Dual-Status Tax Returns and Treaty Tax Rates
I get questions. Here is an answer for a Sunday afternoon:
I’ve scoured the Internet for an answer to this question, and I can’t find it anywhere. Since you’re the go-to guru on the subject, I hope you can help.
Background info:
I renounced my U.S. citizenship on [Month] 31, 2014 and I have received my CLN. I’m a Canadian citizen and have lived in Canada almost my entire life.
As I understand it, I’m supposed to file form 1040NR for the entire 2014 tax year, and file form 1040 for Jan 1 to July 29, 2014, plus form 8854 and the FBAR. That’s fine. Well, not fine, but I’ve accepted it.
Question:
What do I write in Item L of Form 1040NR, Schedule OI (the section about claiming exemption from income tax under a U.S. income tax treaty with a foreign country)? My Form 1040NR is a sea of zeros. Am I supposed to write anything in Item L, or do I just leave it blank?
Thank you!
Short answer
Leave Item L blank.Long answer: who cares about Item L?
Item L applies to a nonresident alien individual who has U.S. source income that is taxable in the United States under the normal tax rules. Such a person has two choices:- pay the U.S. tax and claim a foreign tax credit in his or her home country; or
- use the terms of an income tax treaty to reduce or eliminate the U.S. tax on that U.S. source income.
Dividends are a prime example of this. The default tax rate imposed by the United States is 30%. Income tax treaties reduce this. The Canada/USA income tax treaty, for instance, reduces the tax rate to 15%. Look at Article X, Section 2(b).
If you are using a treaty to reduce the U.S. tax rate on your U.S. income, you have to let the IRS know. You do that by (among other things) filling in this information on Form 1040NR, Schedule OI, Item L. The other way you tell the IRS is by putting the income item in the correct column on Schedule NEC, and (sometimes) by attaching Form 8833 to your Form 1040NR. More information is in the Instructions to Form 1040NR for when you are supposed to attach Form 8833.
Long answer: you (probably) don’t care about Item L
None of this matters to you if you have no U.S. source income. In fact, this is sort of the point of expatriating. Very, very few people would expatriate if the tax reasons did not exist. You do not see British citizens renouncing their passports. Or Canadians, for that matter. Citizenship-based taxation is the only reason that expatriation is a Thing.
You have expatriated so you are out of reach of citizenship-based taxation.
If you have no investments in the United States, you will completely eliminate your U.S. tax paperwork requirements in the United States. This is true for the year of expatriation (from your expatriation date in [Month Obscured], 2014 until December 31, 2014). It is also true for future years.
As a result, if you have no income from U.S. sources for the after-expatriation time period (from now until eternity) you can completely ignore Item L.
Great article. Thanks for the info, you have made it easy to understand. BTW, if anyone needs to fill out IRS form 1040nr, I found a blank form here http://goo.gl/qLvit1. This site also has some tutorials on how to fill it out and a few related blank tax forms.
Jasmine,
I can’t tell you what to do — that amounts to legal advice, and that can only be done after getting all the facts and thinking things through.
One option is indeed to file an amended return as you describe. Another option is to do nothing. What are the implications of these two choices _for you_? I do not know, because I do not know anything about you or your situation.
Phil, I did not understand your answer.
Do not you think I can file 1040 X amended return for this mistake?
I found this on the internet : ” You will need to file an amended return on Form 1040X and attach a Form 1040NR as well as the relevant pages of the 1040 you originally filed.”
Thank you,
Jasmine
Check out the instructions to Schedule NEC on Form 1040NR for how Social Security will be taxed. But also see if there is a tax treaty that will help eliminate US tax. Form 2555 won’t help you because this is not earned income.
Hello,
I renounced in early 2014 and am now trying to complete all filing requirements. The information I’ve included on the 1040 reflects my income up to the day before renunciation. I’ve used 2555 (with the 1040) to reduce my U.S. tax liability to zero. I plan to file 1040NR for the rest of 2014. I received just under $3,400 in U.S. Social Security benefits in 2014. Can I use a 2555 with 1040NR as well, so as not to have to pay tax on the S.S. benefits? Thanks for your help.
Woo boy. 1040 vs 1040NR. That could be a situation of no consequence or could be something to fix. You can fix stuff like this (using the wrong form) but you want to think about it before doing so. Look before you leap, etc.
You will never receive a letter from the IRS saying you are finished. So the fact that you did not receive a note is normal.
For filing this year — a 1040NR — again this is a look before you leap situation. You are trying to fix a prior error. Is this the way to do so? Probably not but think it through first.
Hi Phil,
Thank you for this post. I started worring about what did I do on the last year return.
I filed 1040 instead of 1040 NR! Other than this I did everything right…
I was a green card holder and I filed 1-407 at the consulate and expatriated on September 2013 because I was living in my country.
In 2014 tax year, I filed 1040 form with 2555 and attached original signed 8854 form to my 2013 Tax return. I send it with FedEx to the address on IRS web site for Private Delivery Services in Austin.
I also send a copy of 8854 form to Philedelphia address(without street name) of IRS with FedEx ( PDS address on IRS web). I have saved online FedEx confirmation which see that left at the “dock” and “signed by Nieto” …Is this enough proof ? I tried to reach to IRS to learn that my file is reached and no problem, but no luck..
My gross total income was less then ten thousand dollars and do not owe any tax. Also last 5 years I had filed all my tax returns on time.
My big concern is about “Did I make a big mistake filing 1040 instead of 1040NR last year? And how can I correct it?
My Questions are;
1- I did not hear a note or mail from IRS regarding that I am done and ok regarding Tax liabilities. I do not know will I file a 1040NR form this year and let them know one more time just to be safe.. Because last year I did not file NR form as I am NR at the end of the year…
2- If I send a 1040NR form this year is it good or not necessary? Also will I send a copy of 8854 form again which filed with 2013 tax return?
Please would you inform me about what is the best thing to do for me this year?
Thank you so much for your help and greatly appreciated.
Best Regards,
Jasmine