Taxpayer is not a US citizen or resident.
Only income is non-effectively connected income, on which tax was withheld, so there's no balance due or refund.
Last year, the IRS took a long time to process her return and paid s amall amount of interest.
Is that interest considered not-effectively connected, thereby causing a small balance owing, or is it effectively connected (no tax, since deductions are sufficient)?
Anyone know off hand if this is effectively connected income, or not-effectively connected?
Thanks,
Rob
IRS interest on 1040NR
Moderator: Mark T Serbinski CA CPA
You do realize that the treaty US interest rate for Cdn residents is 0%.
In fact for all non-residents, US sourced interest is non-taxable.
So your premise is incorrect. Neither connected nor NEC income would be taxed by IRS.
Its considered NEC, btw.
In fact for all non-residents, US sourced interest is non-taxable.
So your premise is incorrect. Neither connected nor NEC income would be taxed by IRS.
Its considered NEC, btw.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing 
What other types of interest (that are not associated with running a business) do you know of?
In any event, the client was correctly (not) withheld on that interest, so no return needed.
In any event, the client was correctly (not) withheld on that interest, so no return needed.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
Well, Publication 519 lists interest that is exempt for non-residents.
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https://www.irs.gov/publications/p519/ch03.html
Nonresident Aliens
Nonresident aliens can exclude the following items from their gross income.
Interest Income
Interest income that is not connected with a U.S. trade or business is excluded from income if it is from:
Deposits (including certificates of deposit) with persons in the banking business,
Deposits or withdrawable accounts with mutual savings banks, cooperative banks, credit unions, domestic building and loan associations, and other savings institutions chartered and supervised as savings and loan or similar associations under federal or state law (if the interest paid or credited can be deducted by the association), and
Amounts held by an insurance company under an agreement to pay interest on them.
State and local government obligations. Interest on obligations of a state or political subdivision, the District of Columbia, or a U.S. possession, generally is not included in income. However, interest on certain private activity bonds, arbitrage bonds, and certain bonds not in registered form is included in income.
Portfolio interest. Interest and original issue discount that qualifies as portfolio interest is not subject to chapter 3 withholding under sections 1441 through 1443 of the Internal Revenue Code. However, such interest may be subject to withholding if it is a withholdable payment, and there is no exception under chapter 4 (sections 1471 through 1474) of the Internal Revenue Code.
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Since interest from government (other than from certain government obligations described above) is US source income, and is not in this list of exempt interest, I deduced (perhaps incorrectly) that it was taxable. In the end, that taxation is overridden by the revision to treaty article XI, and all interest to Canadian residents is exempt.
Presumably, if I was doing a return for a resident of Iran (no treaty), the amount would be taxable at 30%, since it's not in the list of exempt interest.
In my case, since my client is resident in Canada, I would include it in item L on page 5.
==========================================================
https://www.irs.gov/publications/p519/ch03.html
Nonresident Aliens
Nonresident aliens can exclude the following items from their gross income.
Interest Income
Interest income that is not connected with a U.S. trade or business is excluded from income if it is from:
Deposits (including certificates of deposit) with persons in the banking business,
Deposits or withdrawable accounts with mutual savings banks, cooperative banks, credit unions, domestic building and loan associations, and other savings institutions chartered and supervised as savings and loan or similar associations under federal or state law (if the interest paid or credited can be deducted by the association), and
Amounts held by an insurance company under an agreement to pay interest on them.
State and local government obligations. Interest on obligations of a state or political subdivision, the District of Columbia, or a U.S. possession, generally is not included in income. However, interest on certain private activity bonds, arbitrage bonds, and certain bonds not in registered form is included in income.
Portfolio interest. Interest and original issue discount that qualifies as portfolio interest is not subject to chapter 3 withholding under sections 1441 through 1443 of the Internal Revenue Code. However, such interest may be subject to withholding if it is a withholdable payment, and there is no exception under chapter 4 (sections 1471 through 1474) of the Internal Revenue Code.
==========================================================
Since interest from government (other than from certain government obligations described above) is US source income, and is not in this list of exempt interest, I deduced (perhaps incorrectly) that it was taxable. In the end, that taxation is overridden by the revision to treaty article XI, and all interest to Canadian residents is exempt.
Presumably, if I was doing a return for a resident of Iran (no treaty), the amount would be taxable at 30%, since it's not in the list of exempt interest.
In my case, since my client is resident in Canada, I would include it in item L on page 5.