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U.S. Tax Guide for Aliens, Publication 519 (2007)

3. Exclusions From Gross Income

Introduction

Topics - This chapter discusses:

Useful Items - You may want to see:

Publication

Resident Aliens

Foreign Earned Income and Housing Amount

Foreign country

Nonresident Aliens

Interest Income

Government obligations

Portfolio interest

Contingent interest

Exception for existing debt

Dividend Income

Certain dividends paid by foreign corporations

Services Performed for Foreign Employer

Employees of foreign persons, organizations, or offices

Example —

Example —

Crew members

Students and exchange visitors

Foreign employer

Income from certain annuities

Income affected by treaties

Gambling Winnings From Dog or Horse Racing

Gain From the Sale of Your Main Home

Scholarships and Fellowship Grants

Candidate for a degree

Eligible educational institution

Qualified education expenses

Expenses that do not qualify

Amounts used to pay expenses that do not qualify

Payment for services

Example —

U.S. Tax Guide for Aliens, Publication 519 (2007)

3. Exclusions From Gross Income

Introduction

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.

Topics - This chapter discusses:

• Nontaxable interest,
• Nontaxable dividends,
• Certain compensation paid by a foreign employer,
• Gain from sale of home, and
• Scholarships and fellowship grants.

Useful Items - You may want to see:

Publication

• 54 Tax Guide for U.S. Citizens and Resident Aliens Abroad
• 523 Selling Your Home

See chapter 12 for information about getting these publications.

Resident Aliens

Resident aliens may be able to exclude the following items from their gross income.

Foreign Earned Income and Housing Amount

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 $85,700 in 2007. 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.

Foreign country

The term “foreign country” means any territory under the sovereignty of a government other than that of the United States. The term also includes territorial waters of the foreign country, the airspace over the foreign country, and the seabed and subsoil of submarine areas adjacent to the territorial waters of the foreign country.

Nonresident Aliens

Nonresident aliens can exclude the following items from their gross income.

Interest Income

U.S. source interest income that is not connected with a U.S. trade or business is excluded from income if it is from:

• Deposits (including certificates of deposit) with persons in the banking business,
• 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
• Amounts held by an insurance company under an agreement to pay interest on them.

Government obligations

Interest on obligations of a state or political subdivision, the District of Columbia, or a U.S. possession, generally is not included in income. However, interest on certain private activity bonds, arbitrage bonds, and certain bonds not in registered form is included in income.

Portfolio interest

U.S. source interest income that is not connected with a U.S. trade or business and that is portfolio interest on obligations issued after July 18, 1984, is excluded from income. Portfolio interest is interest (including original issue discount) that is paid on obligations:

• 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,
• In registered form that are targeted to foreign markets and the interest on which is paid through financial institutions outside the United States, or
• 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.

• 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.
• 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.
• Contingent interest.

For the definition of 10% shareholder, see Regulations section 1.871-14(g).

Contingent interest

Portfolio interest does not include contingent interest. Contingent interest is either of the following:

1. Interest that is determined by reference to:
   1. Any receipts, sales, or other cash flow of the debtor or related person,
   2. Income or profits of the debtor or related person,
   3. Any change in value of any property of the debtor or a related person, or
   4. Any dividend, partnership distributions, or similar payments made by the debtor or a related person.
2. Any other type of contingent interest that is identified by the Secretary of the Treasury in regulations.

Exception for existing debt

Contingent interest does not include interest paid or accrued on any debt with a fixed term that was issued:

• On or before April 7, 1993, or
• 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.

Dividend Income

The following dividend income is exempt from the 30% tax.

Certain dividends paid by foreign corporations

There is no 30% tax on U.S. source dividends you receive from a foreign corporation. See Second exception under Dividends in chapter 2 for how to figure the amount of excludable dividends. Certain interest-related dividends. There is no 30% tax on certain interest-related dividends from sources within the United States that you receive from a mutual fund or other regulated investment company. The mutual fund will designate in writing which dividends are interest-related dividends. Certain short-term capital gain dividends. There may not be any 30% tax on certain short-term capital gain dividends from sources within the United States that you receive from a mutual fund or other regulated investment company. The mutual fund will designate in writing which dividends are short-term capital gain dividends. This tax relief will not apply to you if you are present in the United States for 183 days or more during your tax year.

Services Performed for Foreign Employer

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.

Employees of foreign persons, organizations, or offices

Income for personal services performed in the United States as a nonresident alien is not considered to be from U.S. sources and is tax exempt if you meet all three of the following conditions.

1. 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.
2. 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.
3. Your pay for these services is not more than $3,000.

Crew members

Compensation for services performed by a nonresident alien in connection with the individual's temporary presence in the United States as a regular crew member of a foreign vessel engaged in transportation between the United States and a foreign country or U.S. possession is not U.S. source income and is exempt from U.S. tax.

Students and exchange visitors

Nonresident alien students and exchange visitors present in the United States under “F,” “J,” or “Q” visas can exclude from gross income pay received from a foreign employer. This group includes bona fide students, scholars, trainees, teachers, professors, research assistants, specialists, or leaders in a field of specialized knowledge or skill, or persons of similar description. It also includes the alien's spouse and minor children if they come with the alien or come later to join the alien. A nonresident alien temporarily present in the United States under a “J” visa includes an alien individual entering the United States as an exchange visitor under the Mutual Educational and Cultural Exchange Act of 1961.

Foreign employer

A foreign employer is:

• A nonresident alien individual, foreign partnership, or foreign corporation, or
• 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.

Income from certain annuities

Do not include in income any annuity received under a qualified annuity plan or from a qualified trust exempt from U.S. income tax if you meet both of the following conditions.

1. You receive the annuity only because:
   1. You performed personal services outside the United States while you were a nonresident alien, or
   2. 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.
2. 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.

• You are a resident of a country that gives a substantially equal exclusion to U.S. citizens and residents, or
• You are a resident of a beneficiary developing country under the Trade Act of 1974.

Income affected by treaties

Income of any kind that is exempt from U.S. tax under a treaty to which the United States is a party is excluded from your gross income. Income on which the tax is only limited by treaty, however, is included in gross income. See chapter 9.

Gambling Winnings From Dog or Horse Racing

You can exclude from your gross income winnings from legal wagers initiated outside the United States in a parimutuel pool with respect to a live horse or dog race in the United States.

Gain From the Sale of Your Main Home

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.

Scholarships and Fellowship Grants

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:

1. You are a candidate for a degree at an eligible educational institution, and
2. You use the scholarship or fellowship to pay qualified education expenses.

Candidate for a degree

You are a candidate for a degree if you:

1. Attend a primary or secondary school or are pursuing a degree at a college or university, or
2. Attend an accredited educational institution that is authorized to provide:
   1. A program that is acceptable for full credit toward a bachelor's or higher degree, or
   2. A program of training to prepare students for gainful employment in a recognized occupation.

Eligible educational institution

An eligible educational institution is one that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities.

Qualified education expenses

These are expenses for:

• Tuition and fees required to enroll at or attend an eligible educational institution, and
• 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.

Expenses that do not qualify

Qualified education expenses do not include the cost of:

• Room and board,
• Travel,
• Research,
• Clerical help, or
• Equipment and other expenses that are not required for enrollment in or attendance at an eligible educational institution.

Amounts used to pay expenses that do not qualify

A scholarship amount used to pay any expense that does not qualify is taxable, even if the expense is a fee that must be paid to the institution as a condition of enrollment or attendance.

Payment for services

You cannot exclude from income the portion of any scholarship, fellowship, or tuition reduction that represents payment for teaching, research, or other services. This is true even if all candidates for a degree are required to perform the services as a condition for receiving the degree.