us internal revenue service: i1040nr--1998

8/14/2019 US Internal Revenue Service: i1040nr--1998

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1998 Department of the TreasuryInternal Revenue ServiceInstructions for Form1040NRU.S. Nonresident Alien Income Tax Return

Section references are to the Internal Revenue Code unless otherwise noted.

General InstructionsTIP: For details on these and other changes,see Pub. 553 or see What's Hot atwww.irs.ustreas.gov.

What's New for 1998?

Student Loan Interest Deduction

If you paid interest on a qualified student loan,you may be able to deduct up to $1,000 of theinterest on line 25. See the instructions for line25 on page 9 for details.

New Child Tax Credits

Do you have a dependent child (see theinstructions for line 7c on page 6 for a list offilers who are allowed to claim a dependent onForm 1040NR) who was under age 17 at theend of 1998?

If so, you may be able to claim either or bothof these new credits:q The Child Tax Creditq The Additional Child Tax Credit

The total of these credits cannot be morethan $400 for each qualifying child. Figure thechild tax credit first. If you have three or morequalifying children and you are not able toclaim the full $400 child tax credit for each

child, you may be able to claim the additionalcredit.

The additional child tax credit isrefundable; that is, it may give you a refundeven if you do not owe any tax.

These credits are in addition to the child anddependent care credit that you may be able toclaim.

Who is a Qualifying Child? The child mustbe your dependent and must meet certain otherrequirements. See Qualifying Child for ChildTax Credit in the instructions for line 7c,column (4), on page 6.

Caution: If the child meets thoserequirements, check the box in column (4) online 7c of your return.

Where Do You Claim These Credits?

Child Tax Credit. If you have at least onequalifying child, follow the instructions thatbegin on page 10. Enter the credit on Form1040NR, line 41.

Additional Child Tax Credit. Use Form 8812to figure this credit and attach it to your return.Enter the additional child tax credit on Form1040NR, line 56.

Sale of Your Home

If you sold your main home in 1998 and allfour of the following apply, you do not have toreport the sale on your tax return.

1. No part of the home was used forbusiness or rental purposes.

2. You owned and lived in the home asyour main home for at least 2 years within the5-year period ending on the date of sale.

3. You have not sold or exchanged anothermain home after May 6, 1997.

4. The selling price of the home is not over$250,000.

If all four of the conditions do not apply, seePub. 523 to find out if you have to report thesale on your return and, if you do, how to doso.

Self-Employed Health Insurance

You may be able to deduct up to 45% of yourhealth insurance. See the instructions for line28 on page 10 for details.

IRA Deduction Restored for SomePeople Covered by Retirement Plans

You may be able to take an IRA deduction ifyou were covered by a retirement plan andyour modified adjusted gross income is lessthan $40,000 if you checked filing status box1, 2, 3, 4, or 5; or $60,000 if qualifyingwidow(er) (filing status box 6). See theinstructions for line 24 on page 9.

Conversions From Traditional IRAs toRoth IRAs

If you converted part or all of a traditional, SEP,or SIMPLE IRA to a Roth IRA in 1998, you mayhave to file Form 8606. See Form 8606 and itsinstructions for details.

Penalty-Free IRA Distributions

The additional tax on an early distribution froman IRA may not apply if you paid highereducation expenses for yourself, your spouse,or your children or grandchildren. The tax alsomay not apply if you pay expenses related tothe purchase of a home by a first-timehomebuyer. See Form 5329 and itsinstructions for details.

Estimated Tax PenaltyYou generally will not owe an estimated taxpenalty if the amount you owe on line 67 is lessthan $1,000. See the instructions for line 68 onpage 13.

Credit for Federal Tax Paid onKerosene

If you bought undyed kerosene after June 30,1998, for heating or certain other nonhighwayuses, you may be able to take a credit of 24.4cents for each gallon. You can get a refundeven if you do not owe tax. See Form 4136.

Payment of Tax

If you owe tax, make your check or moneyorder payable to the United StatesTreasury. See the instructions for line 67 onpage 13 for more details.

Standard Mileage Rates

The rate for business use of a vehicle hasincreased to 32.5 cents a mile. Starting thisyear, you can use the business rate even if youlease your vehicle. For charitable contributions,the rate has increased to 14 cents a mile.

What To Look for in 1999Child Tax Credits. The total of the child taxcredit and the additional child tax credit can beas much as $500 for each qualifying child.

Student Loan Interest Deduction. You maybe able to deduct up to $1,500 of the interestyou pay on a qualified student loan.

Self-Employed Health Insurance Deduction.You may be able to deduct up to 60% of yourhealth insurance.

IRA Deduction Allowed to More TaxpayersCovered by a Retirement Plan. You may beable to take an IRA deduction if you arecovered by a retirement plan and your 1999modified adjusted gross income is less than:$41,000 if single or married filing separately

and you lived apart from your spouse for all of1999; or $61,000 if qualifying widow(er).

Items To NoteForm 1040NR-EZ. You may be able to useForm 1040NR-EZ, U.S. Income Tax Return forCertain Nonresident Aliens With NoDependents, if your only income from U.S.sources is wages, salaries, tips, taxablerefunds of state and local income taxes, andscholarship or fellowship grants. Also, ifmarried, you cannot claim an exemption foryour spouse. For more details, see Form1040NR-EZ and its instructions.

Other Reporting Requirements. If you meetthe closer connection to a foreign country

exception to the substantial presence test youmust file Form 8840, Closer ConnectionException Statement for Aliens. If you excludedays of presence in the United States forpurposes of the substantial presence test, youmust file Form 8843, Statement for ExemptIndividuals and Individuals With a MedicalCondition. This rule does not apply toforeign-government-related individuals whoexclude days of presence in the United States.Certain dual-resident taxpayers who claim taxtreaty benefits must file Form 8833,Treaty-Based Return Position DisclosureUnder Section 6114 or 7701(b). Adual-resident taxpayer is one who is a resident

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of both the United States and another countryunder each country's tax laws.

Additional Information

If you need more information, our freepublications may help you. Pub. 519, U.S. TaxGuide for Aliens, will be the most important, butthe following publications may also help.

Pub. 525, Taxable and Nontaxable Income

Pub. 529, Miscellaneous Deductions

Pub. 552, Recordkeeping for Individuals

Pub. 597, Information on the UnitedStates-Canada Income Tax TreatyPub. 901, U.S. Tax Treaties

Pub. 910, Guide to Free Tax Services(includes a list of all publications)

These free publications and the forms andschedules you will need are available onrequest from the Internal Revenue Service. Ifyou have a foreign address, send your order tothe Eastern Area Distribution Center, P.O. Box85627, Richmond, VA 23285-5627, U.S.A.

Resident Alien or NonresidentAlien

If you are not a citizen of the United States,specific rules apply to determine if you are a

resident alien or a nonresident alien for taxpurposes. Generally, you are considered aresident alien if you meet either the green cardtest or the substantial presence test for1998. If you do not meet either of these testsfor 1998 but you meet the substantial presencetest for 1999, you may be able to choose to betreated as a resident alien for part of 1998. Butyou must have been physically present in theUnited States for at least 31 days in a rowduring 1998 to do so. This choice does notapply if you met either the green card test orthe substantial presence test for 1997. Formore details, see Pub. 519.

You are considered a nonresident alien forthe year if you are not a U.S. resident undereither of these tests. You are also considered

a nonresident alien if you otherwise meet thesubstantial presence test but you come underany of the three exceptions described below.

For more details on resident andnonresident status, the tests for residence andthe exceptions to them, see Pub. 519.

Green Card Test. You are a resident for taxpurposes if you were a lawful permanentresident (immigrant) of the United States at anytime during 1998.

Substantial Presence Test. You areconsidered a U.S. resident if you meet thesubstantial presence test for 1998. You meetthis test if you were physically present in theUnited States for at least:

1. 31 days during 1998, and

2. 183 days during the period 1998, 1997,

and 1996, counting all the days of physicalpresence in 1998 but only 1/3 the number ofdays of presence in 1997 and only 1/6 thenumber of days in 1996.

Generally, you are treated as present in theUnited States on any day that you arephysically present in the country at any timeduring the day.

Exceptions. The following are exceptions tothe substantial presence test.

1.Exempt individual. You do not countdays for which you are an exempt individual.In general, an exempt individual is someonewho is a:

a. foreign-government-related individual,

b. teacher or trainee,

c. student, or

d. professional athlete who is temporarilyin the United States to compete in a charitablesports event.

Note: Alien individuals with Q visas aretreated as either students, teachers, or traineesand, as such, are exempt individuals forpurposes of the substantial presence test ifthey otherwise qualify. Q visas are issued toaliens participating in certain international

cultural exchange programs.2.Medical condition. You do not countany day that you intended to leave the UnitedStates but were unable to leave because of amedical condition or medical problem thatarose while you were present in the UnitedStates.

Note: This exception does not apply topre-existing medical conditions or problems.For more details, see Pub. 519.

3.Closer connection to foreign country.Even though you would otherwise meet thesubstantial presence test, you are not treatedas having met that test for 1998 if you:

a. were present in the United States forfewer than 183 days during 1998,

b. establish that during 1998 you had a taxhome in a foreign country, and

c. establish that during 1998 you had acloser connection to one foreign country inwhich you had a tax home than to the UnitedStates unless you had a closer connection totwo foreign countries.

Who Must File

File Form 1040NR if any of the following fourconditions applies to you.

1. You were a nonresident alien engagedin a trade or business in the United Statesduring 1998. You must file even if

a. none of your income came from a tradeor business conducted in the United States,

b. you have no U.S. source income, orc. your income is exempt from U.S. tax.

In any of the above three cases, do notcomplete the schedules for Form 1040NR.Instead, attach a list of the kinds of exclusionsyou claim and the amount of each.

Note: If you were a nonresident alien student,teacher, or trainee who was temporarilypresent in the United States under an F, J,M, or Q visa, you must file Form 1040NR (orForm 1040NR-EZ) onlyif you have incomethat is subject to tax under section 871 (i.e., theincome items listed on lines 8 through 21 onpage 1 of Form 1040NR and on lines 69through 79 on page 4 of Form 1040NR).

2. You were a nonresident alien notengaged in a trade or business in the United

States during 1998 and not all U.S. tax that youowe was withheld from your income.

3. You represent a deceased person whowould have had to file Form 1040NR.

4. You represent an estate or trust that hasto file Form 1040NR.

Exception for Children Under Age 14. If yourchild was under age 14 on January 1, 1999,had income only from interest and dividendsthat are effectively connected with a U.S. tradeor business, and that income totaled less than$6,500, you may be able to elect to report yourchild's income on your return. But you must useForm 8814, Parents' Election To Report Child's

Interest and Dividends, to do so. If you makethis election, your child does not have to file areturn. For more details, see Form 8814.

Filing a Deceased Person's Return. Thepersonal representative must file the return fora deceased person who was required to file areturn for 1998. A personal representative canbe an executor, administrator, or anyone whois in charge of the deceased person's property.

Filing for an Estate or Trust. If you are filingForm 1040NR for a nonresident alien estateor trust, change the form to reflect theprovisions of Subchapter J, Chapter 1, of the

Internal Revenue Code. You may find it helpfulto refer to Form 1041, U.S. Income Tax Returnfor Estates and Trusts, and its instructions.

When To FileIndividuals. If you were an employee andreceived wages subject to withholding, fileForm 1040NR by the 15th day of the 4th monthafter your tax year ends. A return for the 1998calendar year is due by April 15, 1999.

If you did not receive wages as an employeesubject to U.S. income tax withholding, fileForm 1040NR by the 15th day of the 6th monthafter your tax year ends. A return for the 1998calendar year is due by June 15, 1999.

Estates and Trusts. If you file for a

nonresident alien estate or trust that has anoffice in the United States, file the return by the15th day of the 4th month after the tax yearends. If you file for a nonresident alien estateor trust that does not have an office in theUnited States, file the return by the 15th dayof the 6th month after the tax year ends.

Note: If the regular due date for filing falls ona Saturday, Sunday, or legal holiday, file by thenext business day.

Extension of Time To File. If you cannot fileyour return by the due date, you should fileForm 4868, Application for AutomaticExtension of Time To File U.S. IndividualIncome Tax Return. You must file Form 4868by the regular due date of the return.

Note: Form 4868 does not extend the time to

pay your income tax. The tax is due by theregular due date of the return.

Where To File

File Form 1040NR with the Internal RevenueService Center, Philadelphia, PA 19255, U.S.A.

Private Delivery Services

You can use certain private delivery servicesdesignated by the IRS to meet the timelymailing as timely filing/paying rule for taxreturns and payments. The IRS publishes a listof the designated private delivery services inSeptember of each year. The list published inSeptember 1998 includes only the following:q Airborne Express (Airborne): Overnight Air

Express Service, Next Afternoon Service, andSecond Day Service.q DHL Worldwide Express (DHL): DHL SameDay Service, and DHL USA Overnight.q Federal Express (FedEx): FedEx PriorityOvernight, FedEx Standard Overnight, andFedEx 2Day.q United Parcel Service (UPS): UPS Next DayAir, UPS Next Day Air Saver, UPS 2nd DayAir, and UPS 2nd Day Air A.M.

The private delivery service can tell you howto get written proof of the mailing date.

Caution: Private delivery services cannotdeliver items to P.O. boxes. You must use the

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U.S. Postal Service to mail any item to an IRSP.O. box address.

Election To Be Taxed as aResident Alien

You can elect to be taxed as a U.S. resident forthe whole year if all of the following apply toyou:q You were married.q Your spouse was a U.S. citizen or residentalien on the last day of the tax year.q

You file a joint return for the year of theelection using Form 1040, 1040A, or 1040EZ.

To make this election, you must attach thestatement described in Pub. 519 to your return.Do not use Form 1040NR.

Your worldwide income for the whole yearmust be included and will be taxed under U.S.tax laws. You must agree to keep the records,books, and other information needed to figurethe tax. If you made the election in an earlieryear, you may file a joint return or separatereturn for 1998. If you file a separate return,use Form 1040 or Form 1040A. Yourworldwide income for the whole year must beincluded whether you file a joint or separatereturn.

Caution: Nonresident aliens who make this

election may forfeit the right to claim benefitsotherwise available under a U.S. tax treaty.For more details, see Pub. 901 or refer to thespecific treaty.

Dual-Status Taxpayers

Note: If you elect to be taxed as a residentalien (discussed above), the specialinstructions and restrictions discussed heredonotapply.

Dual-Status Tax Year

A dual-status year is one in which you changestatus between nonresident and resident alien.Different U.S. income tax rules apply to eachstatus.

Most dual-status years are the years ofarrival or departure. Before you arrive in theUnited States, you are a nonresident alien.After you arrive, you may or may not be aresident, depending on the circumstances.

If you become a U.S. resident, you stay aresident until you leave the United States. Youmay become a nonresident alien when youleave, if, after leaving (or after your last day oflawful permanent residency if you met thegreen card test) and for the remainder of thecalendar year of your departure, you have acloser connection to a foreign country than tothe United States, and, during the nextcalendar year, you are not a U.S. residentunder either the green card test or thesubstantial presence test. See Pub. 519.

What and Where To File for aDual-Status Year

If you were a U.S. resident on the last day ofthe tax year, file Form 1040, U.S. IndividualIncome Tax Return. Write Dual-StatusReturn across the top and attach a statementshowing your income for the part of the yearyou were a nonresident. You may use Form1040NR as the statement; write Dual-StatusStatement across the top. File your return andstatement with the Internal Revenue ServiceCenter, Philadelphia, PA 19255, U.S.A.

If you were a nonresident on the last dayof the tax year, file Form 1040NR. Write

Dual-Status Return across the top and attacha statement showing your income for the partof the year you were a U.S. resident. You mayuse Form 1040 as the statement; writeDual-Status Statement across the top. Fileyour return and statement with the InternalRevenue Service Center, Philadelphia, PA19255, U.S.A.

Statements. Any statement you file with yourreturn must show your name, address, andidentifying number (defined on page 5).

Former long-term U.S. residents arerequired to file Form 8854, Expatriation

Information Statement, with their dual-statusreturn for the last year of U.S. residency. Todetermine if you are a former long-term U.S.resident, see page 4.

Income Subject to Tax for Dual-StatusYear

As a dual-status taxpayer not filing a jointreturn, you are taxed on income from allsources for the part of the year you were aresident alien. Generally, you are taxed onincome only from U.S. sources for the part ofthe year you were a nonresident alien.However, all income effectively connected withthe conduct of a trade or business in the UnitedStates is taxable.

Income you received as a dual-statustaxpayer from sources outside the UnitedStates while a resident alien is taxable, even ifyou became a nonresident alien after receivingit and before the close of the tax year.Conversely, income you received from sourcesoutside the United States while a nonresidentalien is not taxable in most cases, even if youbecame a resident alien after receiving it andbefore the close of the tax year. Income fromU.S. sources is taxable whether you receivedit while a nonresident alien or a resident alien.

Restrictions for Dual-Status Taxpayers

Standard Deduction. You may not take thestandard deduction.

Head of Household. You may not use theHead of HouseholdTax Table column or TaxRate Schedule.

Joint Return. You may not file a joint return.However, see Election To Be Taxed as aResident Alien above.

Tax Rates. If you were married and anonresident of the United States for all or partof the tax year and you do not make theelection to be taxed as a resident alien asdiscussed earlier, you must use the Tax Tablecolumn or Tax Rate Schedule for Married FilingSeparatelyto figure your tax on incomeeffectively connected with a U.S. trade orbusiness. If married, you may not use theSingleTax Table column or Tax RateSchedule.

Deduction for Exemptions. As a dual-status

taxpayer, you usually will be entitled to yourown personal exemption. Subject to thegeneral rules for qualification, you are allowedexemptions for your spouse and dependents infiguring taxable income for the part of the yearyou were a resident alien. The amount you mayclaim for these exemptions is limited to yourtaxable income (determined without regard toexemptions) for the part of the year you werea resident alien. You may not use exemptions(other than your own) to reduce taxable incometo below zero for that period.

Special rules apply for exemptions for thepart of the tax year a dual-status taxpayer is anonresident alien if the taxpayer is a resident

of Canada, Mexico, Japan, or the Republic ofKorea; a U.S. national; or a student or businessapprentice from India. See Pub. 519.

Education Credits. You may not take aneducation credit unless your filing status ismarried filing jointly.

How To Figure Tax for Dual-StatusYear

When you figure your U.S. tax for a dual-statusyear, you are subject to different rules for thepart of the year you were a resident and thepart of the year you were a nonresident.

All income for the period of residence andall income that is effectively connected with atrade or business in the United States for theperiod of nonresidence, after allowabledeductions, is added and taxed at the samerates that apply to U.S. citizens and residents.Income that is not effectively connected with atrade or business in the United States for theperiod of nonresidence is subject to the flat30% rate or lower treaty rate. No deductionsare allowed against this income.

If you were a resident alien on the last dayof the tax year, add to the tax from the TaxTable, Tax Rate Schedules, Schedule D (Form1040), or Form 8615 the tax on thenoneffectively connected income. Enter thetotal tax on Form 1040, line 40. Next to line 40show the two amounts. If you are filing Form1040NR, enter the tax from the Tax Table, TaxRate Schedules, Schedule D (Form 1040), orForm 8615 on line 39 and the tax on thenoneffectively connected income on line 48.

Credits. You are allowed a credit against yourU.S. income tax liability for certain taxes youpaid, are considered to have paid, or that werewithheld from your income. These include:

1. Tax withheld from wages earned in theUnited States and taxes withheld at the sourcefrom various items of income from U.S. sourcesother than wages. This includes U.S. taxwithheld on dispositions of U.S. real propertyinterests.

When filing Form 1040, show the total tax

withheld on line 57. Enter amounts from theattached statement (Form 1040NR, lines 54,61a, 61b, 62a, and 62b) to the left of line 57and identify and include in the amount on line57.

When filing Form 1040NR, show the totaltax withheld on lines 54, 61a, 61b, 62a, and62b. Enter the amount from the attachedstatement (Form 1040, line 57) to the left of line54 and identify and include in the amount online 54.

2. Tax paid with Form 1040-ES, EstimatedTax for Individuals, or Form 1040-ES (NR),U.S. Estimated Tax for Nonresident AlienIndividuals.

3. Tax paid with Form 1040-C, U.S.Departing Alien Income Tax Return. When

filing Form 1040, include the tax paid with Form1040-C with the total payments on line 64.Identify the payment in the area to the left ofthe entry.

As a dual-status taxpayer, you generallymay claim tax credits using the same rules thatapply to resident aliens.

How To Report Income on Form1040NR

Community Income

If either you or your spouse, or both you andyour spouse, were nonresident aliens at any

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time during the tax year, and you hadcommunity income during the year, treat thecommunity income according to the applicablecommunity property laws except as follows:q Earned income of a spouse, other than tradeor business or partnership distributive shareincome. The spouse whose services producedthe income must report it on his or her separatereturn.q Trade or business income, other thanpartnership income. Treat this income asreceived by the husband unless the wifeexercises substantially all of the management

over the trade or business.q Partnership income (or loss) received froma trade or business carried on by thepartnership. Treat this income (or loss) asreceived by the spouse who is the partner andreport it on that spouse's return.q Income derived from the separate propertyof one spouse that is not earned income, tradeor business income, or partnership distributiveshare income. The spouse with the separateproperty must report this income on his or herseparate return.

See Pub. 555, Community Property, formore details.

Kinds of Income

You must divide your income for the tax yearinto the following three categories:

1. Income effectively connected with a U.S.trade or business. This income is taxed at thesame rates that apply to U.S. citizens. Reportit on page 1 of Form 1040NR. Pub. 519describes this income in greater detail.

2. U.S. income not effectively connectedwith a U.S. trade or business. This income istaxed at 30% unless a treaty between yourcountry and the United States has set a lowerrate that applies to you. Report this income onpage 4 of Form 1040NR and figure the tax onit. Then, report the tax on line 48. Pub. 519describes this income more fully.

Note: Use line 51 to report the 4% tax on U.S.source gross transportation income.

3. Income exempt from U.S. tax. Completeitems L and M on page 5 of Form 1040NR andline 22 if applicable.

Dispositions of U.S. Real PropertyInterests

Gain or loss on the disposition of a U.S. realproperty interest by a nonresident alienindividual is treated as if the alien individualwere engaged in a trade or business in theUnited States and as if the gain or loss wereeffectively connected with the conduct of thattrade or business. Losses of individuals shallbe taken into account only to the extent theywould be taken into account under section165(c). See section 897 and its regulations.

Report gains and losses on the dispositionof U.S. real property interests on Schedule D(Form 1040) and Form 1040NR, line 14. Also,net gains may be subject to the alternativeminimum tax. See the instructions for line 47.

The nonrecognition rules (not recognizinggain or loss) apply only when a U.S. realproperty interest is exchanged for an interestthe sale of which would be subject to U.S. tax.

Money and the fair market value of propertyreceived in exchange for an interest in apartnership, trust, or estate, will, to the extentattributable to a U.S. real property interest heldby the partnership, trust, or estate, be

considered as received from the sale orexchange of the U.S. real property interest.

Gains or losses from the disposition of aU.S. real property interest by a partnership,trust, or estate generally are passed throughand must be reported on the income tax returnof each partner or beneficiary.

U.S. Real Property Interests. A U.S. realproperty interest is any interest (other than aninterest solely as a creditor) in real propertylocated in the United States or the VirginIslands, or any interest in a domesticcorporation that is a U.S. real property holding

corporation. Generally, real property includes:q Land and unsevered natural products ofthe land, such as growing crops and timber,and mines, wells, and other natural deposits.q Improvements on land, including buildings,other inherently permanent structures, andstructural components of these.q Personal property associated with the useof real property, such as farming, forestry,mining, or construction equipment, or propertyused in lodging facilities or rented office space.See Pub. 519 for exceptions.

A corporation is a U.S. real property holdingcorporation if the fair market value of its U.S.real property interests is 50% or more of thefair market value of its U.S. real property

interests, interests in foreign real property, plusany other of its assets that are used or held foruse in a trade or business. For special rules,see sections 897(c)(4) and (5).

An interest in a foreign corporation is a U.S.real property interest only if the corporationelected to be treated as a domesticcorporation.

An interest in a domestic corporation is nota U.S. real property interest if at the date ofdisposition of the interest in the corporation: (a)the corporation did not hold any U.S. realproperty interests, and (b) all the U.S. realproperty interests held by the corporationduring the shorter of the periods described insection 897(c)(1)(A)(ii):

1. Were disposed of in a transaction in

which all gain realized was recognized, or2. Ceased to be U.S. real property interests

because of the application of section897(c)(1)(B) to one or more other corporations.

Stock Regularly Traded. A U.S. real propertyinterest does not include any class of stock ofa domestic corporation that is regularly tradedon an established securities market, unless youheld more than 5% of that class of stock at anytime during the shorter of the periods describedin section 897(c)(1)(A)(ii).

Section 897(h) provides special rules for areal estate investment trust.

Virgin Islands Real Estate. Gain or loss ondispositions of real property interests located inthe U.S. Virgin Islands is reported on returnsfiled with the Virgin Islands tax authorities. Tax

on these dispositions is paid to the VirginIslands tax authorities.

Income You May Elect To Treat asEffectively Connected With a U.S.Trade or Business

You may elect to treat some items of incomeas effectively connected with a U.S. trade orbusiness. The election applies to all incomefrom real property, or an interest in realproperty, located in the United States and heldfor the production of income. Income from realproperty includes:q Rental income from real property.

q Profit from disposing of U.S. timber, coal, oriron ore while keeping a share in it.q Rents and royalties from mines, oil or gaswells, or other natural resources.

The election does not apply to dispositionsof U.S. real property interests discussed earlier.

To make the election, attach a statement toyour return for the year of the election. Includein your statement:

1. That you are making the election.

2. A complete list of all your real property,or any interest in real property, located in the

United States (including location). Give thelegal identification of U.S. timber, coal, or ironore in which you have an interest.

3. The extent of your interest in the realproperty.

4. A description of any substantialimprovements on such real property.

5. Your income from the property.

6. The dates you owned it.

7. Whether the election is under section871(d) or treaty.

8. Details of any previous elections andrevocations of the real property elections.

Foreign Income Taxed by the UnitedStates

You may be required to report some incomefrom foreign sources on your U.S. return if it iseffectively connected with a U.S. trade orbusiness. For this foreign income to be treatedas effectively connected with a U.S. trade orbusiness, you must have a fixed place ofbusiness in the United States. The income,gain, or loss must result directly from the usualbusiness activities of your U.S. office. Thekinds of foreign income that may be taxed atthe graduated rates are:q Interest or dividends from the U.S. business.q Income from foreign sales made by your U.S.office.q Rents or royalties you received for the useof intangible property located outside theUnited States or the privilege of using it. Suchproperty includes patents, copyrights,trademarks, and franchises.

Special Rules for Former U.S.Citizens and Former Long-TermU.S. Residents

Section 877 may affect your tax liability if youare a former citizen or former long-termresident of the United States. You are a formerlong-term resident if you were a lawfulpermanent resident of the United States (i.e.,you had a green card) for at least 8 out of the15 consecutive tax years ending with the yearyour residency ended. In determining if you area former long-term resident, do not count anyyear that you were treated as a resident ofanother country under a tax treaty and did notwaive treaty benefits.

If you were a former citizen or formerlong-term resident and you relinquished yourcitizenship or terminated your residency afterFebruary 5, 1995, you are subject to theprovisions of section 877 on your U.S. sourceincome if one of the principal purposes of youraction was to avoid U.S. taxes.

You are considered to have tax avoidanceas a principal purpose if (1) your averageannual net income tax for the last 5 tax yearsending before the date of your action torelinquish your citizenship or terminate your



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residency was more than $100,000, or (2) yournet worth on the date of your action was$500,000 or more. These amounts areadjusted for inflation if your expatriation actionis after 1996. If you expatriated in 1997, youraverage annual net income tax has to havebeen more than $106,000 or your net worthhas to have been $528,000 or more for theserules to apply. If you expatriated in 1998, theamounts are $109,000 and $543,000,respectively.

Although there are exceptions to these rules,you will qualify for an exception only if you are

eligible to submit a ruling request to the IRSthat your renunciation of U.S. citizenship ortermination of U.S. residency did not have asone of its principal purposes the avoidance ofU.S. tax and you submit such a ruling requestin a complete and good faith manner. For moredetails about these exceptions, see section877(c); Notice 97-19, 1997-1 C.B. 394; andNotice 98-34, 1998-27 I.R.B. 30.

If the rules of section 877 apply to you,check the Yes box in item P on page 5 ofthe form. You are subject to tax on U.S.source income and gains on either (1) a netbasis at the graduated rates applicable toindividuals with allowable deductions, or (2) agross basis at a rate of 30% under the rulesof section 871(a). See Chapter 4 of Pub. 519

for more details on the tax imposed undersection 871(a).

If you have items of U.S. source income thatare subject to tax under section 871(a), youwill be taxed at a rate of 30% on your grossincome only if this tax exceeds the tax at theregular graduated rates on your net income. Ifthe 30% tax on your gross income exceeds thegraduated tax on your net income, report thoseitems on the appropriate lines on page 4 ofForm 1040NR. If the graduated tax on your netincome exceeds the 30% tax on your grossincome, report your income on the appropriatelines on page 1 of Form 1040NR and attach astatement describing the items and amountsof income that are subject to tax by reason ofsection 877.

If you have other items of U.S. sourceincome that are not subject to tax under section871(a), you will be taxed on a net basis at theregular graduated rates applicable toindividuals. Report this income on theappropriate lines on page 1 of Form 1040NR.

For purposes of computing the tax dueunder section 877, the following items ofincome are treated as U.S. source:

1. Gains on the sale or exchange ofpersonal property located in the United States.

2. Gains on the sale or exchange of stockissued by a domestic corporation or debtobligations of the United States, U.S. persons,a state or political subdivision thereof, and theDistrict of Columbia.

3. Income or gain derived from stock in aforeign corporation if you owned, either directlyor indirectly (through the rules of sections958(a) and 958(b)) more than 50% of the voteor value of the stock of the corporation on thedate of your renunciation of citizenship ortermination of residency or at any time duringthe 2 years preceding such date. Such incomeor gain is considered U.S. source only to theextent of your share of the earnings and profitsearned or accumulated prior to the date ofrenunciation of U.S. citizenship or terminationof residency.

You may not claim that a tax treaty in effecton August 21, 1996, prevents the impositionof tax by reason of section 877.

Annual Information Statement

If the expatriation rules apply to you and youare liable for U.S. taxes, you must attach astatement to Form 1040NR that sets forth bycategory (e.g., dividends, interest, etc.) allitems of U.S. and foreign source gross income(whether or not taxable in the United States).The statement must identify the source of suchincome (determined under section 877 as

modified by Section V of Notice 97-19, 1997-1C.B. 394) and those items of income subject totax under section 877. If the expatriation rulesapply to you, you must attach this statement toForm 1040NR, even if you have fully satisfiedyour U.S. tax liability through withholding of taxat source.

If you fail to furnish a complete statement,as described above, you will not be consideredto have filed a true and accurate return.Therefore, you will not be entitled to anydeductions or credits if your tax liability for your1998 taxable year is later adjusted. See section874(a).

Line Instructions for Form1040NR

Name, Address, and IdentifyingNumberName. If you are filing Form 1040NR for anestate or trust, enter the name of the estate ortrust, and your name, title, and address. Also,give the name and address of any U.S.grantors and beneficiaries.

P.O. Box. Enter your box number instead ofyour street address only if your post officedoes not deliver mail to your home.

Foreign Address. Enter the information in the

following order: city, province or state, andcountry. Follow the country's practice forentering the postal code. Please do notabbreviate the country name.

Identifying Number. If you are an individual,you are generally required to enter your socialsecurity number (SSN). To apply for an SSN,get Form SS-5, from a Social SecurityAdministration (SSA) office. Fill in Form SS-5and return it to the SSA.

If you do not have an SSN and are noteligible to get one, you must get an individualtaxpayer identification number (ITIN). To applyfor an ITIN, file Form W-7 with the IRS. Itusually takes about 30 days to get an ITIN.Enter your ITIN wherever your SSN isrequested on your tax return. If you are

required to include another person's SSN onyour return and that person does not have andcannot get a SSN, enter that person's ITIN.

Note: An ITIN is for tax use only. It does notentitle you to social security benefits or changeyour employment or immigration status underU.S. law.

If you are filing Form 1040NR for an estateor trust, enter the employer identificationnumber of the estate or trust.

An incorrect or missing identifying numbermay increase your tax or reduce your refund.

Filing Status

The amount of your tax depends on your filingstatus. Before you decide which box to check,read the following explanations.

Were You Single or Married? If you weremarried on December 31, consider yourselfmarried for the whole year. If you were single,divorced, or legally separated under a decreeof divorce or separate maintenance onDecember 31, consider yourself single for thewhole year. If you meet the tests describedunder Married Persons Who Live Apartbelow, you may consider yourself single for thewhole year.

If your spouse died in 1998, consideryourself married to that spouse for the wholeyear, unless you remarried before the end of1998.

Married Persons Who Live Apart. Somemarried persons who have a child and who donot live with their spouse may file as single. Ifyou meet all five of the following tests and youare a married resident of Canada or Mexico,or a U.S. national, check the box on line 1. Ifyou meet the tests and you are a marriedresident of Japan or the Republic of Korea,check the box on line 2.

1. You file a separate return from yourspouse.

2. You paid more than half the cost to keepup your home in 1998.

3. You lived apart from your spouse duringthe last 6 months of 1998.

4. Your home was the principal home ofyour child, stepchild, adopted child, or fosterchild for more than half of 1998.

5. You claim this child as your dependentor the child's other parent claims him or her asa dependent under the rules in Pub. 501,Exemptions, Standard Deduction, and FilingInformation, for children of divorced orseparated parents.

Line 6Qualifying Widow(er) WithDependent Child. You may check the box on

line 6 and use joint return tax rates for 1998 ifall seven of the following apply.

1. You were a resident of Canada, Mexico,Japan, or the Republic of Korea, or were a U.S.national.

2. Your spouse died in 1996 or 1997 andyou did not remarry in 1998.

3. You have a child, stepchild, adoptedchild, or foster child whom you can claim as adependent.

4. This child lived in your home for all of1998. Temporary absences, such as for school,vacation, or medical care, count as time livedin the home.

5. You paid over half the cost of keepingup your home.

6. You were a resident alien or U.S. citizenthe year your spouse died. This refers to youractual status, not the election that somenonresident aliens can make to be taxed asU.S. residents.

7. You could have filed a joint return withyour spouse the year he or she died, even ifyou did not actually do so.

Exemptions

Exemptions for estates and trusts aredescribed in the instructions for line 37.



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Note: Residents of India who were studentsor business apprentices may be able to claimexemptions for their spouse and dependents.See Pub. 519 for details.

Line 7bSpouse. If you checked filing statusbox 3 or 4, you can take an exemption for yourspouse only if your spouse had no grossincome for U.S. tax purposes and cannot beclaimed as a dependent on another U.S.taxpayer's return. (You can do this even if yourspouse died in 1998.) In addition, if youchecked filing status box 4, your spouse musthave lived with you in the United States at

some time during 1998. Finally, your spousemust have an SSN or an ITIN. If your spouseis not eligible to obtain an SSN, he or she canfile Form W-7 with the IRS to apply for an ITIN.See Identifying Number on page 5 foradditional information.

Line 7cDependents. Only U.S. nationals,and residents of Canada, Mexico, Japan, andthe Republic of Korea, may claim exemptionsfor their dependents. If you were a U.S.national (American Samoan) or a resident ofCanada or Mexico, you can claim exemptionsfor your children and other dependents on thesame terms as U.S. citizens. See Pub. 501 formore details. If you were a resident of Japanor the Republic of Korea, you may claim anexemption for any of your children who lived

with you in the United States at some timeduring 1998.

You can take an exemption for each of yourdependents. If you have more than fivedependents, attach a statement to your returnwith the required information.

Line 7c, Column (2). You must enter eachdependent's identifying number (SSN, ITIN, oradoption taxpayer identification number(ATIN)). If you do not enter the correctidentifying number, at the time we process yourreturn we may disallow the exemption claimedfor the dependent and reduce or disallow anyother tax benefits (such as the child tax credits)based on the dependent. If your dependentchild was born and died in 1998 and you donot have an identifying number for the child,

attach a copy of the child's birth certificateinstead and enter DIED in column (2).

Adoption Taxpayer IdentificationNumbers (ATINs). If you have a dependentwho was placed with you by an authorizedplacement agency and you do not know his orher SSN, you must get an ATIN for thedependent from the IRS. See Form W-7A fordetails.

Line 7c, Column (4). Check this column ifyour dependent is a qualifying child for the childtax credit (defined below). If you have at leastone qualifying child, you may be able to takethe child tax credit on line 41.

Qualifying Child for Child Tax Credit. Aqualifying child for purposes of the child taxcredit is a child who:q Is claimed as your dependent on line 7c, andq Was under age 17 at the end of 1998, andq Is your son, daughter, adopted child,grandchild, stepchild, or foster child, andq Is a U.S. citizen or resident alien.

A child placed with you by an authorizedplacement agency for legal adoption is anadopted child even if the adoption is not final.

A grandchild is any decendent of your son,daughter, or adopted child and includes yourgreat-grandchild, great-great-grandchild, etc.

A foster child is any child you cared for asyour own child and who lived with you for all

of 1998. A child who was born or died in 1998is considered to have lived with you for all of1998 if your home was the child's home for theentire time he or she was alive during 1998.

To find out who is a resident alien, seeResident Alien or Nonresident Alien on page2.

Children Who Did Not Live With You Dueto Divorce or Separation. If you are claiminga child who did not live with you under the rulesin Pub. 501 for children of divorced orseparated parents, attach Form 8332 or similarstatement to your return. But see Exception

below. If your divorce decree or separationagreement went into effect after 1984 and itstates you can claim the child as yourdependent without regard to any condition,such as payment of support, you may attach acopy of certain pages from the decree oragreement instead. See Pub. 504, Divorcedor Separated Individuals, for details.

Note: You must attach the requiredinformation even if you filed it in an earlier year.

Exception. You do not have to attach Form8332 or similar statement if your divorce decreeor written separation agreement went intoeffect before 1985 and it states that you canclaim this child as your dependent.

Other Dependent Children. Include thetotal number of children who did not live withyou for reasons other than divorce orseparation on the line labeled Dependents on7c not entered above.

Rounding Off to Whole Dollars

To round off cents to the nearest whole dollaron your forms and schedules, drop amountsunder 50 cents and increase amounts from 50to 99 cents to the next dollar. If you do roundoff, do so for all amounts. But if you have toadd two or more amounts to figure the amountto enter on a line, include cents when addingand only round off the total.

Income Effectively ConnectedWith U.S. Trade or Business

Pub. 519 explains how income is classified andwhat income you should report here. Theinstructions for this section assume you havedecided that the income involved is effectivelyconnected with a U.S. trade or business inwhich you were engaged. But your decisionmay not be easy. Interest, for example, maybe effectively connected with a U.S. trade orbusiness, it may not be, or it may be taxexempt. The tax status of income also dependson its source. Under some circumstances,items of income from foreign sources aretreated as effectively connected with a U.S.trade or business. Other items are reportable

as effectively connected or not effectivelyconnected with a U.S. trade or business,depending on how you elect to treat them.

Line 8Wages, Salaries, Tips, etc. Enter thetotal of your effectively connected wages,salaries, tips, etc. But, do not include amountsexempted under a tax treaty and reported inItem M on page 5 of Form 1040NR. Alsoinclude in this total:q Tip income you did not report to youremployer. Also include allocated tips shownon your W-2 form(s) unless you can prove thatyou received less. Allocated tips should beshown in box 8 of your W-2 form(s). They are

not included as income in box 1. See Pub.531, Reporting Tip Income, for more details.

Caution: You may owe social security andMedicare tax on unreported or allocated tips.See the instructions for line 49 on page 12.q Dependent care benefits, which should beshown in box 10 of your W-2 form(s). But firstcomplete Form 2441, Child and DependentCare Expenses, to see if you may exclude partor all of the benefits.q Employer-provided adoption benefits,which should be shown in box 13 of your W-2

form(s) with code T. But first complete Form8839 to see if you can exclude part or all of thebenefits.q Excess salary deferrals. The amountdeferred should be shown in box 13 of yourW-2 form and the Deferred compensation boxin box 15 should be checked. If the totalamount you deferred for 1998 under all planswas more than $10,000, include the excess online 8. But a different limit may apply if amountswere deferred under a tax-sheltered annuityplan or an eligible plan of a state or localgovernment or tax-exempt organization. SeePub. 575, Pension and Annuity Income, fordetails.

Caution: You maynotdeduct the amountdeferred. It is not included as income in box 1

of your W-2 form.q Disability pensions shown on Form 1099-Rif you have not reached the minimumretirement age set by your employer. Disabilitypensions received after you reach that age andother pensions shown on Form 1099-R (otherthan payments from an IRA*) are reported onlines 17a and 17b.q Corrective distributions shown on Form1099-R of (1) excess salary deferrals and (2)excess contributions to a retirement plan. Butdo not include distributions from an IRA* on line8. Instead, report them on lines 16a and 16b.

*This includes a Roth, SEP, SIMPLE, oreducation IRA.

Missing or Incorrect Form W-2. If you donot get a Form W-2 by February 1, 1999, ask

your employer for it. Even if you do not get aForm W-2, you must still report your earningson line 8. If you lose your Form W-2 or it isincorrect, ask your employer for a new one.

Line 9aTaxable Interest Income. Reporton line 9a all of your taxable interest incomefrom assets effectively connected with a U.S.trade or business.

If you received interest not effectivelyconnected with a U.S. trade or business, reportit on page 4 of Form 1040NR, unless it is taxexempt under a treaty. See Pub. 901, U.S. TaxTreaties. In addition, interest from a U.S. bank,savings and loan association, credit union, orsimilar institution, and from certain depositswith U.S. insurance companies, is tax exemptif it is not effectively connected with a U.S.

trade or business.Interest credited in 1998 on deposits that

you could not withdraw because of thebankruptcy or insolvency of the financialinstitution may not have to be included in your1998 income. For details, see Pub. 550,Investment Income and Expenses.

Line 9bTax-Exempt Interest. Certain typesof interest income from investments in stateand municipal bonds and similar instrumentsare not taxed by the United States. If youreceived such tax-exempt interest income,report the amount on line 9b. Include anyexempt-interest dividends from a mutual fund



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or other regulated investment company. But donot include interest earned on your IRA, orinterest from a U.S. bank, savings and loanassociation, credit union, or similar institution(or from certain deposits with U.S. insurancecompanies) that are exempt from tax under atax treaty or under section 871(i) because theinterest is not effectively connected with a U.S.trade or business.

Line 10Ordinary Dividends. Enter yourtotal ordinary dividends from assets effectivelyconnected with a U.S. trade or business. Eachpayer should send you a Form 1099-DIV.

Capital Gain Distributions. If you receivedany capital gain distributions, report them onSchedule D (Form 1040), line 13.

Nontaxable Distributions. Somedistributions are nontaxable because they area return of your cost. They will not be taxeduntil you recover your cost. You must reduceyour cost (or other basis) by these distributions.After you get back all of your cost (or otherbasis), you must report these distributions ascapital gains. For details, see Pub. 550.

TIP: Dividends on insurance policies are apartial return of the premiums you paid. Do notreport them as dividends. Include them inincome only if they exceed the total of all netpremiums you paid for the contract.

Line 11Taxable Refunds, Credits, orOffsets of State and Local Income Taxes.

TIP: None of your refund is taxable if, in theyear you paid the tax, youdid notitemizedeductions.

If you received a refund, credit, or offset ofstate or local income taxes in 1998, you mayreceive a Form 1099-G. If you chose to applypart or all of the refund to your 1998 estimatedstate or local income tax, the amount appliedis treated as received in 1998.

For details on how to figure the amount youmust report as income, see Recoveries inPub. 525, Taxable and Nontaxable Income.

Line 12Scholarship and FellowshipGrants. If you received a scholarship orfellowship, part or all of it may be taxable.

If you were a degree candidate, the amountsyou used for expenses other than tuition andcourse-related expenses are generally taxable.For example, amounts used for room, board,and travel are generally taxable.

If you were not a degree candidate, the fullamount of the scholarship or fellowship isgenerally taxable. Also, amounts received asa scholarship or fellowship that are payment forteaching, research, or other services aretaxable even if the services were required toget the grant.

Report the total amount of the grant on line12 and show any nontaxable part on line 31. Ifthe grant was reported on Form 1042-S, enterthe gross amount from column (b) on line 12.However, do not include amounts exempted

under a tax treaty and reported in item M onpage 5 of Form 1040NR. If you are excludingitems allowed by section 117 (i.e., amountsused for tuition and course-related expensessuch as fees, books, supplies, and equipment)that exceed amounts shown on Form 1042-S,attach a statement describing these amounts.See Pub. 520, Scholarships and Fellowships,for more information.

Attach any Form 1042-S or Form W-2 youreceived from the college or institution. If youdid not receive a 1042-S or W-2 form, attacha statement from the college or institution (on

their letterhead) showing the details of thegrant.

Line 13Business Income or (Loss). If youoperated a business or practiced yourprofession as a sole proprietor, report yourincome and expenses on Schedule C orSchedule C-EZ (Form 1040).

Include any income you received as a dealerin stocks, securities, and commodities throughyour U.S. office. If you dealt in these itemsthrough an independent agent, such as a U.S.broker, custodian, or commissioned agent,your income may not be considered effectively

connected with a U.S. business. For generalinformation on business income or loss, seethe Instructions for Schedule C (Form 1040)and see Pub. 334, Tax Guide for SmallBusiness.

Line 14Capital Gain or (Loss). If you hada capital gain or loss, including any capitalgain distributions from a mutual fund, youmust complete Schedule D (Form 1040).Enter the effectively connected gain or (loss)from Schedule D (Form 1040). You may needPub. 544, Sales and Other Dispositions ofAssets.

Gains and losses from disposing of U.S. realproperty interests are taxed as if you wereengaged in a U.S. trade or business and aretreated as effectively connected with that trade

or business. See Dispositions of U.S. RealProperty Interests on page 4.

Line 15Other Gains or (Losses). If yousold or exchanged assets used in a U.S. tradeor business, see the instructions for Form4797.

Lines 16a and 16bIRA Distributions. Youshould receive a Form 1099-R showing theamount of the distribution from your individualretirement arrangement (IRA). Unlessotherwise noted in the line 16a and 16binstructions, an IRA includes a traditional IRA,Roth IRA, education (Ed) IRA, simplifiedemployee pension (SEP) IRA, and a savingsincentive match plan for employees (SIMPLE)IRA. Leave line 16a blank and enter the totaldistribution on line 16b.

Exception: Do not enter your total IRAdistribution on line 16b if any of the followingapplies.

1. You made nondeductible contributions toany of your traditional or SEP IRAs for 1998or an earlier year. Instead, use Form 8606 tofigure the amount to enter on line 16b; enterthe total distribution on line 16a. If you madenondeductible contributions to these IRAs for1998, also see Pub. 590, Individual RetirementArrangements (IRAs).

2. You converted part or all of a traditional,SEP, or SIMPLE IRA to a Roth IRA. Instead,use Form 8606 to figure the amount to enteron line 16b; enter the total distribution on line16a.

3. You made an excess contribution in1998 to your IRA and withdrew it during theperiod of January 1, 1999, through April 15,1999. Enter the total distribution on line 16aand the taxable part (the earnings) on line 16b.

4. You received a distribution from an Edor Roth IRA and the total distribution was notrolled over into another IRA of the same type.Instead, use Form 8606 to figure the amountto enter on line 16b; enter the total distributionon line 16a.

5. You rolled your IRA distribution over intoanother IRA of the same type (for example,from one traditional IRA to another traditional

IRA). Enter the total distribution on line 16a andwrite Rollover next to line 16b. If the total online 16a was rolled over, enter zero on line 16b.If the total was not rolled over, enter the partnot rolled over on line 16b. But if 1 above alsoapplies, use Form 8606 to figure the taxablepart.

Caution: You may have to pay an additionaltax if(1)you received an early distribution fromyour IRA and the total distribution was notrolled over, or(2)you were born before July1, 1927, and received less than the minimumrequired distribution. See the instructions for

line 50 on page 12 for details.Lines 17a and 17bPensions andAnnuities. Use lines 17a and 17b to reporteffectively connected pension and annuitypayments you received. You should receive aForm 1099-R showing the amount youreceived. See page 8 for details on rolloversand lump-sum distributions. But if this incomeis not effectively connected with your U.S. tradeor business, report it on line 75.

Do not include the following payments onlines 17a and 17b. Instead, report them on line8.

q Disability pensions received before you reachthe minimum retirement age set by youremployer.

q Corrective distributions of excess salarydeferrals or excess contributions to retirementplans.

TIP: Attach Form 1099-R to Form 1040NR ifany Federal income tax was withheld.

Some annuities are tax-exempt. See section871(f).

Note: If you perform services in the UnitedStates, your income is effectively connectedwith the conduct of a U.S. trade or business.When you receive a pension in a later year asa result of these services, the pension is alsoconsidered effectively connected with theconduct of a U.S. trade or business.

Fully Taxable Pensions and Annuities. Ifyour pension or annuity is fully taxable, enterit on line 17b; do not make an entry on line17a. Your payments are fully taxable if eitherof the following applies:

1. You did not contribute to the cost (seepage 8) of your pension or annuity, or

2. You got your entire cost back tax freebefore 1998.

Fully taxable pensions and annuities alsoinclude military retirement pay shown on Form1099-R. For details on military disabilitypensions, see Pub. 525, Taxable andNontaxable Income. If you received a FormRRB-1099-R, see Pub. 575, Pension andAnnuity Income, for information on how toreport your benefits.

Partially Taxable Pensions and Annuities.If your pension or annuity is partially taxable

and your Form 1099-R does not show thetaxable part, you must use the General Rule tofigure the taxable part. The General Rule isexplained in Pub. 939, Pension General Rule.However, if your annuity starting date (definedon page 8) was after July 1, 1986, you maybe able to use the Simplified Method explainedon page 8. But if your annuity starting date wasafter November 18, 1996, and items 1, 2, and3 on page 8 under Simplified Method apply,you must use the Simplified Method to figurethe taxable part.

You can ask the IRS to figure the taxablepart for you for an $80 fee. For details, seePub. 939.



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Simplified Method WorksheetLines 17a and 17b (keep for your records)

Enter the total pension or annuity payments received this year. Also, enterthis amount on Form 1040NR, line 17a

1.1.

Enter your cost in the plan at the annuity starting dateplus any death benefit exclusion (see the instructionson this page)

2.

2.

3.

3.

Divide line 2 by line 3 4.4.

Multiply line 4 by the number of months for which thisyears payments were made. If your annuity startingdate was before 1987, skip lines 6 and 7 and enterthis amount on line 8. Otherwise, go to line 6

5.

5.

Enter the amount, if any, recovered tax free in yearsafter 1986 6.

6.

Subtract line 6 from line 2 7.7.

Enter the smaller of line 5 or line 78. 8.

Taxable amount. Subtract line 8 from line 1. Enter the result, but not lessthan zero. Also, enter this amount on Form 1040NR, line 17b. If your Form1099-R shows a larger amount, use the amount on this line instead ofthe amount from Form 1099-R

9.

9.

Note: If you had more than one partially taxable pension or annuity, figure the taxable part ofeach separately. Enter the total of the taxable parts on Form 1040NR, line 17b. Enter the totalpension or annuity payments received in 1998 on Form 1040NR, line 17a.

Enter the appropriate number from Table 1 below.But if your annuity starting date was after 1997 andthe payments are for your life and that of your ben-eficiary, enter the appropriate number from Table 2below

TABLE 1 FOR LINE 3 ABOVE

IF the age at annuitystarting date (seebelow) was . . .

55 or under

5660

6165

6670

71 or older

300

260

240

170

120

360

310

260

210

160

AND your annuity starting date was

before November 19,1996, enter on line 3 . . .

after November 18, 1996,enter on line 3 . . .

TABLE 2 FOR LINE 3 ABOVE

IF the combined ages atannuity starting date(see below) were . . .

110 or under

111120

121130

131140

141 or older

410

360

310

260

210

THEN enter online 3 . . .

payments was fewer than 5. See Pub. 575 forthe definition of guaranteed payments.

If all three apply, use the worksheet on thispage to figure the taxable part of your pensionor annuity. For more details on the SimplifiedMethod, see Pub. 575.

Age (or Combined Ages) at AnnuityStarting Date. If you are the retiree, use yourage on the annuity starting date. If you are thesurvivor of a retiree, use the retiree's age onhis or her annuity starting date. But if yourannuity starting date was after 1997 and thepayments are for your life and that of your

beneficiary, use your combined ages on theannuity starting date.

If you are the beneficiary of an employeewho died, see Pub. 575. If there is more thanone beneficiary, see Pub. 575 to figure eachbeneficiary's taxable amount.

Changing Methods. If your annuity startingdate was after July 1, 1986, and beforeNovember 19, 1996, you may be able tochange from the General Rule to the SimplifiedMethod (or the other way around). For details,see Pub. 575.

Cost. Your cost is generally your netinvestment in the plan as of the annuity startingdate. It should be shown in box 9b of Form1099-R for the first year you received paymentsfrom the plan.

Death Benefit Exclusion. If you are thebeneficiary of a deceased employee or formeremployee who died before August 21, 1996,amounts paid to you by, or on behalf of, anemployer because of the death of theemployee may qualify for a death benefitexclusion of up to $5,000. If you are entitled tothis exclusion, add it to the amount you enteron line 2 of the worksheet on this page. Do thiseven if the Form 1099-R shows a taxableamount. The payer of the annuity cannot addthe death benefit exclusion to your cost whenfiguring the taxable amount. Special rulesapply if you are the survivor under a joint andsurvivor's annuity. For details, see Pub. 575.

Rollovers. A rollover is a tax-free

distribution of cash or other assets from oneretirement plan that is contributed to anotherplan. Use lines 17a and 17b to report a rollover,including a direct rollover, from one qualifiedemployer's plan to another or to an IRA or SEP.

Enter on line 17a the total distribution beforeincome tax or other deductions were withheld.This amount should be shown in box 1 of Form1099-R. From the total on line 17a, subtractany contributions (usually shown in box 5) thatwere taxable to you when made. From thatresult, subtract the amount that was rolled overeither directly or within 60 days of receiving thedistribution. Enter the remaining amount, evenif zero, on line 17b. Write Rollover next to line17b.

Special rules apply to partial rollovers of

property. For more details on rollovers,including distributions under qualified domesticrelations orders, see Pub. 575.

Lump-Sum Distributions. If you receiveda lump-sum distribution from a profit-sharingor retirement plan, your Form 1099-R shouldhave the Total distribution box in box 2bchecked. You may owe an additional tax if youreceived an early distribution from a qualifiedretirement plan and the total amount was notrolled over. For details, see the instructions forline 50 on page 12.

Enter the total distribution on line 17a andthe taxable part on line 17b.

If your Form 1099-R shows a taxableamount, you may report that amount on line17b. But you may be able to report a lowertaxable amount by using the General Rule orthe Simplified Method.

Once you have figured the taxable part ofyour pension or annuity, enter that amount online 17b and the total on line 17a.

Annuity Starting Date. Your annuitystarting date is the later of the first day of thefirst period for which you received a payment,or the date the plan's obligations became fixed.

Simplified Method. If your annuity startingdate (defined above) was after July 1, 1986,

and all three of the following apply, you canuse this simpler method. But if your annuitystarting date was after November 18, 1996,and all three of the following apply, you mustuse the Simplified Method.

1. The payments are for (a) your life or (b)your life and that of your beneficiary.

2. The payments are from a qualifiedemployee plan, a qualified employee annuity,or a tax-sheltered annuity.

3. At the time the pension or annuitypayments began, either you were under age75 or the number of years of guaranteed



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TIP: You may be able to pay less tax on thedistribution if you were at least age 591/2 on thedate of the distribution, you meet certain otherconditions, and you choose to useForm 4972,Tax on Lump-Sum Distributions, to figure thetax on any part of the distribution. You mayalso be able to use Form 4972 if you are thebeneficiary of a deceased employee who waseither age 591/2 or older on the date of deathor was born before 1936. For details, see Form4972.

Line 20Unemployment Compensation.You should receive a Form 1099-G showing

the total unemployment compensation amountpaid to you in 1998.

If you received an overpayment ofunemployment compensation in 1998 and yourepaid any of it in 1998, subtract the amountyou repaid from the total amount you received.Enter the result on line 20. Also, enterRepaid and the amount you repaid on thedotted line next to line 20. If, in 1998, yourepaid unemployment compensation that youincluded in gross income in an earlier year, youmay deduct the amount repaid on Schedule A,line 11. But if you repaid more than $3,000, seeRepayments in Pub. 525 for details on how toreport the repayment.

Line 21Other Income. Use line 21 to reportany other income effectively connected with

your U.S. business that is not reportedelsewhere on your return or other schedules.List the type and amount of income. Ifnecessary, show the required information onan attached statement. For more details, seeMiscellaneous Taxable Income in Pub. 525.

Report other income on page 4 of Form1040NR if not effectively connected with a U.S.trade or business.

Net Operating Loss. If you had a netoperating loss in an earlier year to carryforward to 1998, include it as a negativeamount in parentheses on line 21. Attach astatement showing how you figured theamount. See Pub. 536, Net Operating Losses,for more details.

Line 22. Use line 22 to report your totaleffectively connected income that is exemptfrom tax by a tax treaty. Do not include thisexempt income on line 23. Also, you mustcomplete item M on page 5 of Form 1040NR.

Adjustments

Adjustments are amounts you can subtractfrom your income effectively connected with aU.S. trade or business.

Line 24IRA Deduction.

TIP: If you make any nondeductiblecontributions to a traditional IRA for 1998, youmust report them onForm 8606.

If you made contributions to a traditional IRAfor 1998, you may be able to take an IRAdeduction. But you must have had earnedincome to do so. You should receive astatement by June 1, 1999, that shows allcontributions to your traditional IRA for 1998.

Were You Covered by a Retirement Plan?If you were covered by a retirement plan(qualified pension, profit-sharing (including401(k)), annuity, Keogh, SEP, SIMPLE, etc.)at work or through self-employment, your IRAdeduction may be reduced or eliminated. Butyou can still make contributions to an IRA evenif you cannot deduct them. In any case, theincome earned on your IRA contributions is nottaxed until it is paid to you.

Student Loan Interest Deduction WorksheetLine 25 (keep for your records)

2.

Enter the total interest you paid in 1998 on qualified student loans (definedbelow). Do not include interest that was required to be paid after the first60 months

3.

Enter the smaller of line 1 or $1,000

4. Enter the total of the amounts from Form 1040NR,line 24, lines 26 through 31, plus any amount youentered on the dotted line next to line 32

5. Modified AGI. Subtract line 4 from line 3

6. Subtract $40,000 from line 5. If zero or less, enter -0-here and on line 8, skip line 7, and go toline 9

7. Divide line 6 by $15,000. Enter the result as a decimal (rounded to at leastthree places). Do not enter more than 1.000

8. Multiply line 2 by line 7

9. Student loan interest deduction. Subtract line 8 from line 2. Enter theresult here and on Form 1040NR, line 25. Do not include this amount infiguring any other deduct ion on your return (such as on Schedule A (Form1040), Schedule C (Form 1040), Schedule E (Form 1040), etc.)

2.

8.

9.

3.

4.

5.

6.

7. .

1.

Before you begin, see the instructions for line 25 below.

1.

Enter the amount from Form 1040NR, line 23

Note: If line 5 is $55,000 or more, stop here. Youcannottake the deduction.

The Pension plan box in box 15 of yourW-2 form should be checked if you werecovered by a plan at work even if you were not

vested in the plan. You are also covered by aplan if you were self-employed and had aKeogh, SEP, or SIMPLE retirement plan.

Not Covered by a Retirement Plan. If youwere not covered by a retirement plan, you cantake a full IRA deduction.

Special Rule for Married Individuals. Ifyou checked filing status box 3, 4, or 5 and youwere not covered by a retirement plan but yourspouse was, you are considered covered by aplan unless you lived apart from your spousefor all of 1998.

See Pub. 590, Individual RetirementArrangements (IRAs), for more details.

Line 25Student Loan Interest Deduction.

You may take this deduction if all five of the

following apply.1. You paid interest in 1998 on a qualified

student loan (see below).

2. At least part of the interest paid in 1998was paid during the first 60 months thatpayments were required to be made. SeeExample below.

3. You checked filing status box 1, 2, or 6.

4. Your modified adjusted gross income(AGI) is less than $55,000. Use lines 3 through5 of the worksheet above to figure yourmodified AGI.

5. You are not claimed as a dependent onsomeone's (such as your parent's) 1998 taxreturn.

If all five apply, use the worksheet above to

figure your deduction. But first you will need tocomplete Form 1040NR, lines 26 through 31,and figure any amount to be entered on thedotted line next to line 32.

Example. You took out a qualified studentloan in 1991 while in college. You had 6 yearsto repay the loan and your first monthlypayment was due July 1993, after yougraduated. You made a payment every monthas required. If you meet items 3 through 5listed above, you may use only the interest youpaid for January through June 1998 to figureyour deduction. June is the end of the60-month period (July 1993June 1998).

Qualified student loan. This is any loanyou took out to pay the qualified highereducation expenses for yourself, your spouse,

or anyone who was your dependent when theloan was taken out. The person for whom theexpenses were paid must have been an eligiblestudent (see below). However, a loan is not aqualified student loan if (1) any of the proceedswere used for other purposes or (2) the loanwas from either a related person or a personwho borrowed the proceeds under a qualifiedemployer plan or a contract purchased undersuch a plan. To find out who is a relatedperson, see Pub. 970, Tax Benefits for HigherEducation.

Qualified higher education expensesgenerally include tuition, fees, room and board,and related expenses such as books andsupplies. The expenses must be for educationin a degree, certificate, or similar program at

an eligible educational institution. An eligibleeducational institution includes most colleges,universities, and certain vocational schools.You must reduce the expenses by the followingnontaxable benefits:q Employer-provided educational assistancebenefits that are not included in box 1 of yourW-2 form(s).q Qualified distributions from an education IRA.q Any scholarship, educational assistanceallowance, or other payment (but not gifts,inheritances, etc.) excluded from income.

For more details on these expenses, seePub. 970.

An eligible student is a person who:q Was enrolled in a degree, certificate, or other

program (including a program of study abroadthat was approved for credit by the institutionat which the student was enrolled) leading toa recognized educational credential at aneligible educational institution, andq Carried at least half the normal full-time workload for the course of study he or she waspursuing.

Line 26Medical Savings Account (MSA)Deduction. If you made contributions to anMSA for 1998, you may be able to take thisdeduction. See Form 8853, Medical SavingsAccounts and Long-Term Care InsuranceContracts, for details.



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Self-Employed Health Insurance Deduction WorksheetLine 28(keep for your records)

1. Enter the total amount paid in 1998 for health insurance coverageestablished under your business for 1998 for you, your spouse, anddependents. But do not include amounts for any month you wereeligible to participate in an employer-sponsored health plan 1.

2. Multiply line 1 by 45% (.45) 2.

3. Enter your net profit and any other earned income* from the businessunder which the insurance plan is established, minus any deductionyou claim on Form 1040NR, line 29 3.

4. Self-employed health insurance deduction. Enter the smaller ofline 2 or line 3 here and on Form 1040NR, line 28 4.

*Earned incomeincludes net earnings and gains from the sale, transfer, or licensing ofproperty you created. It does not include capital gain income.

box 1 or 2; $93,400 if you checked filing statusbox 3, 4, or 5; $186,800 if you checked filingstatus box 6.

If you are filing for an estate, enter $600 online 37. If you are filing for a trust whosegoverning instrument requires it to distribute allits income currently, enter $300 on line 37. Anyother trust is allowed an exemption of $100.

Line 39Tax. Use one of the followingmethods to figure your tax. Also, include in thetotal on line 39 any tax from Form 4972, Taxon Lump-Sum Distributions, or Form 8814,Parents' Election To Report Child's Interest and

Dividends. Be sure to check the appropriatebox.

Tax Table or Tax Rate Schedules. Youmust use the Tax Table or Tax Rate Schedulesto figure your tax unless you are required touse Form 8615 or Schedule D (Form 1040),or you use Schedule J (Form 1040) (for farmincome). If your taxable income (line 38) is lessthan $100,000, you must use the Tax Table,which starts on page 18. Be sure you use thecorrect column. If you checked filing status box3, 4, or 5, you must use the Married filingseparatelycolumn. If your taxable income is$100,000 or more, OR you are filing for anestate or trust, use the Tax Rate Schedules onpage 30.

Schedule D (Form 1040). If you had a net

capital gain on Schedule D (Form 1040) (bothlines 16 and 17 of that schedule are gains) andthe amount on Form 1040NR, line 38, is morethan zero, use Part IV of Schedule D (Form1040) to figure your tax.

Form 8615. You must generally use Form8615 to figure the tax for any child who wasunder age 14 on January 1, 1999, and who hadmore than $1,400 of investment income, suchas taxable interest or dividends, that iseffectively connected with a U.S. trade orbusiness. But if neither of the child's parentswas alive on December 31, 1998, do not useForm 8615 to figure the child's tax.

Schedule J. If you had income fromfarming, your tax may be less if you choose tofigure it using income averaging on ScheduleJ (Form 1040).

CreditsLine 40Credit for Child and DependentCare Expenses. You may be able to take thiscredit if you paid someone to care for your childunder age 13 or your dependent who could notcare for himself or herself. For details, seeForm 2441.

Line 41Child Tax Credit.

TIP: This credit is in addition to the child anddependent care credit that you may be able toclaim.

What is the Child Tax Credit? The childtax credit is a credit for people who have aqualifying child; it reduces tax people owe. Thecredit can be as much as $400 for eachqualifying child.

Note: If the amount on Form 1040NR, line 39is zero, youcannottake this credit becausethere is no tax to reduce. But if you have threeor more qualifying children, you may be able totake the additional child tax credit on Form1040NR, line 56. To find out if you can,complete theChild Tax Credit Worksheetinthe Instructions for Form 1040 even though youcannot take the credit.

How Do You Figure the Credit? Use theChild Tax Credit Worksheet in the

Line 27Moving Expenses. Employees andself-employed persons (including partners) candeduct certain moving expenses. The movemust be in connection with employment thatgenerates effectively connected income.

If you moved in connection with your job orbusiness or started a new job, you may be ableto take this deduction. But your new workplacemust be at least 50 miles farther from your oldhome than your old home was from your oldworkplace. If you had no former workplace,your new workplace must be at least 50 milesfrom your old home. The deduction is generallylimited to moves to or within the United Statesor its possessions. If you meet theserequirements, see Pub. 521, MovingExpenses. Use Form 3903, Moving Expenses,to figure the amount to enter on this line.

Line 28Self-Employed Health InsuranceDeduction. If you were self-employed and hada net profit for the year, you may be able todeduct part of the amount paid for healthinsurance for yourself, your spouse, anddependents. The insurance plan must beestablished under your business. But if youwere also eligible to participate in anysubsidized health plan maintained by your oryour spouse's employer for any month or part

of a month in 1998, amounts paid for healthinsurance coverage for that month cannot beused to figure the deduction. For example, ifyou were eligible to participate in a subsidizedhealth plan maintained by your spouse'semployer from September 30 throughDecember 31, you cannot use amounts paid forhealth insurance coverage for Septemberthrough December to figure your deduction.For more details, see Pub. 535, BusinessExpenses.

If you qualify to take the deduction, use theworksheet above to figure the amount you candeduct. But if any of the following apply, do notuse the worksheet. Instead, see Pub. 535 tofind out how to figure your deduction.q You had more than one source of income

subject to self-employment tax.q You are using amounts paid for qualifiedlong-term care insurance to figure thededuction.

Line 29Keogh and Self-Employed SEPand SIMPLE Plans. If you were self-employedor a partner, you may be able to take thisdeduction. See Pub. 560.

Line 30Penalty on Early Withdrawal ofSavings. The Form 1099-INT or Form1099-OID you received will show the amountof any penalty you were charged.

Line 31Scholarship and FellowshipGrants Excluded. If you were a degreecandidate, enter amounts used for tuition andcourse-related expenses (such as fees, books,supplies, and equipment). Do not include anyamount shown on line 22. See Pub. 520,Scholarships and Fellowships, for moreinformation.

Line 32. Include in the total on line 32 any ofthe following adjustments that are related toyour effectively connected income. To findout if you can take the deduction, see the formor publication indicated. On the dotted line nextto line 32, enter the amount of your deductionand identify it as indicated.

q Performing-arts-related expenses (see Form2106 or Form 2106-EZ). Identify as QPA.q Reforestation amortization (see Pub. 535).Identify as RFST.q Repayment of supplemental unemploymentbenefits under the Trade Act of 1974 (see Pub.525). Identify as Sub-Pay TRA.q Contributions to section 501(c)(18) pensionplans (see Pub. 575). Identify as 501(c)(18).q Deduction for clean-fuel vehicles (see Pub.535). Identify as Clean-Fuel.

Line 33Adjusted Gross Income. If line 33is less than zero, you may have a net operatingloss that you can carry to another tax year. SeePub. 536.

Tax Computation on IncomeEffectively Connected With aU.S. Trade or BusinessLine 35Itemized Deductions. Enter thetotal itemized deductions from Schedule A.

Note: Residents of India who were studentsor business apprentices may be able to takethe standard deduction instead of their itemizeddeductions. See Pub. 519 for details.

Line 37Deduction for Exemptions. You

can claim exemptions only to the extent of yourincome that is effectively connected with a U.S.trade or business.

If you file as an individual, multiply $2,700by the total number of exemptions entered online 7d. (If you were a resident of Japan or theRepublic of Korea, you must figure theexemptions for your spouse and childrenaccording to the proportion your U.S. incomebears to your total income. For details, seePub. 519.) But use the worksheet on page 11to figure the amount, if any, to enter on line 37if your adjusted gross income from line 34 ismore than $124,500 if you checked filing status



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Deduction for Exemptions WorksheetLine 37 (keep for your records)See the instructions for line 37.

2. Multiply $2,700 by the total number of exemptions claimed onForm 1040NR, line 7d

3. Enter the amount from Form 1040NR, line 34

4. Enter the amount shown below for the filing statusbox you checked on page 1 of Form 1040NR: Box 1 or 2, enter $124,500 Box 3, 4, or 5, enter $93,400 Box 6, enter $186,800

5. Subtract line 4 from line 3. If zero or less, stop; enterthe amount from line 2 above on Form 1040NR, line37

Note: If line 5 is more than $122,500 if you checkedfiling status box 1, 2, or 6; or more than $61,250 ifyou checked filing status box 3, 4, or 5, stop;youcannottake a deduction for exemptions. Enter -0- onForm 1040NR, line 37.

6. Divide line 5 by $2,500 if you checked filing statusbox 1, 2, or 6; or by $1,250 if you checked filing status

box 3, 4, or 5. If the result is not a whole number,round it up to the next higher whole number (forexample, round 0.0004 to 1)

7. Multiply line 6 by 2% (.02) and enter the result as adecimal amount

8. Multiply line 2 by line 7

9. Deduction for exemptions. Subtract line 8 from line 2. Enter the resulthere and on Form 1040NR, line 37

2.

8.

9.

3.

4.

5.

6.

7.

Is the amount on Form 1040NR, line 34, more than the amount shown on line 4 below foryour filing status?

.

No. Stop. Multiply $2,700 by the total number of exemptions claimed on Form 1040NR, line7d, and enter the result on line 37.

Yes. Go to line 2.

1.

5. All of your foreign taxes were:q Legally owed and not eligible for a refund,andq Paid to countries that are recognized by theUnited States and do not support terrorism.

If you meet all five requirements, enter yourtotal foreign tax on line 43. If you do not, seeForm 1116 to find out if you can take the creditand, if you can, if you have to file Form 1116.If you need more information about theserequirements, see the instructions for Form1116.

Line 44Other Credits. Include in the totalon line 44 any of the following credits andcheck the appropriate box. If box d is checked,also enter the form number. To see if you cantake the credit, see the form or publicationindicated.q Mortgage interest credit. If a state or localgovernment gave you a mortgage creditcertificate, see Form 8396.q Credit for prior year minimum tax. If you paidalternative minimum tax in a prior year, seeForm 8801.q Qualified electric vehicle credit. If you placeda new electric vehicle in service in 1998, seeForm 8834.q General business credit. This credit consistsof a number of credits that usually apply only

to individuals who are partners, shareholdersin an S corporation, self-employed, or whohave rental property. See Form 3800 or Pub.334, Tax Guide for Small Business.q Empowerment zone employment credit. SeeForm 8844.q District of Columbia first-time homebuyercredit. See Form 8859.

Line 45. If you sold fuel produced from anonconventional source, see section 29 to findout if you can take the nonconventionalsource fuel credit. If you can, attach aschedule showing how you figured the credit.Include the credit in the total on line 45. Enterthe amount and FNS on the dotted line nextto line 45.

Other TaxesLine 47Alternative Minimum Tax. The taxlaw gives special treatment to some kinds ofincome and allows special deductions andcredits for some kinds of expenses. If youbenefit from these provisions, you may have topay a minimum amount of tax through thealternative minimum tax. This tax is figured onForm 6251 for individuals. If you a

us internal revenue service: i1040nr--1998

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