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Does anyone have much experience with the 1040NR and Not Effectively Connected income?

I have NEC Income that has a treaty rate of 0%

Now should this be reported on:

    a) Schedule NEC (page 4) [under 0% in column d]
or  b) Schedule OI, line L (page 5) [for income exempt by treaty]
or  c) Both?

The instructions are a bit ambiguous. Compare the heading 'page 4' on p. 5 which seems to say a) with 'line 22' on p. 21 which seems to say b).

It also feels to me like it would be a mistake to report the same income twice on the same form, but I really don't know for sure.

Thanks if anyone can help.

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2 Answers 2

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I'm not a tax adviser, and you should verify with one (a tax adviser is someone who holds EA, CPA or Attorney credentials and is licensed to practice in your State).

I believe the right answer is (c): both.

On Schedule NEC you report the NEC income and use the additional columns (column (d)) to separate the exempt income into the 0% tax category. Attach a statement explaining why.

But also, on Schedule OI, you need to write down all your treaty claims, including this. This will go to the table on line L.

You will see that from Schedule OI nothing flows to the actual return, and from Schedule NEC nothing will flow because you'll use the 0% tax rate.

One might claim that reporting on Schedule OI might be an overkill since you'll be attaching a statement to explain the 0% rate on the Schedule NEC, but I think that all the treaty claims should be reported on Schedule OI regardless of additional statements you'll be making.

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  • Thanks so much for this! I spent most of yesterday continuing to read up on this, and was also leaning towards c) both. I suppose overkill is better than being rejected for being incomplete, right? Your caveat about consulting a tax advisor is noted. I've had trouble finding an advisor in my price bracket (the income we're talking about here is really not all that much). The only other thing thats confusing me is the 'prior months' on Schedule OI. But it's really a seperate question and you've done quite enough to help me as it is. (I'd still be grateful if you took a look though!)
    – user28877
    May 15, 2015 at 1:37
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  1. NEC income goes on page 4 of the return (NEC Schedule).
  2. NEC taxed at 0% under the treaty does not mean exempt income.
  3. ECI income goes on page 1 of the return.
  4. ECI exempt under a treaty goes on line 22 of page 1 and is also itemized on page 5, item L.
  5. Still confused? Taxback!
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  • Thank you for replying. I will checkout taxback. Is there a source for point 2? While I have been researching this some people have said that NEC income with a 0% treaty rate is the same as being exempt by treaty. I haven't been able to find any unambiguous official statement although the instructions (p.21) do say to: "Report on line 22 the total of all your income that is exempt from tax by an income tax treaty, including both effectively connected income and not effectively connected income."
    – user28877
    May 15, 2015 at 15:02
  • Instructions for Schedule NEC, Tax on Income Not Effectively Connected With a U.S. Trade or Business “Enter your income in the row that lists the correct category of income and in the column that lists the correct tax rate under a tax treaty or the general U.S. tax rules. Use column (d) if the income is subject to a 0% rate. Include income only to the extent it is not effectively connected with the conduct of a trade or business in the United States.”
    – Peter Smith
    Jun 2, 2015 at 9:41
  • For all practical purposes, if you did not have any ECI income and your only US sourced income is NEC where the withholding agent withheld the correct amount of tax at source, you would not have a filing requirement at all. So if you have to file a US tax return to report NEC income, it is most probably because the withholding agent withheld an incorrect amount of tax and you want to claim a refund. Then the proper place to report income is schedule NEC and you will have to attach a completed and signed Form W8BEN along with your tax return, as stated in the instructions of form 1040NR.
    – Peter Smith
    Jun 2, 2015 at 9:41
  • Attaching Form W8BEN will give the IRS all necessary treaty information for the income reported on Schedule NEC. Depending on the type of income, you may also need to submit Form 8833.
    – Peter Smith
    Jun 2, 2015 at 9:41
  • IRM 3.38.147.3.11 (01-01-2015) Tax Treaty - General Information 3. All treaty information for effectively connected income reported on Form 1042-S, Income Code 15 through 19, should be provided on Item L, Schedule OI on page 5 of Form 1040NR or Item J, Schedule OI, page 2 of Form 1040NR-EZ. Taxpayers should not include amounts exempt by treaty on Line 8, Form 1040NR or Line 3, Form 1040NR-EZ. The treaty amounts should be included on Line 22, Form 1040NR or Line 6, Form 1040NR-EZ. There is nowhere in the IRM mentioned that NEC income should be reported on Schedule OI.
    – Peter Smith
    Jun 2, 2015 at 9:41

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