Welcome to all of you, and thank you so much for joining today's webinar. Before we move along with our session, let me make sure you're in the right place. Today's webinar is Preparation of Form 1040-NR, U.S.-Nonresident Alien Income Tax Return. This webinar is scheduled for approximately 100 minutes. So let me go ahead and introduce our fabulous speakers for today.

First, we have James Kwong. James is a Supervisory Internal Revenue Agent with the Outbound Practice Network in the LB&I Exchange Withholding an International Individual Compliance Practice Area. He advises develops technical content and training, facilitates workshops and network events, and develops LB&I campaigns in the area of inbound activities of nonresident alien individuals. Areas include issues related to effectively connected income, determination of U.S.- trade or business, taxation of compensation from employment, income exempt under a tax treaty, and taxation of foreign athletes and entertainers. His speaking engagements, which also include content development, consists of virtual and face-to-face presentations, such as the IRS Nationwide Tax Forum, so you may have seen them before, webinars on emerging issues, CPE classes on technical topics, and network events on technical and procedural issues related to LB&I campaigns. Prior to joining the IRS, James worked in public accounting as a Senior Tax Manager, specializing in tax planning and compliance for family-owned businesses and high net worth individuals. James received his Master of Science in Taxation from DePaul University, his Bachelor of Science in Accounting from the University of Illinois at Chicago and is a licensed CPA. Next is Andy Daxon. Andy is a Senior Revenue Agent with a Withholding Practice Network in the LB&I, Withholding and International Individual Compliance Practice Area. Andy provides assistance to examiners, training, facilitates workshops and network events, and develops LB&I campaigns with respect to Chapter 3 withholding on and the taxation of Fixed, Determinable, Annual, Periodical Income or FDAP and Effectively Connected Income, compensation from employment, foreign athletes and entertainers, and income exempt under a tax treaty received by nonresident aliens. Andy has worked for the IRS for 35 years, which includes 12 years in the international practice area, 5 years in the International Individual Compliance Area of LB&I Business Operating Division, 5 years in SBSE International, and 13 years in regular exam. So, folks, we've got a wealth of knowledge on here with us today. So, right now, I'm going to turn it over to Andy to begin the presentation.

Andy, the mic is all yours. Thank you, Evette. Hello, everyone, and thank you for attending today's webinar. During this webinar, James Kwong, and myself, Andy Daxon, will provide a brief overview of the taxation of nonresident aliens. We'll review the Form 1040-NR in detail with explanations for certain line items, and we'll point out some common errors and issues. Since the 2023 Form 1040-NR is not available yet, we will highlight some relevant changes made to the 2022 form that will be applicable to the 2023 form. And, finally, we will conclude with a comprehensive example of a properly completed Form 1040-NR. As you see here, the agenda for today's webinar includes, first, identifying where to report various types of income and expenses on a Form 1040-NR, and identifying the common types and tax treatment of effectively connected income, which is ECI for short, and non-effectively connected income, which is non-ECI. So, here we have some common acronyms that you'll see on some of the slides today and may be used by James and myself when we speak today. A few of these include: ECI, which is Effectively Connected Income; FDAP, which is Fixed, Determinable, Annual, or Periodical; NEC, which is Non-Effectively Connected Income; NRA, which is Nonresident Alien; and finally USTB, which is U.S.-Trade or Business. Now, for a quick overview of the Taxation of Nonresident Alien. As most of you know, U.S.-citizens and resident aliens are taxed on their worldwide income regardless of where it is earned or where it's sourced. However, nonresident aliens are taxed differently. They are taxed on a territorial system only on U.S.--sourced income, an income that is effectively connected with a U.S.-trade or business. So, it is important to know the source rules and these rules determine whether income is sourced within or without the U.S.-as this is a major determining factor in income, which income is taxed or not to a nonresident alien. The sourcing rules can be found in Section 861 through 865 and the related regulations. So, for example, income from personal services is generally sourced to the location to where the services are actually performed.

Interest income is sourced to the residence to the payer. Dividends are sourced based upon whether the corporation is a U.S.-or foreign corp. Rental income is sourced based upon the location of the property and capital gains on personal property are sourced based upon the residence to the seller.

Again, there are generally two categories of income for nonresident aliens that are subject to U.S.-tax. The first being income that is Fixed, Determinable, Annual or Periodical, which we referred to earlier as FDAP income, that is non-effectively connected with the U.S.-trade or business. The second category's income that is effectively connected with the U.S.-trade or business, otherwise known as effectively connected income, or ECI. The statutory authority to tax these types of income can be found in Section 871(a) for non-effectively connected FDAP income and Section 871(b) for effectively connected income. Under Section 871(a), U.S.--sourced non-effectively connected FDAP income is taxed on a gross basis, meaning no deductions are allowed, and it is taxed at a flat statutory rate of 30% or at a lower rate or exempt from tax pursuant to an applicable income tax treaty. This generally means that passive income such as interest, dividend, rental, royalty, and gambling income to name a few are taxed in this manner. For effectively connected income, nonresident aliens are taxed under Section 871(b) at graduated tax rates on their net taxable income just like a U.S.-citizen or resident alien. Effectively connected income may include wages paid as an employee, while working in the U.S.-, income from a U.S.-sole proprietorship, flow-through income from a partnership operating a U.S.-trade or business, etc. Being taxed on their net taxable income means that deductions can be taken against the gross income as long as they are properly allocated and apportioned and a true and accurate tax return is filed timely. In contrast with the taxation of non-effectively connected income that we just discussed, in which that income is taxed on a gross basis, meaning no deductions are allowed.

So there are two key concepts that must be satisfied in order to have a tax liability under Section 871(b). First, a nonresident alien must be engaged in a U.S.-trade or business; and second, the income earned must be effectively connected with a trade or business. The term U.S.- trade or business is not fully defined in the code or in the regulation. As a result, the term is largely defined through case law. In general, the threshold for a U.S.-trade or business is heavily based on the facts and circumstances of the case. The courts will consider whether the activities are profit-seeking in nature and the activities are sufficiently regular, substantial, and continuous. Activities that are isolated, sporadic, or incidental do not give rise to a U.S.- trade or business. And just like a reduction or elimination of the flat 30% statutory tax on non-effectively connected FDAP income of a nonresident alien, income tax treaties may limit the U.S.-taxation of effectively connected income. Although, we are separating FDAP and ECI into two categories, it is important to note that FDAP may or may not be treated as ECI or effectively connected income. It's important to distinguish FDAP as either ECI or non-ECI, because as stated previously, FDAP that is not considered ECI is taxed differently than FDAP that is considered ECI and appears in different sections on the Form 1040-NR, which we will cover later. So, FDAP is considered ECI that passes either the Asset Use Test or the Business Activities Test. Under the Asset Use Test, the FDAP income would be considered ECI if the income is derived from assets used or held for use in a conduct of a nonresident alien's U.S.-trade or business. Under the Business Activities Test, the FDAP income would be considered ECI if the activities of the nonresident alien's U.S.-trade or business are a material factor in the realization of the income. So, again, FDAP income can be considered ECI if it meets either of these two tests: If it does, it will be taxed at graduated rates on a net basis; if it does not, it will be considered non-effectively connected income and taxed at the 30% statutory rate on the gross base. Okay, so that was a quick refresher on the taxation of nonresident aliens, which will help with understanding the rest of this webinar today. Now, let's discuss the filing requirements of the Form 1040-NR. So nonresident aliens must file a return if they were engaged in a U.S.-trade or business, even if the business had no income, produced no U.S.-sourced income, or only produced income that is exempt from U.S.- tax under an applicable income tax treaty or a section of the code. So, basically, if nonresident aliens are engaged in a U.S.-trade or business, whether or not there is any income to report, they have to file a Form 1040-NR. Second, they also have to file a return if they were not engaged in a U.S.-trade or business, but received U.S.-sourced non-effectively connected income reportable on Schedule NEC, and the correct amount of tax was not withheld from the income by the withholding agent. Third, if a nonresident alien meets one or two, which is first two I discussed, but is deceased at the end of the year, a representative or agent responsible for these nonresident aliens needs to file returns for the period from January 1st through the day of death. If there are estates or trusts of nonresident aliens described above, the fiduciaries of these estates or trusts would have to file returns as well. And, finally, for those nonresident aliens who want to claim the benefit of any deduction or exemption and/or want to claim a refund due to being over withheld upon, would want the file returns and claim the refund. So, here, we see the due dates for the Form 1040-NR. A timely filed return for a nonresident alien is generally due on June 15th following the close of the tax year. However, it's important to note that if the nonresident alien received wages as an employee that is subject to Chapter 24 withholding, the Form 1040-NR is due on April 15th, same as the Form 1040. And just like a U.S.-person filing a Form 1040, a nonresident alien may extend their time to file by filing a Form 4868 for a 6-month automatic extension. Okay, now, we're going to go move over and look at the Form 1040-NR itself starting with Page 1. However, before we do that, I think it's time for our first polling question. Is that correct, Evette? That is correct. Thank you so very much. Okay, everybody, I hope you've been listening and I hope you are ready to go for this first polling question. All right. Here we go.

So the first polling question is this, we're asking you to select the answer that best completes the following statement. If an NRA is engaged in a U.S.-trade or business, their FDAP income; A, is always considered ECI; B, may be considered ECI; C, is always taxed at a flat 30% rate; or D, is always considered U.S.-source. Okay, folks, Andy just talked about this. Take a moment, click the radio button that best answers the question. I'll repeat the question just to give you a few more minutes, moments to make your selection. Okay, select the answer that best completes the following statement. If a nonresident alien is engaged in a U.S.-trade or business, their FDAP income: A, is always considered ECI; B, may be considered ECI; or C, is always taxed at a flat 30% rate; or is it D, is always considered U.S.-source. Okay, folks, I know he gave us some great information. We're going to stop the polling now and share the correct answer on the next slide. Okay, folks, the correct response is, B, may be considered ECI. Now, let's give it a moment and see what percentage of you responded correctly. Okay, it looks like we have a response rate of 33%. All right. Okay, we're going to need some help with this one, Andy. Can you please explain to the audience and everyone why the correct response is B? Sure, Evette. So if you recall earlier, I mentioned that FDAP income is generally considered non-effectively connected income, but it can be considered effectively connected income if it meets either of the two tests, the Asset Use Test or the Business Activities Test. And if it meets either of these two tests, the normally non-effectively connected FDAP income converts to being effectively connected income. So I hope that explains that, yes, generally it's non-effectively connected income, FDAP income is considered non-effectively connected income, but if it meets either of the two tests, then it's considered effectively connected income. Thank you, Andy. This just tells us that we're all in the right place and we're ready to learn from you and James. So thank you so very much. Go for it.

I think you're going to go ahead and continue. Thanks, Evette. Okay, now on to Form 1040-NR and let's start with Page 1, focusing on filing status and dependents section. Here is a screenshot of the two sections, which include the name and the address information, the filing status section, and the dependents section. A couple of more things to note for these sections. There are currently five filing statuses available for the Form 1040-NR. Three are for nonresident aliens, including single, married filing separately, and qualifying surviving spouse. Then there's two more, one for estates and one for trust. The next section on the form is titled Dependents. This section is used for dependent information in order to claim certain tax credits that are available to certain nonresident aliens, which we are going to cover later in this webinar. Moving down Page 1 of the Form 1040-NR, we get to this section titled, Income Effectively Connected with a U.S.- Trade or Business. This is the section where nonresident aliens would include all items of effectively connected income and deduction related to ECI, which will also include items from Schedule 1, which is titled Additional Income and Adjustments to Income. And as you can see, it also includes the itemized deduction and qualified business income deduction line to get to taxable income. There was a change with this section that was effective for the 2022 form and continues with the 2023 form. That is that line 1 was expanded into the new lines 1a through 1z.

The additional lines on line 1 now itemize items of income that may not be included on a Form W-2, such as household employee wages, taxable dependent care benefits, and tip income. Another change in note includes some amount that in prior years were reported on the Form 1040-NR, are now reported on Schedule 1 of the Form 1040 like scholarships and fellowship grants, and pension and annuity income from a non-qualified deferred compensation plan. Okay, let's spend some time on these light items, starting with line 1a, which is total amount from Form W-2 box 1. So under the sourcing rules of Section 864(b)(1), the term trade or business in the U.S.-includes the performance of personal services within the U.S.-Therefore, any U.S.--sourced wages, salaries, or tips paid for these services are included on a Form W-2, would be considered effectively connected income, and included in this section on line 1a of the return. So you would want to make sure that this line equals the total of all amounts reported in box 1 for all Forms W-2 issued to a specific taxpayer. Any amounts for household employee wages, tip income, Medicaid, waiver payments, et cetera., that are not included on Form W-2, would be reported on their respective line items 1b through 1h. Also note that these amounts on line 1a should not include amounts exempted under a tax treaty, since exempted amounts are not included in a Form W-2. There are certain tax treaty articles such as the dependent personal services article of a treaty that exempts wages earned from employment if certain rules are met. So in these cases, any amount that are exempt from income and properly reported on a Form 1042-S and not on the Form W-2 should be included on line 1k, the total income exempt by a treaty line. It should also be reflected on item L of the Schedule OI, which we'll go over later in this webinar. Also note that the amount on line 1k should not be included in the total effectively connected income amount on line 9 since they are not taxable.

So, generally, U.S.-sourced wages exempt from tax due to a tax exemption are reported on the Form 1042-S with the exemption code 04. Any taxable U.S.-sourced wages paid are reported on Form W-2.

So, again, it's important to make sure that line 1a totals all box 1 amounts of all Forms W-2 and line 1k with total all amounts exempt from tax reported on the Form 1042-S. In order for a nonresident alien to claim an exemption of income tax withholding due to an income tax treaty benefit and receive a Form 1042-S, the nonresident alien would have to provide the withholding agent with proper documentation. In the case of compensation for services, a Form 8233 should be provided. The Form W-8BEN is provided by individuals for all other payments, such as a lower treaty rate for taxable scholarships. It is also important to note that if a Form 8233 was not provided to the employer, even though a nonresident alien did qualify for a tax treaty benefit, it does not prevent the nonresident alien from claiming the exemption of wages on the Form 1040-NR.

Since the Form 8233 was not provided to the employer, this employer would have withheld tax on the wages and issued a Form W-2. In this case, the nonresident alien would still reduce wages on line 1a of the return, report the exempt amount on line 1k, and complete item L on Schedule OI. In addition, the nonresident alien would then have to attach a statement to the return, containing all information that otherwise would have been required on the Form 8233 to explain his or her eligibility for the exemption. So, again, if a nonresident alien does not provide the employer with a Form 8233 for a withholding exemption, it does not prevent the nonresident alien from claiming the exemption from tax on the Form 1040-NR as long as they meet the requirements of the treaty and attach the proper information to the return. The instructions for the Form 1040-NR actually have some good examples going over these scenarios. We're going to review two of them now. So here's example 1 from the instruction. Jean is a citizen of France who came to the U.S.- on an F-1 visa in 2019 for the primary purpose of studying at an accredited university. In 2022, she completed a paid summer internship with a U.S.-company as part of her optional practical training. She earned $8,000 from this internship. Under Article 21, which is the student and trainees article of the income tax treaty with France, she can exempt up to $5,000 of personal service income from U.S.-tax. She submitted a valid Form 8233 to her employer to claim an exemption from withholding for the portion of her wages that is exempt under the treaty. She received a Form 1042-S from her employer showing the $5,000 exempt amount, and a Form W-2 showing $3,000 of wages in box 1. On her 2022 Form 1040-NR, she should report $3,000 on line 1a, include $5,000 on line 1k, and complete item L on Schedule OI. She should attach both the Form W-2 and the Form 1042-S to her return. Now on to example 2. The facts are the same as the previous example, except that Jean did not realize she was eligible for the $5,000 exemption when she began to work, and did not submit a Form 8233 to her employer, claiming the exemption amount. All of Jean's wages from the internship were withheld upon and reported in box 1 on her Form W-2. On her Form 1040-NR, she should report $3,000 on line 1a, includes $5,000 on line 1k, and complete item L on Schedule OI. She should attach the Form W-2 to her Form 1040-NR. She should also attach a statement to her Form 1040-NR, containing all the information that otherwise would be required on a Form 8233 to justify the exemption claimed. Okay, moving on to the next line items, which would be lines 2b and 3b, which are interest and dividends, respectively. Now, normally we associate this type of income as the passive type, and as non-effectively connected FDAP. But as stated before, items of U.S.-sourced FDAP income, such as interest, dividends, rents, royalties, may be considered effectively connected income if they pass either the Asset Use Test or the Business Activities Test. In these instances, any taxable interest or dividends earned that is considered effectively connected income would be reported on these lines. Any taxable interest or dividends that are not considered effectively connected income would be reported on Schedule NEC as we'll discuss later. Just like interest and dividends, if any U.S.-sourced capital gains pass either the asset use or business activities test, then the amounts will be considered effectively connected income and reported on line 7 on Page 1 of the Form 1040-NR. Schedule D and Form 8949 may also have to be completed when reporting capital gains that are effectively connected income. Now, moving on to lines 4a and 4b, which are the IRA distributions. IRAs or Individual Retirement Accounts, on this line includes traditional IRAs, Roth IRAs, simplified employee pension, or SEP IRAs, and a savings incentive match plan for employees or a SIMPLE IRAs. The total distribution amounts, which are reported on line 4a of the Form 1040-NR, would come from Form 1099-R box 1, which is the gross distribution box amount, and taxable amounts, which are reported on line 4b of the Form 1040-NR, would come from the Form 1099-R box 2, which is the taxable amount box. Next, we have lines 5a and 5b, which is pensions and annuities. The total distributions from pensions and annuities reported on line 5a are coming from either Form 1042-S box 2, which is the gross income box, and they would have income code 15 for pensions and annuities, or Form 1099-R box 1, which is the gross distribution box. And the taxable portion of the distributions are reported on line 5b.

Pension and annuity payments include distributions from 401(k)s, 403(b)s, and governmental 457(b)

plans. Distributions that are considered effectively connected income would be included in this line. Any amounts not considered effectively connected income would be subject to the 30% tax and withholding unless reduced or eliminated by treaty and reported on Schedule NEC. Also be aware that some distributions may include non-taxable amounts or amounts that are not considered effectively connected income, such as earnings or foreign source distributions, which would be distributions allocable to work performed outside of the U.S.-and therefore not taxable. So, if this is the case, allocations will be necessary. Okay, so we have now covered lines 1a through line 7 of the page 1 of the 1040-NR. Line 8 collects the total amounts from Schedule 1, which is the additional income. However, before we look at Schedule 1, I think it's time for our second polling question. Yes, Andy, you are correct. Okay, audience, here is our second polling question, which of the following statuses are available to nonresident aliens for 2022? Is it A, single resident of Canada or Mexico, single and married filing jointly? B, single, married filing separate, qualifying surviving spouse, estate and trust? C, single, married filing jointly, qualifying surviving spouse, estate and trust? Or D, single, married filing separately and qualifying surviving spouse? All right, folks, take a moment and click on the radio button that best answers the question. I'm going to give you a few more seconds to make your selection. Think about what Andy just talked to us about and choose the best response, which is the following statuses are available to nonresident aliens for 2022? Is it A, B, C, or D? Okay. All right, folks, let's go ahead and stop the polling now. And let's look at the correct answer on the next slide. And the correct response, folks, is B, single, married filing separately, qualifying surviving spouse, estate and trust. Let's see what percentage of you responded correctly. Okay, Andy, it looks like we need some help here as well. We have a 50% correct response rate. Can you please tell everyone why the correct response is B? Yes, sure, Evette. So for the years 2017 and prior, there were six filing statuses. However, starting for the 2018 and going forward, they were reduced to five. Three for nonresident aliens that were normally used to, which are single, married filing separate, and qualifying surviving spouse, and then also the estate and trust. So, again, for the years 2018 and subsequent, there are the five filing statuses that are on the Form 1040-NR, which again are in item B there, which are the single, married filing separate, qualifying surviving spouse, estate and trust. Awesome. See, again, that's what we're all here, Andy. Thank you so very much. I'm going to turn it back over to you to continue. Okay, thank you, Evette. So, here's a snapshot of Schedule 1. As stated previously, the Form 1040-NR uses Schedule 1 for the same purposes that an individual filing Form 1040 does, that is to report other income and adjustments. Here we have a snapshot for the additional income section, which will total all additional income amounts that will flow back to line 8 on the Form 1040-NR. As you can see, this section will detail additional income items such as taxable refunds, alimony received, Schedule C income, income from other gains, rental activity, flow-through activity, farm income, unemployment compensation, and other types of income, which would include gambling income and any scholarship or fellowship grants not reported on a Form W-2. So let's talk about some of these line items in a little more detail. First, line 3 of Schedule 1 will contain the total net income or loss from Schedule C. If the nonresident alien is operating a business in the U.S.-as a sole proprietor or through a disregarded entity, any effectively connected income and expenses related to such business will be reported on the Schedule C, just like a Form 1040 filer, and carried over to line 3 on the Schedule 1. And if the nonresident alien sold or exchanged any assets used in a U.S.- trade or business, any gains or losses would be reported on Form 4797, just like a U.S.-person would, and carried over to line 4 of the Schedule. Line 5 of Schedule 1 reports income from rental real estate, partnerships, royalties, estates, and trusts carried forward from Schedule E from the Form 1040 series. And since this line item and schedule is included in the effectively connected income section of the Form 1040-NR, this means that it includes rental income that is considered effectively connected income. For rental income to be considered effectively connected income, it must either be effectively connected with the conduct of a U.S.-trade or business in the rentals business or the nonresident alien elects under Section 871(d) to treat the rental income as effectively connected income. Whether or not the nonresident alien is in a trade or business of rental property is based on the individual facts and circumstances. In many situations, a nonresident alien may own one piece of real estate that is being rented out. So in this case, it would be hard to argue that the individual is considered to be in a U.S.-trade or business in rentals and, therefore, the default classification from the rental income would be as passive non-effectively connected income, and reported on Schedule NEC subject to the 30% statutory tax under Section 871(a). The nonresident alien, in this case, would most likely choose to elect to treat the rental income as effectively connected income to avoid the flat 30% statutory tax on the gross rental income, as well as being able to take deductions such as real estate taxes, interest, insurance, utilities, et cetera, on the Schedule E. Once the election is made and the taxpayer does not file an amended return for the year to revoke the election, it will remain in effect for all subsequent years, even though there is no income from the property in those years and can only be revoked by the consent of the IRS. The election is made by attaching a statement with the nonresident alien's tax return, and you can refer to the Form 1040-NR instructions on what information needs to be put on the statement. You can also refer to Treasury Regulation 1.871-10(d)(1)(ii) for this list of items. We also want to note that under the Foreign Investments in Real Property Tax Act, known as FIRPTA, Section 897 of the code treats gains or losses from the sale of U.S.-real property interest by a foreign person as effectively connected with the conduct of a U.S.-trade or business. Therefore, these gains or losses would be reported on Schedule D and/or Form 4797, and would be carried forward to Page 1 of the Form 1040-NR. We are not going to get into FIRPTA during this presentation due to the scope of this webinar, but just wanted to make you all aware that the gains on the sale of U.S.-real property would be considered effectively connected income. Schedule E is also the form which reports activities from flow-through entities such as partnerships. The information from the flow-through entity via Schedule K-1 and Schedule K-3 would be reported on Page 2 of Schedule E and then will be carried forward to line 5 of the Schedule 1. If you have a nonresident alien that receives a Schedule K-1 and Schedule K-3, make sure they are reviewed in detail to make sure all items are properly reported for U.S.-tax purposes. Because it's important to note that items allocated to a nonresident alien partner from the Schedule K-1 may contain foreign source income that may not be taxable to nonresident alien partner. A partnership that has a nonresident alien partner will provide a Schedule K-3 along with the Schedule K-1. The Schedule K-3 requires the partnership to break out the character, in other words ECI or non-ECI, and the source, whether U.S.-sourced or foreign sourced, of all income and loss and deductions for the foreign partners. This schedule will make it easier for the foreign partners to correctly report the taxable distributive share of a partnership's income. Okay, so that's line 5. The last line we want to point out in this section is line 8, which is labeled Other Income, and basically includes any other income that is considered effectively connected income that is not reported elsewhere on the return or other schedules, such as net operating losses.

Gambling income, cancellation of debt income, and scholarship and fellowship grants, not reported on a Form W-2. And speaking of scholarship and fellowship grants, let's take a further look at the line 8r of Schedule 1. This is a very common line item for students that come from abroad on student visas such as the F-1 or J-1 visa. For a nonresident alien, U.S.-sourced income that comes in the form of scholarship or fellowship can be treated in one of three ways. First, it could be either excludable under Section 117, exempt by an applicable income tax treaty or taxable subject to a 14% or the 30% withholding, depending on the visa status, and would be includable on the Form 1040-NR filed by the nonresident alien. So, let's talk about the first way, which is to be excluded under Section 117. To be excluded under Section 117, the payment must be considered a qualified scholarship, which means the payment is for either tuition and fees required for enrollment at a qualified institution, or fees, books, supplies or equipment required for the courses. The nonresident alien must also be a candidate for a degree, meaning he or she has to be enrolled in a degree-seeking program at a qualified educational institution. Any scholarship or fellowship grant received that is excludable under Section 117 does not have to be reported on any line on the Form 1040-NR. Any portion of a scholarship or fellowship grant that does not meet the requirements of Section 117 would be considered a non-qualified grant and includable in gross income and taxable. The taxable amounts would be reported on a Form 1042-S box 2, with the Income Code 16. Non-qualified grants paid to a nonresident alien that would be normally taxable may be exempt from U.S.-tax under an income tax treaty. Any amounts exempted are not included on line 8r, but should be included on line 1k and reflected in item L of Schedule OI. Any grantee who claims that part or all of his or her scholarship or fellowship grant is exempt from income based on a tax treaty must file a Form W-8BEN containing a valid taxpayer identification number with the University for the Exemption of Withholding. If this is the case and the Form W-8BEN is accepted by the University, the University will report the amounts exempted on Form 1042-S in box 2 using the exemption code 04. Okay, so to recap, scholarship and fellowship grants may be excluded under Section 117 if they meet certain requirements. If this is the case, they don't have to be reported anywhere on the Form 1040-NR. Grants that do not meet the requirements of Section 117 would be taxable, but may be excludable under an income tax treaty. If that's the case, the excludable amounts would be reported on line 1k of the Form 1040-NR and item L of the Schedule OI.

Grants that do not meet Section 117 requirements and are not excludable under any income tax treaty are taxable and reported on line 8r. Okay, that wraps up the additional income section of Schedule 1. The totals of this section of the Schedule 1 are carried over to line 8 on the Form 1040-NR. So let's go back to Page 1 of Schedule 1 again. Okay, now if you look at line 9 of Page 1, this totals all amounts of effectively connected income. The next line, which is line 10 is where we have the adjustments to income, which consists of above the line deductions that are available to nonresident aliens. As you can see on line 10a, we are pulling amounts from Schedule 1 again, and it would be the adjustments to income section. Let's move on to that section. And here's a snapshot of the adjustments to income section of Schedule 1, which details available above the line deductions available for nonresident alien. So as previously discussed, ECI is taxed on a net basis, meaning deductions are allowed to offset this type of income as long as they are properly allocated and apportioned. This basically means that expenses must be connected with the effectively connected income in order to be a deductible. So let's take an example of these above the line deductions that must be connected with effectively connected income. Let's take the first expense, which is educator expenses, line 10. Educator expenses in this case would be deductible as long as the expenses are connected with the income that a nonresident alien earns as a teacher here in the U.S.-, since the nonresident alien is performing personal services in the U.S.-as a teacher, that income earned would be considered effectively connected income, and any related educator expenses would be deductible in this case as long as they are substantiated. This wraps up the above the line deductions. So we then take the totals from line 26 here and enter it back on Page 1 of the Form 1040-NR on line 10a. Let's continue going down the lines on Page 1 of the Form 1040-NR. So taking the total effectively connected income amount from line 9 and subtracting the adjustments to income from line 10a, we have the adjusted gross income, which is reported on line 11. That concludes the income effectively connected with the U.S.-trade or business section of Page 1 of the Form 1040-NR. Next is line 12 of Page 1, which is the itemized deductions lines, which comes from the total of Schedule A. And to reiterate, most nonresident aliens are not allowed to take this standard deduction. So that is why we do not have a separate line item for it. But as you can see on the line 12 description, eligible students or business apprentices from India can take the standard deduction. In this case, the student or business apprentice would put the standard deduction amount here. Okay, let's go to Schedule A. For reference, the instructions to the Schedule A are located in the Form 1040-NR instructions. As you can see from the snapshot of the schedule, the Schedule A for the Form 1040-NR is different from the Schedule A for the Form 1040 as nonresident aliens are more limited in the deductions they can take. As previously discussed, the code provides that a nonresident alien can deduct all deductible items as long as they are connected with effectively connected income. But they also can deduct two other types of losses not connected with effectively connected income. And those are casualty and theft losses attributable to property located in the United States and certain charitable contributions. The casualty and theft losses and charitable contributions are reflected on Schedule A here. Looking at line 1, the state and local deduction is limited to $10,000 for nonresident alien and $5,000 if they are married. For line 6, casualty and theft losses, losses are limited only to federally declared disasters. The TCJA suspended all miscellaneous itemized deductions subject to the 2% floor. Those include unreimbursed employee business expenses such as travel, education expenses, and tax prep fees and, therefore, are no longer deductible or are not. So after taking any line 7 other deductions, we have the total deductions on line 8 which will flow back to Page 1, line 12 of the Form 1040-NR. Let's go back to that slide. So we just covered line 12 which is itemized deductions. Now, moving down the form, we have the qualified business income deduction on line 13a and wrapping up the bottom portion of the Page 1 of the form, we have line 13b which allows an exemption deduction for estates and trusts. And once we subtract these deductions from the adjusted gross income line, we get to line 15 which is taxable income. Evette, I think, it's time for another polling question. Yes, I think you're right, Andy. And let me just say thank you so much for going through these forms line by line. This is so very helpful.

Okay, audience, here is our third polling question. Select the answer that best completes the following statement. An NRA claiming a treaty exemption for wages should report amounts on: A, Form 1040-NR, line 1k, total income exempt by a treaty; B, Schedule OI, Form 1040-NR, item L; C, both A and B; or D, to report amounts on a statement attached to the Form 1040-NR. Okay, folks, think about all the great information you just heard. And apply that knowledge, take a moment, look at the question, look at the responses, and click the radio button that best answers the question.Let's give you a few more seconds to kind of look over it. An NRA claiming a treaty exemption for wages should report amounts on; A, B, C, or D. Okay? We're learning a lot here, folks. We're learning together, so it's okay. Let's go ahead and stop the polling now. And let's share the correct answer on the next slide. Okay, and the correct response is C, both A and B.

Now, let's see what percentage of you responded correctly. Ooh, Andy, we're getting better and better. We are still at 71%. So just for the sake of it all, could you please explain to everyone, why A and C are the correct responses? Sure, no problem, Evette. So as provided earlier, wages that nonresident aliens are claiming to be exempt from taxation and income tax treaty reported on line 1k on the Form 1040-NR and also reported in detail on item L on the bottom of Schedule OI, the exempt wages would not be reported on line 1A, because remember the amounts reported on line 1A are the taxable wages reported on the Form W-2. The wages that are exempt by treaty would generally be reported on the Form 1042-S. Got it. Excellent. And great job, everyone. Okay, Andy.

I'm going to turn it back over to you to continue. Thanks, Evette. So moving on to Page 2 of the form, which details the taxes, credits, payments, and withholding amounts. Amounts from Schedule 2, which is the additional taxes, and Schedule 3, which is the additional credits and payments, will be carried over to line 17 and 20 on this page, respectively. And, again, Schedules 2 and 3 are from the Form 1040 series. Line 16 here is the line for tax calculated on the taxable income line, which is line 15. And line 17 takes amounts from Schedule 2, again, which is additional taxes. So let's go over that form. So here's a snapshot of Page 1 of Schedule 2. And just like Schedule 1, Schedule 2 is the same schedule used for Form 1040 filers. As you can see, this form totals up the various additional taxes that may be imposed on a taxpayer like the alternative minimum tax, self-employment tax, Schedule H taxes, and so on. The totals on Part 1 of the schedule will flow to line 17 of the Form 1040-NR, and the totals from the other taxes section, which is Part 2, of the schedule will flow to line 23b of the Form 1040-NR. So here's a snapshot of Page 2 of Schedule 2. Totals from the other taxes section, which is Part 2 of the schedule will flow to line 23b of the Form 1040-NR. Okay, let's now go over Schedule 3, which is the schedule for additional credits and payments. And, again, here's a snapshot of the schedule, which is also used by Form 1040 filers. It's detailing additional credits and payments made. Also note that since the schedule is also used by Form 1040 filers, there are credits listed here that are not available to nonresident aliens, such as education credits, which include the American Opportunity and Lifetime Learning Credits. So let's talk about the various credits that are available to nonresident aliens. So nonresident aliens that have effectively connected income may claim certain credits if they meet the requirements of each of the credit, which include on: line 1, the foreign tax credit, related to foreign source effectively connected income; line 2, credit for child and dependent care expenses; line 3, nonresident alien, and generally cannot claim, again, education credits. And then other credits on Forms 3800 and 8801, which are the general business credits, credit for prior year minimum tax, adoption credit, et cetera. And here is Page 2 of Schedule 3, which details Other Payments and Refundable Credits. Lines 9 through 12 may be applicable to nonresident aliens, refer to the instructions for Schedule 3 for more guidance on these. It's important to note that tax credits may not offset other taxes that are not imposed on effectively connected income, which is why you will see later that taxes from Schedule NEC, which are taxes imposed on non-effectively connected income, come after the tax credit sections. When you total up all credits on this schedule on line 7, it will carry over to Form 1040-NR to line 20. All other payments and refundable credits are totaled on line 15 here, and will carry over to line 31 on the Form 1040-NR. So at this point now, I'm going to turn the presentation over to my colleague, James, who will finish up today's webinar. All right, thanks, Andy. Great job. Appreciate it.

Okay, so the next slide, let's go over a few key points on the additional taxes and credits as they do relate to NRAs. Regarding Schedule 2 here, as you can see on this slide, line 4, Self-Employment Tax, the code does not impose the self-employment tax on the self-employment income of an NRA, unless that liability is imposed on the terms of the totalization agreement. The totalization agreement determines if an NRA is covered under the U.S.-Social Security System, and I'll also do want to note that the U.S.-does not have totalization agreements with every country.

On Scheduled 3, line 1, that's the Foreign Tax Credits. NRAs are allowed to claim the foreign tax credit, but only in the specific situation in which they are taxed on their foreign source income, which is pretty rare as well. An example here would be the foreign income that is taxable in the U.S.-, because it is treated as ECI in situations where the income is attributable to an office or a fixed place of business in the U.S.-So, in addition, the NRA must have paid or owed the foreign tax on that income in order to claim the foreign tax credit. So the NRA would have to complete and attach to Form 1116 to claim the credit, and you can also refer to Schedule 3 1040 instructions, which lists the exceptions for filing that form. And then on line 19, on Page 2 of the 1040-NR, it provides the two possible credits for dependents, as Andy had mentioned. We discussed earlier that the dependent section on Page 1 of the 1040-NR was necessary in order for the NRA to take credits related to the dependents, the child tax credits, and the credit for other dependents are such credits. So, basically, for NRA to claim the CTC, the NRA must either be a U.S.-national, a resident of Canada, Mexico, South Korea, or India, and the person claimed must be a U.S.-citizen, national or resident alien, as well as they have to meet that qualifying child criteria as well.

Again, you can refer to the instructions for the specific requirements to claim either the child tax credit or the credit for other dependents. The 1040 instructions also do include a worksheet to calculate that credit. And then, finally, we have line 23a on Page 2, and that will carry over any tax on non-ECI income, and that would be coming from the Schedule NEC, so we're going to go over that form right now. And here's a snapshot of that schedule, where one would report passive items, such as interest and dividends, royalties, rents, gambling winnings, and capital gains and losses. And then the instructions to the Schedule NEC, they would be actually located in 1040-NR instructions. So, generally, as Andy had discussed earlier today, the statutory rates of tax on non-ECI items, that would be 30%, and it would be tax on the gross basis, meaning no deductions are available. And you can see on this form here, there are also different rates, such as a 10% and 15% columns, and that would commonly apply to various types of income that are eligible for treaty benefits. There are many treaty articles that provide a reduced rate of tax such as a 10% or 15% on, so let's say, dividend income, so you want to keep that in mind. Any taxes that are withheld at source, they are reported here, and then finally will be carried over to Page 2 on that line 23a of the 1040-NR. And speaking of withholding tax is required to be withheld at source on income paid to NRAs that is not effectively connected with the U.S.-trade or business. The withholding is generally at that statutory 30% rate unless a reduced rate applies due to a treaty. Any tax withheld that would be paid to the IRS in Form 1042-S would be issued to the recipients. And as stated earlier in this lesson, if an NRA has only non-ECI U.S.--sourced income and that tax withheld at source fully covered the tax liability, no return would be required. A return should be filed, though, in order to claim a refund of an overpayment if that withholding agent has already filed and remitted the tax. Okay, so let's look at the first two lines on this schedule, and that is the interest and dividends. Any interest and dividends that are not considered ECI, again, those are the amounts that do not pass either the asset use or business activities test, they would be reported here on lines 1 and 2. Moving down the form, we have line 5 and that's other royalties. So only royalties that are considered non-ECI would be reported here. Line 6, any rental income that is not considered ECI and the NRA also did not do that election to treat rental income as ECI, that would be reported here as well. And then we have line 8, and that's Social Security Benefits and those are taxable to NRAs. The NRA would have to include 85% of any U.S.-social security benefit and any equivalent railroad retirement benefits that are received. The benefits would be considered U.S.-sourced income and they are not effectively connected with the U.S.-trade or business and, therefore, would be subject to that flat 30% tax, unless again, it's exempt or taxed at a lower treaty rate. Okay, moving on to line 10, and that includes all taxable gambling winnings and gambling losses to the extent of winnings, and that would be only for residents of Canada that are not in the trade or business of gambling. So, again, it's important to note that gambling losses allowed to the extent of winnings, those are only available to Canadian residents, and that is why there is a separate gambling line item for them. Any other NRA would not be allowed to deduct gambling losses, and that would take us to line 11, and that's for NRAs other than Canadian residents, and that's where they report their gambling winnings. We also want to mention that winnings from certain games are not taxable to NRAs, and those games are blackjack, baccarat, craps, roulette, and big-6 wheel. Since these winnings from these games are not taxable, the losses should not be deductible for Canadian residents either for these type of games. All right, wrapping up Schedule NEC on the bottom of the form, as you can see on this slide, is the Capital Gains and Losses section. And that's where we will report capital gains and losses that are not effectively connected with the U.S.-trade or business. So the rules are, any U.S.-source personal property capital gains, they are taxed at flat 30% rates or a lower treaty rate. They will be reported here if the NRA was in the U.S.-183 days or more during the year. And, again, these gains are not considered ECI. Non-ECI U.S.-source capital gains would not be taxable to the NRA if he or she was in the U.S.-less than 183 days during the year.

Also, non-U.S.-source, non-ECI capital gains are not taxable to NRAs regardless of the days in the U.S. Any capital losses, allocable to U.S.-sources that are not directly related to a U.S.- trade or business, they may be used to offset any capital gains that are not considered ECI. These losses though in excess of gains would not be allowed. All right, it is time for another polling question for the audience. All right. Sure thing, James. Okay, folks, here is our fourth polling question. Select the answer that completes the following statement. Rental income that is considered ECI is reported on: A, Schedule E with the Form 1040 only; B, Schedule E Form 1040, Schedule 1 with the 1040, and Page 1 of Form 1040-NR; C, Schedule NEC Form 1040-NR; or is it D, not reported since income should be fully withheld upon. Okay. All right, folks, think about what you just heard. James gave us some great information. Read the question once more. Rental income that is considered ECI is reported on; A, B, C, or D. Okay, we were at 71% before. Come on, folks. Let's push it on up the ladder. Take a moment, click the radio button that best answers the question, and I just want to give you a few more seconds to make your selection. All right, let's go ahead and stop the polling now, and let's share the correct response on the next slide. Okay, folks, the correct response is B, Schedule E Form 1040, Schedule 1 Form 1040, and Page 1 of Form 1040-NR. Let's see what percentage of you responded correctly. Okay, it looks like 70%, so we're hovering around that 70%, 71%. Okay, so James, can you please help us out and explain why B is the correct response? Sure. As Andy stated earlier during his section, rental income, that would be considered ECI. They're required on a number of forms, and two of the forms are from the 1040 series. So, again, rental income that is considered ECI would be reported on Schedule E, and that is the same as the 1040 as well, because you can take deductions against that income. And then from the Schedule E that carries over to the Schedule 1, again, from the 1040 series, and then from Schedule 1, it goes on to the first page of the 1040-NR. Rental income that is not considered ECI, that would be recorded on Schedule NEC as I discussed a few slides back, and hopefully that helps. You make it sound so simple, James. Thank you so much for that great information and explanation. I'm just going to turn it back over to you to continue. Okay, great. Thanks. Okay, so go to the next slide, we just had wrapped up Schedule NEC and line 23a. So after we total up all the taxes, which would be the taxes on ECI, taxes on non-ECI, additional taxes such as AMT, et cetera, we are on line 24. And then we would move down to line 25 here on this slide, which are the withholding credits. So here's that snapshot of the line 25 that includes any taxes withheld along some other things that we do want to point out right below here. So generally the claim withholding as a credit for tax paid, the NRA must attach the prospective form that reports to withholding through their 1040-NR and that withholding agent would be required to file that respective form with the IRS. The forms would include a W-2, it's for wages; a Form 8805, that is for withholding on an NRA's distributive share of a partnership's ECI. There's a Form 8288-A, and that would be for withholding on the disposition of U.S.-real property. Form 1042-S that would be withholding on U.S.--sourced FDAP income received by an NRA. Also any documents that entitles NRA to treaty benefits or beneficial ownership like a Form W-8BEN, that would be attached in certain situations where a reduced treaty rate would be applicable. All right, so let's go back to Page 2 of the 1040-NR and let's wrap up the rest of these lines. So after factoring the taxes withheld going on the form we can see the remaining lines, such as estimated tax payments on line 26, and refundable credits, such as the additional child tax credit, and the total refundable credits, and that would be coming from Schedule 3. We do come now to taxes owed or refunded and that wraps up 1040-NR. So we've covered the supplemental Schedules 1, 2, and 3. We've covered Schedule A of the 1040-NR. We've covered Schedule NEC. So the last form that's relevant to a 1040-NR filing would be Schedule OI, and that would provide other information about the NRA taxpayer. And here are the snapshots of that first half of the schedule, Schedule OI. It's a separate form, and its titled Schedule OI with the 1040-NR parentheses, the instructions to the schedule. They would be located in the 1040-NR instructions. So the first half of the Schedule OI would provide the following information about the taxpayer, their citizenship, their nationality, their country of residency, information on any prior application for a green card status, U.S.-entry and exit days. So if an NRA is claiming a tax treaty benefit, the country of residence claimed on item B here, that should match the appropriate treaty in which the individual is claiming a benefit. It's also important that lines A and B here, those are completed when claiming dependent in the dependent section of Page 1, since only residents of certain countries can claim dependents for certain tax credits. Moving down the form, we have items G and H, and those detail the days of presence in the U.S.-for the past 3 years. And this is important in calculating whether or not individual meets what we call the substantial presence test. Since the individual is filing a Form 1040-NR, that individual is claiming an NRA status basically. So that would mean that he or she did not pass the substantial presence test. So the information in this section should reflect that. If they did pass the substantial presence test, they would be considered a U.S.-person for tax purposes and, therefore, they would be filing a 1040 instead. So a day of presence is any day physically present in the U.S.- at any time, unless that individual is considered an exempt individual, or was unable to leave the U.S.-, because of a medical condition. If a resident of Canada or Mexico and they commute to work in the U.S.-on more than 75% of the workdays, they would be considered a regular commuter and do not need to enter the dates either. So the individual excludes days of presence in the U.S.-for the substantial presence test, because that taxpayer was an exempt individual, or was unable to leave because of a medical condition. They would have to file a Form 8843, and that is a statement for exempt individuals and individuals with a medical condition, and that should be filed with that 1040-NR. Again, individuals who pass the substantial presence test, they would be treated as NRAs if they were present in the U.S.-for less than 183 days during the year and would have a closer connection to a foreign country. Individuals claiming a closer connection exemption to that substantial presence test, they would have to file a Form 8840 with their 1040-NR. Then here is item L, and that's the income exempt from tax section. We've mentioned this numerous times in the previous slides. Again, this item must be completed to report any income that is exempt from U.S.-tax by an income tax treaty, and that should reconcile with the amounts reported on line 1k of the 1040-NR. And if the NRA is claiming an exemption based on a tax treaty, they also must fill in the item L, and if applicable, complete and include an 8833 form, and that is the treaty-based return position disclosure, and they should file that with the 1040-NR. Finally, if the NRA is making that election for the first time to treat income from real property as ECI, or has already made that election, item M must be checked, and that's the bottom part of this section. So that concludes the schedule from the 1040-NR, and let's move on to another polling question, and then we can go over a comprehensive example. Evette? All right.

That's a great idea, James. Okay, audience, here is our fifth polling question. Now for this one, select the statement that is true. So, which statement is true? A, non-ECI items are taxed on a net basis and reported on Page 1 of form 1040-NR; B, capital gains and losses connected with a U.S.-trade or business are reported on Schedule NEC Form 1040-NR; C, statutory rate of tax on non-ECI U.S.-source income is generally 30%; or is it D, NRAs like U.S.-citizens and resident aliens are always subject to self-employment tax? Okay. Think about what you just heard. Think about maybe what you already know. Take a moment and click the radio button that best answers this question. Which statement is true? Is it A, B, C, or D? Got a lot of great information from James and Andy thus far, right? Let's go ahead and stop the polling now. And let's share the correct answer on the next slide. Okay, folks, the correct response is C. Statutory rate of tax on non-ECI U.S.-source income is generally 30%. Now, let's see what percentage of you responded correctly.

Let's see. Hold on. It looks like, okay, James, 59% responded correctly. We dropped a little bit there, James. Can you help us out, why C is the correct response? I'll do my best. Okay. So again, C, that is the right answer. The statutory rate of tax on non-ECI U.S.-source income is generally 30%, unless reduced by a tax treaty. The other three are not correct. Non-ECI items, they are taxed on a gross basis and not net basis, and they should be reported on Schedule NEC instead of Page 1 in 1040-NR. B is incorrect, because any capital gains or losses connected with the U.S.-trade or business, those will be reported on the 1040-NR Page 1, the ECI section. Since they're connected with the U.S.-trade or business, they're considered ECI, and therefore should not be on Schedule NEC. And then D is not correct, because NRAs are not subject to self-employment tax like U.S.-citizens and resident aliens are. They would be subject to it. There's a totalization agreement that provides otherwise. Hopefully that clarifies everything for this question. It does. Thanks, James. Please continue. Great information. Okay, great. So, here, let's go through an example now. I think hopefully we've gone through a lot of conceptual stuff.

We've gone through the forms. Now, let's put it all together by giving a comprehensive example.

Again, it's not anything too complex, but enough to help people, the participants here understand how everything flows with the 1040-NR. So, here are the facts for the example. We have an NRA, who is a resident of China attending graduate school in the U.S.-and an F-1 visa since September of 2019. She had received the following year-end income tax forms or year-end tax forms, Form W-2 for a campus job in which she had earned $20,000 in wages, had $2,500 of federal tax withheld on that, and $800 in state taxes withheld. Form W-2 also for a summer internship in which she had earned $10,000, $1,700 in federal taxes withheld, and $400 in state taxes withheld. She also received the 1042-S, $5,000 with Income Code 20, and that is the Studying and Training Code for Compensation. Also an Exemption Code 4, and that is exempt under Tax Treaty Code. And this, the $5,000 was also from that same summer internship, and that NRA clearly had provided that Form 8233 with the employer claiming the $5,000 of tax exempt income under the China Treaty, and that is why the payer had properly coded the 1042-S with 20, and Exemption Code of 4. She also received the 1042-S from a company, a $500 dividend with $150 tax withheld, also a 1099-G, with $300 for state income taxes withheld, and also a 1099-INT, and that's $200 from a savings account from a U.S.-bank. One more slide for a little more facts. She had also received $20,000 in qualified scholarship grants, qualified, that's the key word there. Also received $12,000 in rental income, and that's for renting out half of the condo that she had lived in, and that she had owned, and she had also some expense items. $6,000 in real property tax, $1,000 for utilities, $800 in homeowners' insurance, $600 in HOA fees for her condo. She also made an $800 cash contribution to a qualified charity, and also had about $1,000 in unreimbursed expenses during her summer internship. And we do want to note for simplicity purposes, we are not showing depreciation expense for the condo, although depreciation expense is very common in the rental activity, so just keep it simple. Also want to note that since this NRA in the example is a student on an F-1 visa, she would qualify to be an exempt individual for purposes of the substantial presence test and, therefore, will be considered an NRA for tax purposes for the year and, therefore, she will be filing 1040-NR. And also note that she'll have to complete and attach the Form 8843, again, that's that form for the statement for exempting individuals, but she would have to attach that.

All right, so now that we've gone through the facts, let's go through the completed 1040-NR for this individual. So for those of you who can read the slides on another monitor or print out the slides, I'm not sure how this works, but I'll probably have it available in case it'll probably be easier to follow along seeing the forms on the slides as well as seeing the facts in front of you as well. All right, so let's start with Page 1 of the return and the wages paid. So based on the facts provided, the NRA was issued two W-2s for a total amount of $30,000 of wages. So as we stated previously, taxable wages as an employee that are generally issued on a W-2 and will be reported on line 1a of the Form 1040-NR. So, therefore, we have $30,000 on line 1a. Scholarship income of $20,000, I had noted before that it was qualified. It's a qualified scholarship income. So as Andy noted earlier, qualified scholarships are non-taxable under Section 117. So since they're non-taxable under the code, it will not be reported on Schedule 1, it will be reported anywhere else on the return. In addition, the taxpayer was not issued a 1042-S, because probably the university in this case knew about the non-taxability of it and was not required to report or withhold tax on it due to its non-taxability. Moving down the form, we have line 1k. And we have that income that the taxpayer received that was exempted by the China-U.S.-income tax treaty in the amount of the $5,000. As stated earlier, she received that 1042-S with the proper exemption code, so that's why it would be reduced by, it would be non-taxable and be put on line 1k. And as you see later, when we look at the Schedule OI, the taxpayer is claiming the Article 20(c) of the treaty. And that is the students and trainees article that exempts up to $5,000 of income from the personal services performed. So in this case, the taxpayer provided a Form 8233 to the employer.

The employer verified its correctness and then they properly issued a 1042-S with the exempt amount of $5,000, properly coding it Income Code 20, which is the compensation during studying and training code, and also with an exemption code of 04, which is the exempt by tax treaty exemption code. So some of you may or may not know this rule for interest income, but for NRAs under Section 871(h), interest income that is from U.S.-bank deposits that is not considered ECI is non-taxable.

Therefore, that interest income of $200 from the savings accounts that would not be reported on either line 2b of Page 1 or on line 2 of the schedule NEC since it's non-taxable. So, again, for NRAs, interest from U.S.-bank deposits that are not considered ECI non-taxable and, therefore, not reportable on a 1040-NR. And then next we have line 8 here. You can see that we have the amount of $8,100, and those are totals coming from Schedule 1, and that's the additional income and adjustments to income. So let's go to that schedule and take a look at the breakdown. Okay, here we go. Schedule 1, we are reporting here. We are reporting the state income tax refund from the 1099-G of $300. And that would be taxable in this case, because in the example we are assuming in the prior year, the taxpayer took a deduction for state taxes paid, so therefore should be taxable. And then on line 5, which is income from Rental Real Estate, we have net income of $7,800.

So let's switch over to Schedule E for the detail on this amount. And here is Schedule E from the 1040 series. So for purposes of this example, the NRA had made an election that treat the rental income as ECI. And as you will see later, the box for the election was checked on the Schedule OI.

So as you can see here on Schedule E, the taxpayer is reporting the full $12,000 of rents received on line 3. And note that we are only taking half of the expenses related to the property since only 50% of the property was being rented out. So here we will have $400 of homeowners' insurance, $3,000 in real estate taxes, $500 in utilities, and $300 in HOA dues. So that would bring the net rental income to $7,800, and that would be carried over to line 5 on Schedule 1 as we saw earlier.

So let's go back to Page 1 of the 1040-NR. And here we go here. And that's when we see the $7,800 on rental income was calculated, and adding the $300 of state tax refunds, we get the $8,100 of total additional income from Schedule 1 as you can see on line 8 here on the 1040-NR Page 1. So as you can see, the totals of all W-2 wages was properly reported on line 1a. Any income exempted by an income tax treaty was reported on line 1k, that's a $5,000. From there we add the $8,100 total to Schedule 1. And that gives us a total of ECI of $38,100 on line 9. So we've covered all the W-2 income. We've covered the exempt income from the Form 1042-S. We've covered the 1099-G State Tax Refund. We addressed the 1099-INT for the $200 interest income. And we addressed the qualified scholarship grants, the non-taxability of it, and all the rental activity. So let's move on to line 12. And that's where you will see we have $2,000 in itemized reductions from Schedule A. So let's take a look at Schedule A. And here we go, Schedule A as previously stated only limited types of itemized deductions can be claimed by an NRA on Schedule A. In this example, the taxpayer had two W-2s, which had total state income taxes withheld in the amount of $1,200, so it's properly reflected here on line 1. NRAs are not allowed in itemized deduction for real estate taxes under personal residence, since deductions are only allowed and connected with ECI as Andy had stated before. For the only real estate taxes that this individual was able to claim was that 50% of the total, and that was already accounted for as the rental portion on Schedule E, as we've seen earlier. And then, we also have the cash gifts of qualified U.S.-charities of $800 reflected on line 2 and line 5. And remember that the employee also had unreimbursed business expenses of $1,000. Those are no longer deductible on Schedule A due to the tax law changes under the Tax Cuts and Jobs Act. So we have itemized deductions of $2,000 that carries over to line 12 of the 1040-NR. So taking into account the $2,000, we would be subtracting it from the $38,100 of ECI. We would have taxable income of $36,100 as shown on line 15 of the 1040-NR. And here is Page 1 again of the 1040-NR. And as you can see here, we have $36,100 of taxable income. Okay, so that wraps up Page 1 of the 1040-NR. Let's move on to Page 2 starting with line 16, and that is the tax section. All right, so here is the 1040-NR Page 2. So we use the tax tables from the 1040 instructions, and we have tax of $4,130 on the taxpayer's taxable income. So to recap, ECI, taxed at graduated rates on a basis. So as you can see here, we total of all of the NRA's ECI, that was included in the wages, it included the rental activity. We took deductions that were connected with the ECI as we saw on Schedule E. We got some itemized deductions, and that was used to get our total ECI, and then we used the tax table to calculate the tax. And then moving down to line 23a, we are showing the tax of $50, the taxpayer's non-ECI income. And again, FDAP income, that is not considered ECI, that is generally taxed on a gross basis, I mean no deductions are allowed, and a flat 30% rate, unless reduced or eliminated by a treaty. So to calculate the tax on non-ECI FDAP, we would go to Schedule NEC. And here is NEC. So in this example, the NRA did receive dividend from a U.S.-corporation in the amount of $500. And it was not considered ECI in this case and, therefore, should be reported on the schedule. Since this taxpayer is a resident of China, you would have to check the China-U.S.-income tax treaty to see if the dividend qualifies for any reduced rate. So the tax treaty does in fact state that dividends do qualify for a reduced rate of 10% under the dividends article. So, therefore, we have a $50 tax on the dividend income, and you can see that on the 10% column. And it carries over to Page 2 of the 1040-NR line 23. All right, so going back to Page 2 right over here, we've totaled the tax on line 22 and the tax on Schedule A and C on line 23d. We have total tax, $4,180, taking into account the withholding amounts from the W-2s and the 1042-S for a total of $4,350, which will end up giving this taxpayer a refund of $170. So the last thing to fill out for this return would be the information on Schedule OI. And as you can see here, the various information needed to complete the form. Now, we are seeing that we're showing China for the country of residence on item B, the F-1 visa status on item E, and also note that there are no dates entered in item G since the taxpayer did not enter or leave the U.S.-during the 2022 tax year. Item H shows the number of days that this individual was in the U.S.-over the last 3 years for purposes of the substantial presence test. In this case, it doesn't matter since as previously stated, taxpayer's days of presence in the U.S.-are exempt for accounting for purposes of the substantial presence test. We don't count those days. Students who are temporarily present on the F-1 visas, they are generally exempt individuals and they can exclude days of presence in the U.S.-for five calendar years beginning the calendar year in which they arrive. Okay, and finally here is item L and that is where the taxpayer is claiming $5,000 exemption of personal services to do the China-U.S.-treaty. The country is China in column A as you can see here and the Treaty Article 20(c) is noted in column B, and you can see the amount of income exempt in column D of the $5,000 and that would flow to line 1k of the Page 1 of the 1040-NR. And on item M, you can see that the election to treat rental income as ECI was properly checked. Okay, so that wraps up this example and presentation. Let's do our last polling question, Evette. All right, you've got it, James. Okay, audience, here we are with our sixth and final polling question. We're just asking you to tell us which statement is correct. Is it A, the 2022 Form 1040-NR uses the same Schedules, 1, 2, and 3, as the 2022 Form 1040; B, the 2022 Form 1040-NR has its own Schedule E; C, Schedule OI is no longer required when claiming an exemption from income under an income tax treaty in 2022; or is it D, Schedule A with the Form 1040-NR is used to report unreimbursed employee business expenses for NRAs for 2022? Take a moment folks and click the radio button that best answers this question. I want to give you just a few more seconds to make your selection which of these statements is correct; A, B, C, or D? You've heard some great information here today folks. But we're going to go ahead and stop the polling now. And let's go ahead and share the correct answer on the next slide. Okay, and the correct response is A, the 2022 Form 1040-NR uses the same Schedules, 1, 2, and 3, as the 2022 Form 1040. And it looks like 67% of you responded correctly. So, James, can you give us a quick response as to why A is the correct response, please? Yeah, sure. So in the 2022 Form, the NR, they use the same Schedules as 1, 2, and 3 as the 1040. It's been mentioned multiple times during the presentation and even during our comprehensive example. B is not correct, because the 1040-NR does not have its own Schedule E, again, it follows the same Schedule E that the 1040 uses. C is incorrect, because the Schedule OI is required, when claiming an exemption from income under an income tax treaty, you would have to fill out item L. And then, Schedule D is incorrect, because unreimbursed employee business expenses are not deductible in the year 2022 due to the TCJA. Hopefully that clarifies everything. It does, James. Thanks so much. And I just want to make a quick statement here. Folks, if you could just hang in there with us, we want to make sure we get to your questions towards the end. So we're going to go over a bit pass the top of the hour. So just hang in there with us, and we're going to get to a lot of your questions, all right? Okay, James, back to you. Thanks. So we just want to just show along one more slide here for now had some helpful publications and additional resources. We always recommend Publication 519. There's a great publication for anything to deal with NRA taxation. Publication 515 is basically the withholding tax part for NRAs and foreign entities, so that's going to be very helpful as well. As always, we do always want to refer to the instructions of the 1040-NR that gives great information on how to fill out the form.

And, again, since the 1040-NR uses a lot of the forms that the Form 1040 uses, we want to refer to those instructions as well. And as always, IRS.gov is a great resource for any international topics that you may have. You can always just do a search in the search box, and the proper stuff will pop up then. All right, back to you. All right. Thank you, James, and thank you, Andy.

Hello, folks. It's me, Evette Davis, once again, and I'll be moderating the Q&A session. Before we get started with the Q&A session, I do want to thank everyone for attending today's presentation on Preparation of Form 1040-NR, a U.S.-Nonresident Alien Income Tax Return. Now, earlier I mentioned we want to know what questions you have for our presenters. Here is your opportunity, several of you have already entered your questions, but if you haven't input your questions, there is still time. So go ahead and click on the drop-down arrow next to the Ask Questions field. Type in your question and click Send. James and Andy are staying on with us to answer your questions. One quick thing before we start, we may not have time to answer all of the questions, because you submitted a lot, but we will answer as many as time allows for. So let's go ahead and get started, so we can get to as many questions as possible. All right. Let's start with the very first question I have here. Okay, this question is, when is an extended 1040-NR due if there is no W-2 income? Is it 12/15 of the respective year? When is an extended 1040-NR due if there's no W-2? There you go. Yeah, I'll take this one, Evette. Yeah, actually, that is correct.

The actual due date for 1040-NR, when there's no wages that's subject to withholding present, that would be due on 6/15, so June 15 of the year. The tax period can request a 6-month extension, so with that said, with the extended due date then would be 12/15. Excellent. Okay, let's go ahead and rock and roll with these questions. We got a lot of great ones in here. The next one, is there any visa that requires the 1040-NR regardless of residency? For example, someone who meets the resident alien requirements for filing the 1040, but because of their visa, they are required to file the 1040-NR. Okay, so I'll throw this one again, this is James. Okay, so to repeat the question, basically is there any visa that requires the 1040-NR regardless of residency? So the answer to that is no. For tax filing purposes visa status is not relevant for the purposes of determining residency. So residency is the term basically by the substantial presence test or the green card test. So if an individual is a green card holder, then they would qualify as a 1040 filer. If the taxpayer does not meet the substantial presence test, that's when they would have to file the 1040-NR. So there are some visa statuses that may affect the rules for residency. So I did mention this a few times, like the visa status such as an F-1 visa, that's for students, that would cause them to be an exempt individual purposes of the substantial presence test. So they wouldn't count those days for a number of years and, therefore, they would not pass that substantial presence test and, therefore, would have this file a 1040-NR. So, again, the answer to that question is the visa status doesn't really determine residency. The substantial presence test in this case, but the visa status may affect the calculation to that. Excellent. Okay. All right, we got some great questions again. Let's move on, the next question is, can Canada residents work in the U.S.-request not to withhold social security and Medicare taxes? Now, that's a good question. Yeah, that's a good question. So, basically, so can Canadian resident work in the U.S.-and ask not to withhold social security and Medicare taxes? Well, I think this was mentioned earlier in this presentation. The U.S.-has entered into what we call a totalization agreement with foreign countries to coordinate whether or not social security coverage would be required there. And the taxation workers employed for part of all their working careers in one of the countries. So under these agreements, dual coverage and dual contributions for the same work could be eliminated. So what I would do and, again, I don't know the rules for Canadian residents off the top of my head, but they can also for information on totalization agreements, there is a website, I believe it's SSA.gov, and they would have to do a search for totalization agreements.

So hopefully that answers that question. Okay, sounds good to me. All right. Next question.

When an employer includes non-ECI that is exempt from federal tax under a treaty, we typically back out the non-ECI income on the tax return. However, we are constantly getting notices from the IRS not allowing the exemption. Any advice on how we handle these notices, or is there a way we should be recording the income differently on the 1040-NR? Another good question. Okay, maybe I'll pass this on to Andy. Andy, do you want to take this one? Yeah, I'll take it, James.

Thanks. So my recommendation would be, since it's a non-effectively connected income, then the income should probably be reported on Schedule NEC. You would just report it in the 0% column, which is one you would have to on the far right of the Schedule NEC, put in the 0 tax rate. But then also complete item L on Schedule OI, which will identify which particular paragraph, which particular article, which particular treaty that that item of income is being exempted under. So that way, you've let the IRS know this item of income on the Schedule NEC is taxed at 0% or if it's the reduced rate, [15% or 5%], depending on what type of income it is. And then you've identified under which article, under which treaty, and even down to the specific paragraph that that item of income is being exempted. I think when all of that information is there, those who process the return and even look at it later on, if it's kicked out for a potential exam would be able to look at it and identify, yeah, that particular item of income is either taxed at a 0% rate or a reduced rate under a particular treaty. Okay, sounds good. Thanks a lot, Andy. All right.

Next question, would dividends paid to nonresident alien shareholder from a U.S.-trade or business would be considered FDAP from an ECI and thus taxed at U.S.-resident tax rates? Okay, I'll take this one. So would dividends paid to an NRA shareholder, and that's assuming, and also a shareholder from a U.S.-trade or business would that be considered FDAP and tax that at U.S.-resident rates? So I guess the question is, they're asking how would dividends paid to an NRA shareholder from a C corporation would be treated. And hopefully that's what they're asking for. NRA shareholders and we're assuming here they're asking for a U.S.-C corporation, because S corporations cannot be owned by an NRA individual. So I'm going to assume C corporations, they receive dividend payments from that U.S.-Corp, and that U.S.-Corp is engaged in the U.S.-trade or business. That would still be considered non-ECI FDAP income and be subject to a 30% flat rate unless a lower treaty rate is applicable. So, again, an NRA shareholder that just owns stock in the C corporation, any dividends from that would be generally considered non-ECI FDAP, would be reported on Schedule NEC at a flat 30% rate unless a lower treaty rate applies. The fact that the C corp is in the U.S.-trade or business does not mean that the NRA is engaged in the U.S.-trade or business. C corps that are treated as separate U.S.-entities. So the U.S.-trade or business would not cause the NRA investor to be in a U.S.-trade or business in itself. The rule would be different if it's a partnership and that would be actually something that we're going to be holding at our next webinar. We're going to be doing a webinar on partnership, on NRA's owning U.S.-partnership interests. So you'll learn more about that in our next webinar series. So, again, the answer to the question, dividends from a U.S.-C corporation would be generally treated as non-ECI FDAP income, subject to a 30% flat rate, unless reduced by a treaty, because essentially C corp is a separate entity, it doesn't matter if it's a U.S.-trade or business or not, it would not cause a U.S.-trade or business for that NRA shareholder. Okay, good stuff. All right.

Let's see what time it is, let's get one more question in here, all right. Do international students under F-1 visa file a 1040-NR every year? Or can they file a 1040-NR on the first year and a 1040-S after successfully substantial presence test? Yeah, okay, so I'll take this one. So do international students under an F-1 visa have to file a 1040-NR every year? Or they can file a 1040-NR the first year? So, basically, I think that's what they're asking is, for F-1 visa, do they have to file a 1040-NR every year? Well, an F-1 visa, and they discussed this earlier too regarding visa status. That is generally a visa status that under the code, that would cause the NRA do not count their days for the substantial presence test for five calendar years. So, therefore, in this case, they would be exempt from the days and, therefore, not pass the substantial presence test. So, therefore, they would have a file 1040-NR. If the F-1 visa holder, becomes a resident alien after five calendar years, then they would have to file a 1040 in that case, because they would not be counting their days and they're still in the U.S.-, you would still have to do that calculation. But, therefore, it all depends then basically. So F-1 visa holder, they're exempt for five years from counting the days, so no matter what, they would have to file a 1040-NR generally, because the substantial presence test would not be a factor. After the five years, they would have to factor in the days present in the U.S.-and that would determine whether or not they would be a 1040-NR filer or a 1040 filer. And, hopefully, that answers the question.

Wow. Yes, okay, that's great, great, great. Okay, oh my goodness folks, that's all the time we have for questions. I do want to thank our presenters for sharing their knowledge as well as their expertise to help us get to an understanding by answering your questions. But before we close the Q&A session, James, can you share some key points that you want the attendees to remember from today's webinar? Sure, absolutely. Again, we've mentioned this multiple times during all of our webinar series regarding NRAs. I'm going to say it again during our next webinars class that we're going to have in a couple months. Generally, NRAs are taxed on U.S.--source FDAP and income effectively connected with the U.S.-trade or business, two categories. U.S.-citizens, U.S.- persons, resident aliens, they're taxed at worldwide income, NRAs are taxed differently more on a territorial basis, U.S.-source FDAP income effectively connected with U.S.-trade or business.

Also, 1040-NR form, they use many schedules that are shared with the 1040, such as Schedule E as we've seen today, Schedules 1, 2, and 3 as we've seen today as well. U.S.-source FDAP, that is taxed on a gross basis at a rate of 30%, unless reduced by a tax treaty, and that would be reported on Schedule NEC, and that's different from an ECI, ECI is taxed on a net basis and on Page 1 of the 1040-NR. One more slide here for some more key points, actually I jumped ahead, ECI is taxed on a net basis, similar to U.S.-persons, and that would be reported on the Page 1 of the 1040-NR, and then finally, Schedule OI, and that needs to be completed with any 1040-NR to provide additional information about the NRAs such as their citizenship, any items of income that are exempt by treaty, the real estate tax selection to treat real estate income as ECI, et cetera. All right, back to you. All right. Thank you so much, James, for those wonderful key points. Okay, audience, we are planning additional webinars throughout the year to register for an upcoming webinar. Please visit IRS.gov and type in keyword search, Webinars and select the Webinars for Tax Practitioners or Webinars for Small Businesses. When appropriate, we will be offering Certificates and CE credit for upcoming webinars. And we invite you to visit our video portal at www.irsvideos.gov. There you can view archived versions of our webinars. Again, continuing education credits or certificates of completion are not offered if you view an archived version of any of our webinars on the IRS video portal. Another big thank you to James and Andy for a great webinar and for sharing their expertise. I also want to thank you, our attendees, for attending today's webinar, Preparation of Form 1040-NR, U.S.-Nonresident Alien Income Tax Return. If you attended today's webinar for the entire 100 minutes from the official start time, you will receive a certificate of completion that you can use with your credentialing organization for two possible CE credits. If you stayed on for at least 50 minutes from the official start time of the webinar, you will qualify for one possible CE credit. Again, the time we spent chatting before the webinar doesn't count towards your 100 or 50 minutes. If you're eligible for continuing education from the IRS and registered with your valid PTIN, your credit will be posted in your PTIN account. If you're eligible for continuing education from the California Tax Education Council, your credit will be posted to your CTEC account as well. If you qualify and have not received your certificate and/or credit by October 14, please email us at cl.sl.web.conference.team@irs.gov. The email address is shown on this slide as well. If you are interested in finding out who your local Stakeholder Liaison may be, you can send us an email using the address shown on this slide, and we'll gladly send you that information. We would also appreciate it if you would take just a few minutes to complete a short evaluation before you exit. If you'd like to have more sessions like this, then let us know. If you have thoughts on how we can make them better, please let us know that as well. If you have any requests for future webinar topics or pertinent information you'd like to see in an IRS Fact Sheet, Tax Tip, or FAQ on IRS.gov, then please, folks, include your suggestions in the comments section of the survey. Click the Survey button on the right side of your screen to begin. If it doesn't come up, check to make sure you disabled your pop-up blocker.

It has been a pleasure to be here with you, and on behalf of the Internal Revenue Service and our presenters, we would like to thank you for attending today's webinar. It is so important for the IRS to stay connected with the tax professional community, individual taxpayers, industry associations, along with federal, state, and local government organizations. You make our jobs a lot easier by sharing the information that allows for proper tax reporting. Thanks again for your time and attendance. We wish you much success in your business or practice. You may exit the webinar at this time.