I am employee of a US based company on a H1B visa. My work requires me to travel all over the world. Last year, I was in the US for a couple of months, making me a non resident alien for tax purposes. So here is my dilema. IRS.gov, says that only the US sourced income. i.e. 2 months worth of proportional salary is taxable in the US. So what happens to the rest of the Salary, is this tax free / exempt ?

IRS.gov also mentions about effectively connected income and non effectively connected income. This says that the US sourced income (2 months) is effectively connected income and is taxed as regular income, but the rest of the income is non effectively connected income because this was paid by a US company which I was working overseas and this should be taxed at a flat 30% unless I can claim a better rate under an international tax treaty.

So Here are some more questions..
1) Does Salary come under the purview of effectively connected income ?
2) Is the non US sourced salary tax free or treated as non US effectively connected income and thus subject to flat 30% tax rate
3) If it is taxed at 30%... am I just better of filing as a US resident ?
4) What form should I be filing, 1040NR or 1040NR-EZ

Looking forward to getting an answer to this question from whoever has any insight into this. Thank you for your help.

Regds/Hetal

That's a really good question.

Of what country are you a citizen?

In 2007 and 2006 how many days did you spend in the US?

It appears from your post that you are a nonresident alien employed by a US company and performing services abroad in a more or less itinerate manner. You spent 60 days in the US last year.

IRC secs. 871 and 1441 apply a 30% w/h tax and rules for its collection to a variety of income which includes employment income.

However, both secs. Apply the provisions to income SOURCED WITHIN THE US. See Sec. 871. Tax on nonresident alien individuals
And:
Sec. 1441. Withholding of tax on nonresident aliens

Now, notice the language of sec. 862(a)(3)
Sec. 862. Income from sources without the United States

Since you performed your duties outside the US the 30% w/h rules for 871 and 1441 do not apply to that income. It is not considered US source income.

hpatel1812:
1. Any income you get while present in the U.S. is subject to U.S. taxes.

2. Any income you earn while working outside the U.S. even from the U.S. employer, is foreign income.
(a) For a nonresident, this income is not subject to U.S. taxes.
(b) A U.S. citizen or resident will declare this income on the tax return as U.S. taxes worldwide income. If the resident is bonafide resident of foreign country, he/she may even be eligible for foreign earned income exclusion.

3. For nonresident 30% withholding does not apply to wages.
This is covered in IRS publication 54. Tax Guide for Citizens or Residents Aliens Abroad. Read Chapter 2; Withholding Tax.

Take a look at the instructions for 1040NR EZ.
If you meet this criterion file the EZ:

http://www.irs.gov/pub/irs-pdf/i1040nre.pdf

Thank you for your answers.. So if I understand you guys correctly, You are saying that only my proportionate 2 months salary is taxable income in the US. And the rest of my salary is tax free in the US... right ?

Also since I have travelled to various other countries for very short durations and thus cannot satisfy residency requirements anywhere. So in this case, what happens to the rest of the 10 months salary ? Is this totally tax free or since I am a citizen on India, I need to file for in India for the rest of the income ?

As regards to the 1040NR-EZ, there are 11 conditions which need to be met. The 4th one says, "The only adjustment to income you can claim are the exclusion for scholarship and fellowship grants or student loan deduction. " In my case.. my W2 shows me the full years salary and I guess I will be adjusting this for only the US 2 months salary. Is this an adjustment of income ? Does this mean.. I need to file the 1040 NR.

The other question I have is how do I present this on the tax return. As I already mentioned, my W2 shows the full years salary. So should I be showing only the 2 month's salary on Line 3 of NR-EZ or Line 8 of NR ? So should I have to show the full amount and then claim exemption for rest of the salary on some other line. And do I need to show / attach the worksheet for the calculations for how many days I worked in the US and how I came up with the proportionate salary ?

Thank you for you help. Looking forward to hear back from you.

Look, do yourself a favor, you have a complex return; hire a professional in international taxation and have it done right.

hpatel1812:
If you have question about India taxes, you can post at mytaxes - Index

hpatel1812:

I have filed several returns similar to yours. You will find my fees to be most reasonable.

Email me at [email protected] with the details of your case and I will provide you with a fee quote.