Table of Contents
Resident and nonresident aliens are allowed exclusions from gross income if they meet certain conditions. An exclusion from gross income is generally income you receive that is not included in your U.S. income and is not subject to U.S. tax. This chapter covers some of the more common exclusions allowed to resident and nonresident aliens.
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Nontaxable interest,
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Nontaxable dividends,
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Certain compensation paid by a foreign employer,
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Gain from sale of home, and
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Scholarships and fellowship grants.
Publication
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54 Tax Guide for U.S. Citizens and Resident Aliens Abroad
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523 Selling Your Home
See chapter 12 for information about getting these publications.
Resident aliens may be able to exclude the following items from their gross income.
If you are physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months, you may qualify for the foreign earned income exclusion. The exclusion is $92,900 in 2011. In addition, you may be able to exclude or deduct certain foreign housing amounts. You may also qualify if you are a bona fide resident of a foreign country and you are a citizen or national of a country with which the United States has an income tax treaty. For more information, see Publication 54.
Nonresident aliens can exclude the following items from their gross income.
Interest income that is not connected with a U.S. trade or business is excluded from income if it is from:
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Deposits (including certificates of deposit) with persons in the banking business,
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Deposits or withdrawable accounts with mutual savings banks, cooperative banks, credit unions, domestic building and loan associations, and other savings institutions chartered and supervised as savings and loan or similar associations under federal or state law (if the interest paid or credited can be deducted by the association), and
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Amounts held by an insurance company under an agreement to pay interest on them.
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Not in registered form (bearer obligations) that are sold only to foreign investors, and the interest on which is payable only outside the United States and its possessions, and that has on its face a statement that any U.S. person holding the obligation will be subject to limitations under the U.S. income tax laws,
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In registered form that are targeted to foreign markets and the interest on which is paid through financial institutions outside the United States, or
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In registered form that are not targeted to foreign markets, if you furnished the payer of the interest (or the withholding agent) a statement that you are not a U.S. person. You should have made this statement on a Form W-8BEN or on a substitute form similar to Form W-8BEN. In either case, the statement should have been signed under penalties of perjury, should have certified that you are not a U.S. citizen or resident, and should have included your name and address.
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Interest you receive on an obligation issued by a corporation of which you own, directly or indirectly, 10% or more of the total voting power of all classes of voting stock.
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Interest you receive on an obligation issued by a partnership of which you own, directly or indirectly, 10% or more of the capital or profits interests.
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Contingent interest.
For the definition of 10% shareholder, see Regulations section 1.871-14(g).
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Interest that is determined by reference to:
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Any receipts, sales, or other cash flow of the debtor or related person,
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Income or profits of the debtor or related person,
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Any change in value of any property of the debtor or a related person, or
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Any dividend, partnership distributions, or similar payments made by the debtor or a related person.
For exceptions, see Internal Revenue Code section 871(h)(4)(C).
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Any other type of contingent interest that is identified by the Secretary of the Treasury in regulations.
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Members of a family, including only brothers, sisters, half-brothers, half-sisters, spouse, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.).
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Any person who is a party to any arrangement undertaken for the purpose of avoiding the contingent interest rules.
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Certain corporations, partnerships, and other entities. For details, see Nondeductible Loss in chapter 2 of Publication 544.
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On or before April 7, 1993, or
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After April 7, 1993, pursuant to a written binding contract in effect on that date and at all times thereafter before that debt was issued.
The following dividend income is exempt from the 30% tax.
If you were paid by a foreign employer, your U.S. source income may be exempt from U.S. tax, but only if you meet one of the situations discussed next.
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You perform personal services as an employee of or under a contract with a nonresident alien individual, foreign partnership, or foreign corporation, not engaged in a trade or business in the United States; or you work for an office or place of business maintained in a foreign country or possession of the United States by a U.S. corporation, a U.S. partnership, or a U.S. citizen or resident.
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You perform these services while you are a nonresident alien temporarily present in the United States for a period or periods of not more than a total of 90 days during the tax year.
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Your pay for these services is not more than $3,000.
Example 1.
During 2011, Henry Smythe, a nonresident alien from a nontreaty country, worked for an overseas office of a U.S. partnership. Henry, who uses the calendar year as his tax year, was temporarily present in the United States for 60 days during 2011 performing personal services for the overseas office of the partnership. That office paid him a total gross salary of $2,800 for those services. During 2011, he was not engaged in a trade or business in the United States. The salary is not considered U.S. source income and is exempt from U.S. tax.
Example 2.
The facts are the same as in Example 1, except that Henry's total gross salary for the services performed in the United States during 2011 was $4,500. He received $2,875 in 2011, and $1,625 in 2012. During 2011, he was engaged in a trade or business in the United States because the compensation for his personal services in the United States was more than $3,000. Henry's salary is U.S. source income and is taxed under the rules in chapter 4.
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A nonresident alien individual, foreign partnership, or foreign corporation, or
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An office or place of business maintained in a foreign country or in a U.S. possession by a U.S. corporation, a U.S. partnership, or an individual who is a U.S. citizen or resident.
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You receive the annuity only because:
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You performed personal services outside the United States while you were a nonresident alien, or
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You performed personal services inside the United States while you were a nonresident alien and you met the three conditions, described earlier, under Employees of foreign persons, organizations, or offices .
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At the time the first amount is paid as an annuity under the plan (or by the trust), 90% or more of the employees for whom contributions or benefits are provided under the annuity plan (or under the plan of which the trust is a part) are U.S. citizens or residents.
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You are a resident of a country that gives a substantially equal exclusion to U.S. citizens and residents, or
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You are a resident of a beneficiary developing country under Title V of the Trade Act of 1974.
If you sold your main home, you may be able to exclude up to $250,000 of the gain on the sale of your home. If you are married and file a joint return, you may be able to exclude up to $500,000. For information on the requirements for this exclusion, see Publication 523.
If you are a candidate for a degree, you may be able to exclude from your income part or all of the amounts you receive as a qualified scholarship. The rules discussed here apply to both resident and nonresident aliens.
A scholarship or fellowship is excludable from income only if:
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You are a candidate for a degree at an eligible educational institution, and
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You use the scholarship or fellowship to pay qualified education expenses.
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Attend a primary or secondary school or are pursuing a degree at a college or university, or
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Attend an accredited educational institution that is authorized to provide:
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A program that is acceptable for full credit toward a bachelor's or higher degree, or
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A program of training to prepare students for gainful employment in a recognized occupation.
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Tuition and fees required to enroll at or attend an eligible educational institution, and
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Course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. These items must be required of all students in your course of instruction.
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Room and board,
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Travel,
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Research,
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Clerical help, or
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Equipment and other expenses that are not required for enrollment in or attendance at an eligible educational institution.
Example.
On January 7, Maria Gomez is notified of a scholarship of $2,500 for the spring semester. As a condition for receiving the scholarship, Maria must serve as a part-time teaching assistant. Of the $2,500 scholarship, $1,000 represents payment for her services. Assuming that Maria meets all other conditions, she can exclude no more than $1,500 from income as a qualified scholarship.
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