Interest paid by US Treasury

[tp]

Hi - I'm a non-US resident and received a big chunk of interest from the US Treasury for a much delayed refund. Just realized that the US Treasury 1099'ed me for it though which comes as a surprise since I'm a non-resident, have no other US income and have W8-BENs filed with all my banks/investment accounts there. I thought they'd withhold from the payment if it were taxable, but since they went the 1099 route, I'm going to have to file yet another non-resident return with a single line item... :x

Everything I've read says that interest paid by US banks (and some other entities) is not taxable for non-residents. How about tax paid by the US Federal Government? I'm not a Canadian resident either (actually, I'm in Singapore), so no treaty applies.

Thanks!

[nelsona]

Interest from any source in US is not taxable to non-residents. Just because they issued a 1099 doesn't mean it is reportable.

You would only report on 1040NR if they mistakenly withheld, just like any other bank interest, to get refund.

[tp]

Hi Nelson - thanks for the reply. I was thinking the same thing, but then when going through the "US Tax Guide for Aliens" (http://www.irs.gov/pub/irs-pdf/p519.pdf), I came across this:


"A nonresident alien usually is subject to U.S income tax only on U.S. source income"

and then this:

"Generally, U.S. source interest income includes the following items:
- Interest from a state, the District of Columbia, or the U.S. Government"

That's what made me think that this is taxable, unlike bank interest. Also, in this case, no tax was withheld, but I did get a nasty letter from the IRS asking for my return (I have no other US income). So, I just file a 1040NR and leave everything zero?

Thanks again,
Toby.

[nelsona]

You are looking at the wrong section.
P.15 states that Non-res aliens exclude US source interest.
The definition of US-sourced interest you alluded to includes both bank and govt interest, there is no distinction between the two.

The fact that you have been asked to file, means you should file 1040NR

Report no interest.

[tp]

Hi Nelson,

Thanks again for the detailed update. Just checked the reference you pointed me to (P15/16 of the guide linked above), and you're right - I was looking at the wrong section.

However, the section you are pointing to specifically lists all type of interest income that is excluded. It lists bank interest, interest from US state and local governments and portfolio interest. What's interesting is that it seems to go out of its way to list US state and local governments (even going into details about posessions and DC), but says nothing about interest paid by the US Federal Government.

Any further thoughts? Sorry to be so pedantic but I've just spent 3+ years convincing the IRS that I'm a non-resident!

[nelsona]

It is not taxable in US for non-residentd.

[tp]

Hi Nelson,

I've consulted an expatriate tax professional regarding this situation and the advice I've received directly conflicts with yours. Specifically, this is the advice I've received:

Interest on IRS refund is not an exempt interest on state government obligations reportable on form 1099-INT. This interest was reported on form 1099 and has different tax treatment.

When you paid more tax than you owed, you acted as a lending entity borrowing money to the IRS. The IRS repaid loan to you with interest. In effect, you conducted a legitimate money lending business in the United States. This interest is taxable; it does not meet the definition of interest on deposits as described in Sec.871.


[i]Sec. 871. Tax on nonresident alien individuals

No tax shall be imposed under paragraph (1)(A) or (1)(C) of
subsection (a) on any amount described in paragraph (2).
(A) Interest on deposits, if such interest is not effectively
connected with the conduct of a trade or business within the
United States.
(3) Deposits
For purposes of paragraph (2), the term ''deposits'' means
amounts which are -
(A) deposits with persons carrying on the banking business,
(B) deposits or withdrawable accounts with savings
institutions chartered and supervised as savings and loan or
similar associations under Federal or State law
(C) amounts held by an insurance company under an agreement to pay interest thereon.


i thought I'd post this here just in case someone else stumbles over this thread with the same issue.

Nelson - if you disagree with this advice and can point me specifically to why this isn't taxable, I'd of course be eternally grateful :D

Toby.

[nelsona]

Any time you get interest, you are lending money to a US entity, and they are paying you for it, so why is this situation any different, thus it is exempt.

The IRS is part of the Government, so the interest from a state .. etc also applies.

The Us/Canada treaty treats interst as zero taxable.

[nelsona]

By tghe way, if what your pro told you was true, every one who got a tax refund from IRS would have to report business activity, including SE tax etc.

I think you can ignore his advice.