisors, PC, a Professional CPA and CFP Firm  jeff@jbrookswa.com  602-292-2009  Please consult with your professional tax CPA regarding your specific circumstances!  

We help tax filers in Arizona prepare 1040NR. We also help clients in California.

 

Recently, we have helped nice people who live outside the United States and are not U.S. citizens.  The IRS calls these people “Non-Resident Aliens”. The people have received IRS letters asking for large tax payments on stock and mutual fund sales.

The people first called other CPAs who have been told by other CPAs that they have to pay large taxes owed  on capital gains, dividends and interest earned on brokerage statements.  In most cases or situations the CPA has given false and erroneous information!!

 What do I do?

1.  First I go to IRS Publication 901:

 Researching Tax Treaties

Publication 901, U.S. Tax Treaties will tell you whether a tax treaty between the United States and a particular country offers a reduced rate of, or possibly a complete exemption from, U.S. income tax for residents of that particular country. Tables in the back of the publication show the countries that have income tax treaties with the United States, the tax rates on different kinds of income, and the kinds of income that are exempt from tax. In addition to the tables in the back of the publication, the publication contains discussions of the exemptions from tax and certain other effects of the tax treaties on the following types of income:

  1. Pay for certain personal services performed in the United States,
  2. Pay of a professor, teacher, or researcher who teaches or performs research in the United States for a limited time,
  3. Amounts received for maintenance and studies by a foreign student or apprentice who is here for study or experience,
  4. Wages, salaries, and pensions paid by a foreign government.

 

 

2.  I then contact one of my other tax experts who work with 1040NR returns too.

3.  In many cases I find that capital gains other than real estate in the U.S. is excluded under the treaty.   I get the name  and date of the treaty. We attached the relevant section of each treaty to the tax returns.

 

4. We find out what the tax rates are on dividends, interest and other income.

5. I get a Power of Attorney from the client.

 

6.  We begin with the first return filed in the U.S. to begin preparing the tax years that the IRS is requiring.

 

7.  We request the types of Visas (i.e. F1/ F2, B1/B2)

8. We request the physical days spent in the U.S. For example December 31, 2010 to January 31, 2011 would be 32 days.

9. We find out the physical days spent in the U.S. in the previous years.

 

10. If real estate purchased and sold in the U.S. there are rules that must be followed.  This article does not “dig” into this area.

 

Here is additional information that may be useful to you:

 

Requirements for Filing Form 1040NR/1040NR-EZ

Most non-resident aliens present in the United States for a short period of time qualify to file Form 1040NR-EZ, however some must file Form 1040NR for their nonresident tax returns.

Form 1040-EZ can be filed instead of Form 1040NR if all of the requirements below apply to the taxpayer:

  • The taxpayer is      not claiming any dependents; If the taxpayer is married, they did not      claim an exemption for their spouse
  • The taxpayer      cannot be claimed as a dependent on another person’s U.S. tax return
  • The taxpayer’s      only U.S. source income was from wages, salaries, tips, refunds of state      and local income taxes, and scholarship or fellowship grants
  • The taxpayer’s      taxable income (line 14 of Form 1040NR-EZ) is less than $100,000
  • The only      exclusion taken is the exclusion for scholarship and fellowship grants,      and the only adjustment taken is the student loan interest deduction
  • The taxpayer      does not claim any tax credits
  • The only      itemized deduction taken is for state and local income taxes
  • The only taxes      the taxpayer owes are:
    • The       tax from the Tax Table in the instructions for Form 1040NR-EZ or
    • Unreported       social security and Medicare tax from Forms 4137 or 8919

Form 1040NR must be filed by nonresident aliens for which any of the following apply:

  • The taxpayer is      claiming dependents*
  • The taxpayer      received dividends or capital gains from U.S. stocks
  • The taxpayer      received income on Form 1099 as an independent contractor
  • The taxpayer is      claiming itemized deductions such as donations to U.S. charities,      professional tax preparation fees
  • The taxpayer is      claiming unreimbursed employee expenses for moving, travel, continuing      education, etc.
  • The taxpayer has      additional adjustments to income

*(Residents of Canada, Mexico, Japan, Korea and students from India are the only nonresident aliens eligible to claim dependents).

Related Links:
Instructions for Form 1040NR-EZ
Instructions for Form 1040NR
Publication 513, Tax Information for Visitors to the United States

 

Taxation of Nonresident Aliens

An alien is any individual who is not a U.S. citizen or U.S. national. A nonresident alien is an alien who has not passed the green card test or the substantial presence test.

Who Must File

If you are any of the following, you must file a return:

  • A nonresident alien individual engaged or considered to be engaged in a trade or business in the United States during the year. You must file even if:
    • Your income did not come from a trade or business conducted in the United States,
    • You have no income from U.S. sources, or
    • Your income is exempt from income tax.
  • However, if your only U.S. source income is wages in an amount less than the personal exemption amount (see Publication 501), you are not required to file.
  • A nonresident alien individual not engaged in a trade or business in the United States with U.S. income on which the tax liability was not satisfied by the withholding of tax at the source.
  • A representative or agent responsible for filing the return of an individual described in (1) or (2),
  • A fiduciary for a nonresident alien estate or trust, or
  • A resident or domestic fiduciary, or other person, charged with the care of the person or property of a nonresident individual may be required to file an income tax return for that individual and pay the tax (Refer to Treas. Reg. 1.6012-3(b)).

NOTE: If you were a nonresident alien student, teacher, or trainee who was temporarily present in the United States on an “F,””J,””M,” or “Q” visa, you are considered engaged in a trade or business in the United States. You must file Form 1040NR (or Form 1040NR-EZ) only if you have income that is subject to tax, such as wages, tips, scholarship and fellowship grants, dividends, etc. Refer to Foreign Students and Scholars for more information.

Claiming a Refund or Benefit

You must also file an income tax return if you want to:

  • Claim a refund of overwithheld or overpaid tax, or
  • Claim the benefit of any deductions or credits. For example, if you have no U.S. business activities but have income from real property that you choose to treat as effectively connected income, you must timely file a true and accurate return to take any allowable deductions against that income.

Which Income to Report

A nonresident alien’s income that is subject to U.S. income tax must generally be divided into two categories:

Effectively Connected Income, after allowable deductions, is taxed at graduated rates. These are the same rates that apply to U.S. citizens and residents. FDAP income generally consists of passive investment income; however, in theory, it could consist of almost any sort of income. FDAP income is taxed at a flat 30 percent (or lower treaty rate) and no deductions are allowed against such income. Effectively Connected Income should be reported on page one of Form 1040NR. FDAP income should be reported on page four of Form 1040NR.

Which Form to File

Nonresident aliens who are required to file an income tax return must use:

Find more information at Which Form to File.

When and Where To File

If you are an employee or self-employed person and you receive wages or non-employee compensation subject to U.S. income tax withholding, or you have an office or place of business in the United States, you must generally file by the 15th day of the 4th month after your tax year ends. For a person filing using a calendar year this is generally April 15.

If you are not an employee or self-employed person who receives wages or non-employee compensation subject to U.S. income tax withholding, or if you do not have an office or place of business in the United States, you must file by the 15th day of the 6th month after your tax year ends. For a person filing using a calendar year this is generally June 15.

File Form 1040NR-EZ and Form 1040NR at the address shown in the instructions for Form 1040NR-EZ and 1040NR.

Extension of time to file

If you cannot file your return by the due date, you should file Form 4868 (PDF) to request an automatic extension of time to file. You must file Form 4868 by the regular due date of the return.

You Could Lose Your Deductions and Credits

To get the benefit of any allowable deductions or credits, you must timely file a true and accurate income tax return. For this purpose, a return is timely if it is filed within 16 months of the due date just discussed. The Internal Revenue Service has the right to deny deductions and credits on tax returns filed more than 16 months after the due dates of the returns. Refer to When To File in Chapter 7 of Publication 519, U.S. Tax Guide for Aliens (PDF) for additional details.

Departing Alien

Before leaving the United States, all aliens (with certain exceptions) must obtain a certificate of compliance. This document, also popularly known as the sailing permit or departure permit, must be secured from the IRS before leaving the U.S. You will receive a sailing or departure permit after filing a Form 1040-C (PDF) or Form 2063 (PDF).

Even if you have left the United States and filed a Form 1040-C, U.S. Departing Alien Income Tax Return (PDF), on departure, you still must file an annual U.S. income tax return. If you are married and both you and your spouse are required to file, you must each file a separate return, unless one of the spouses is a U.S. citizen or a resident alien, in which case the departing alien could file a joint return with his or her spouse (Refer to Nonresident Spouse Treated as a Resident).

References/Related Topics

 

 

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About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

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JBrooks Wealth Advisors, PC.

Certified Public Accountant
Address: 4647 N 32nd Street, Suite B245
Phoenix, Arizona 85018
Phone: 602-292-2009
Email: jeff@jbrookswa.com