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Free ez form 3. Free ez form   Lifetime Learning Credit Table of Contents Introduction Can You Claim the CreditWho Can Claim the Credit Who Cannot Claim the Credit What Expenses QualifyQualified Education Expenses No Double Benefit Allowed Expenses That Do Not Qualify Who Is an Eligible Student Who Can Claim a Dependent's Expenses Figuring the CreditEffect of the Amount of Your Income on the Amount of Your Credit Claiming the Credit Introduction For 2013, there are two tax credits available to help you offset the costs of higher education by reducing the amount of your income tax. Free ez form They are the American opportunity credit and the lifetime learning credit. Free ez form This chapter discusses the lifetime learning credit. Free ez form The American opportunity credit is discussed in chapter 2, The American Opportunity Credit . Free ez form This chapter explains: Who can claim the lifetime learning credit, What expenses qualify for the credit, Who is an eligible student, Who can claim a dependent's expenses, How to figure the credit, How to claim the credit, and When the credit must be repaid. Free ez form What is the tax benefit of the lifetime learning credit. Free ez form   For the tax year, you may be able to claim a lifetime learning credit of up to $2,000 for qualified education expenses paid for all eligible students. Free ez form There is no limit on the number of years the lifetime learning credit can be claimed for each student. Free ez form   A tax credit reduces the amount of income tax you may have to pay. Free ez form Unlike a deduction, which reduces the amount of income subject to tax, a credit directly reduces the tax itself. Free ez form The lifetime learning credit is a nonrefundable credit. Free ez form This means that it can reduce your tax to zero, but if the credit is more than your tax the excess will not be refunded to you. Free ez form   Your allowable lifetime learning credit may be limited by the amount of your income and the amount of your tax. Free ez form Can you claim more than one education credit this year. Free ez form   For each student, you can elect for any year only one of the credits. Free ez form For example, if you elect to take the lifetime learning credit for a child on your 2013 tax return, you cannot, for that same child, also claim the American opportunity credit for 2013. Free ez form   If you are eligible to claim the lifetime learning credit and you are also eligible to claim the American opportunity credit for the same student in the same year, you can choose to claim either credit, but not both. Free ez form   If you pay qualified education expenses for more than one student in the same year, you can choose to take certain credits on a per-student, per-year basis. Free ez form This means that, for example, you can claim the American opportunity credit for one student and the lifetime learning credit for another student in the same year. Free ez form Differences between the American opportunity and lifetime learning credits. Free ez form   There are several differences between these two credits. Free ez form For example, you can claim the American opportunity credit for the same student for no more than 4 tax years, but any year in which the Hope Scholarship Credit was claimed counts toward the 4 years. Free ez form However, there is no limit on the number of years for which you can claim a lifetime learning credit based on the same student's expenses. Free ez form The differences between these credits are shown in Appendix B, Highlights of Education Tax Benefits for Tax Year 2013 near the end of this publication. Free ez form Overview of the lifetime learning credit. Free ez form   See Table 3-1, Overview of the Lifetime Learning Credit for the basics of the lifetime learning credit. Free ez form The details are discussed in this chapter. Free ez form Can You Claim the Credit The following rules will help you determine if you are eligible to claim the lifetime learning credit on your tax return. Free ez form Who Can Claim the Credit Generally, you can claim the lifetime learning credit if all three of the following requirements are met. Free ez form You pay qualified education expenses of higher education. Free ez form You pay the education expenses for an eligible student. Free ez form The eligible student is either yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. Free ez form Table 3-1. Free ez form Overview of the Lifetime Learning Credit Maximum credit Up to $2,000 credit per return Limit on modified adjusted gross income (MAGI) $127,000 if married filling jointly;  $63,000 if single, head of household, or qualifying widow(er) Refundable or nonrefundable Nonrefundable—credit limited to the amount of tax you must pay on your taxable income Number of years of postsecondary education Available for all years of postsecondary education and for courses to acquire or improve job skills Number of tax years credit available Available for an unlimited number of years Type of program required Student does not need to be pursuing a program leading to a degree or other recognized education credential Number of courses Available for one or more courses Felony drug conviction Felony drug convictions do not make the student ineligible Qualified expenses Tuition and fees required for enrollment or attendance (including amounts required to be paid to the institution for course-related books, supplies, and equipment) Payments for academic periods Payments made in 2013 for academic periods beginning in 2013 or beginning in the first 3 months of 2014 Note. Free ez form Qualified education expenses paid by a dependent for whom you claim an exemption, or by a third party for that dependent, are considered paid by you. Free ez form “Qualified education expenses” are defined later under Qualified Education Expenses . Free ez form “Eligible students” are defined later under Who Is an Eligible Student . Free ez form A dependent for whom you claim an exemption is defined later under Who Can Claim a Dependent's Expenses . Free ez form You may find Figure 3-1, Can You Claim the Lifetime Learning Credit for 2013 , later, helpful in determining if you can claim a lifetime learning credit on your tax return. Free ez form Who Cannot Claim the Credit You cannot claim the lifetime learning credit for 2013 if any of the following apply. Free ez form Your filing status is married filing separately. Free ez form You are listed as a dependent on another person's tax return (such as your parents'). Free ez form See Who Can Claim a Dependent's Expenses , later. Free ez form Your modified adjusted gross income (MAGI) is $63,000 or more ($127,000 or more in the case of a joint return). Free ez form MAGI is explained later under Effect of the Amount of Your Income on the Amount of Your Credit . Free ez form You (or your spouse) were a nonresident alien for any part of 2013 and the nonresident alien did not elect to be treated as a resident alien for tax purposes. Free ez form More information on nonresident aliens can be found in Publication 519. Free ez form You claim the American Opportunity Credit (see chapter 2) or a Tuition and Fees Deduction (see chapter 6) for the same student in 2013. Free ez form What Expenses Qualify The lifetime learning credit is based on qualified education expenses you pay for yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. Free ez form Generally, the credit is allowed for qualified education expenses paid in 2013 for an academic period beginning in 2013 or in the first 3 months of 2014. Free ez form For example, if you paid $1,500 in December 2013 for qualified tuition for the spring 2014 semester beginning in January 2014, you may be able to use that $1,500 in figuring your 2013 credit. Free ez form Academic period. Free ez form   An academic period includes a semester, trimester, quarter, or other period of study (such as a summer school session) as reasonably determined by an educational institution. Free ez form In the case of an educational institution that uses credit hours or clock hours and does not have academic terms, each payment period can be treated as an academic period. Free ez form Paid with borrowed funds. Free ez form   You can claim a lifetime learning credit for qualified education expenses paid with the proceeds of a loan. Free ez form You use the expenses to figure the lifetime learning credit for the year in which the expenses are paid, not the year in which the loan is repaid. Free ez form Treat loan disbursements sent directly to the educational institution as paid on the date the institution credits the student's account. Free ez form Student withdraws from class(es). Free ez form   You can claim a lifetime learning credit for qualified education expenses not refunded when a student withdraws. Free ez form Qualified Education Expenses For purposes of the lifetime learning credit, qualified education expenses are tuition and certain related expenses required for enrollment in a course at an eligible educational institution. Free ez form The course must be either part of a postsecondary degree program or taken by the student to acquire or improve job skills. Free ez form Eligible educational institution. Free ez form   An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. Free ez form S. Free ez form Department of Education. Free ez form It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Free ez form The educational institution should be able to tell you if it is an eligible educational institution. Free ez form   Certain educational institutions located outside the United States also participate in the U. Free ez form S. Free ez form Department of Education's Federal Student Aid (FSA) programs. Free ez form Related expenses. Free ez form   Student-activity fees and expenses for course-related books, supplies, and equipment are included in qualified education expenses only if the fees and expenses must be paid to the institution for enrollment or attendance. Free ez form Prepaid expenses. Free ez form   Qualified education expenses paid in 2013 for an academic period that begins in the first three months of 2014 can be used in figuring an education credit for 2013 only. Free ez form See Academic period , earlier. Free ez form For example, you pay $2,000 in December 2013 for qualified tuition for the 2014 winter quarter that begins in January 2014, you can use that $2,000 in figuring an education credit for 2013 only (if you meet all the other requirements). Free ez form You cannot use any amount you paid in 2012 or 2014 to figure the qualified education expenses you use to figure your 2013 education credit(s). Free ez form In the following examples, assume that each student is an eligible student at an eligible educational institution. Free ez form Example 1. Free ez form   Jackson is a sophomore in University V's degree program in dentistry. Free ez form This year, in addition to tuition, he is required to pay a fee to the university for the rental of the dental equipment he will use in this program. Free ez form Because the equipment rental fee must be paid to University V for enrollment and attendance, Jackson's equipment rental fee is a qualified expense. Free ez form Example 2. Free ez form   Donna and Charles, both first-year students at College W, are required to have certain books and other reading materials to use in their mandatory first-year classes. Free ez form The college has no policy about how students should obtain these materials, but any student who purchases them from College W's bookstore will receive a bill directly from the college. Free ez form Charles bought his books from a friend, so what he paid for them is not a qualified education expense. Free ez form Donna bought hers at College W's bookstore. Free ez form Although Donna paid College W directly for her first-year books and materials, her payment is not a qualified expense because the books and materials are not required to be purchased from College W for enrollment or attendance at the institution. Free ez form Example 3. Free ez form   When Marci enrolled at College X for her freshman year, she had to pay a separate student activity fee in addition to her tuition. Free ez form This activity fee is required of all students, and is used solely to fund on-campus organizations and activities run by students, such as the student newspaper and student government. Free ez form No portion of the fee covers personal expenses. Free ez form Although labeled as a student activity fee, the fee is required for Marci's enrollment and attendance at College X. Free ez form Therefore, it is a qualified expense. Free ez form No Double Benefit Allowed You cannot do any of the following: Deduct higher education expenses on your income tax return (as, for example, a business expense) and also claim a lifetime learning credit based on those same expenses. Free ez form Claim a lifetime learning credit in the same year that you are claiming a tuition and fees deduction for the same student. Free ez form Claim a lifetime learning credit and an American opportunity credit based on the same qualified education expenses. Free ez form Claim a lifetime learning credit based on the same expenses used to figure the tax-free portion of a distribution from a Coverdell education savings account (ESA) or qualified tuition program (QTP). Free ez form See Coordination With American Opportunity and Lifetime Learning Credits in chapter 7, Coverdell Education Savings Account, and Coordination With American Opportunity and Lifetime Learning Credits in chapter 8, Qualified Tuition Program. Free ez form Claim a credit based on qualified education expenses paid with tax-free educational assistance, such as a scholarship, grant, or assistance provided by an employer. Free ez form See Adjustments to Qualified Education Expenses, next. Free ez form This image is too large to be displayed in the current screen. Free ez form Please click the link to view the image. Free ez form Figure 3-1 Adjustments to Qualified Education Expenses For each student, reduce the qualified education expenses paid by or on behalf of that student under the following rules. Free ez form The result is the amount of adjusted qualified education expenses for each student. Free ez form Tax-free educational assistance. Free ez form   For tax-free educational assistance received in 2013, reduce the qualified educational expenses for each academic period by the amount of tax-free educational assistance allocable to that academic period. Free ez form See Academic period , earlier. Free ez form   Some tax-free educational assistance received after 2013 may be treated as a refund of qualified education expenses paid in 2013. Free ez form This tax-free educational assistance is any tax-free educational assistance received by you or anyone else after 2013 for qualified education expenses paid on behalf of a student in 2013 (or attributable to enrollment at an eligible educational institution during 2013). Free ez form   If this tax-free educational assistance is received after 2013 but before you file your 2013 income tax return, see Refunds received after 2013 but before your income tax return is filed , later. Free ez form If this tax-free educational assistance is received after 2013 and after you file your 2013 income tax return, see Refunds received after 2013 and after your income tax return is filed , later. Free ez form   Tax-free educational assistance includes: The tax-free part of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Free ez form Generally, any scholarship or fellowship is treated as tax free. Free ez form However, a scholarship or fellowship is not treated as tax free to the extent the student includes it in gross income (if the student is required to file a tax return for the year the scholarship or fellowship is received) and either of the following is true. Free ez form The scholarship or fellowship (or any part of it) must be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Free ez form The scholarship or fellowship (or any part of it) may be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Free ez form You may be able to increase the combined value of an education credit and certain educational assistance if the student includes some or all of the educational assistance in income in the year it is received. Free ez form For examples, see Coordination with Pell grants and other scholarships, later. Free ez form Refunds. Free ez form   A refund of qualified education expenses may reduce adjusted qualified education expenses for the tax year or require repayment (recapture) of a credit claimed in an earlier year. Free ez form Some tax-free educational assistance received after 2013 may be treated as a refund. Free ez form See Tax-free educational assistance , earlier. Free ez form Refunds received in 2013. Free ez form   For each student, figure the adjusted qualified education expenses for 2013 by adding all the qualified education expenses for 2013 and subtracting any refunds of those expenses received from the eligible educational institution during 2013. Free ez form Refunds received after 2013 but before your income tax return is filed. Free ez form   If anyone receives a refund after 2013 of qualified education expenses paid on behalf of a student in 2013 and the refund is paid before you file an income tax return for 2013, the amount of qualified education expenses for 2013 is reduced by the amount of the refund. Free ez form Refunds received after 2013 and after your income tax return is filed. Free ez form   If anyone receives a refund after 2013 of qualified education expenses paid on behalf of a student in 2013 and the refund is paid after you file an income tax return for 2013, you may need to repay some or all of the credit. Free ez form See Credit recapture, next. Free ez form Credit recapture. Free ez form    If any tax-free educational assistance for the qualified education expenses paid in 2013 or any refund of your qualified education expenses paid in 2013 is received after you file your 2013 income tax return, you must recapture (repay) any excess credit. Free ez form You do this by refiguring the amount of your adjusted qualified education expenses for 2013 by reducing the expenses by the amount of the refund or tax-free educational assistance. Free ez form You then refigure your education credit(s) for 2013 and figure the amount by which your 2013 tax liability would have increased if you had claimed the refigured credit(s). Free ez form Include that amount as an additional tax for the year the refund or tax-free assistance was received. Free ez form Example. Free ez form   You pay $9,300 in tuition and fees in December 2013, and your child began college in January 2014. Free ez form You filed your 2013 tax return on February 14, 2014, and claimed a lifetime learning credit of $1,860. Free ez form You claimed no other tax credits. Free ez form After you filed your return, your child withdrew from two courses and you received a refund of $2,900. Free ez form You must refigure your 2013 lifetime learning credit using $6,400 of qualified education expenses instead of $9,300. Free ez form The refigured credit is $1,280 and your tax liability increased by $580. Free ez form See instructions for your 2014 income tax return to determine where to include this tax. Free ez form If you pay qualified education expenses in 2014 for an academic period that begins in the first 3 months of 2014 and you receive tax-free educational assistance, or a refund, as described above, you may choose to reduce your qualified education expenses for 2014 instead of reducing your expenses for 2013. Free ez form Amounts that do not reduce qualified education expenses. Free ez form   Do not reduce qualified education expenses by amounts paid with funds the student receives as: Payment for services, such as wages, A loan, A gift, An inheritance, or A withdrawal from the student's personal savings. Free ez form   Do not reduce the qualified education expenses by any scholarship or fellowship reported as income on the student's tax return in the following situations. Free ez form The use of the money is restricted, by the terms of the scholarship or fellowship, to costs of attendance (such as room and board) other than qualified education expenses, as defined in Qualified education expenses in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Free ez form The use of the money is not restricted. Free ez form For examples, see Adjustments to Qualified Education Expenses in chapter 2, American Opportunity Credit. Free ez form Coordination with Pell grants and other scholarships. Free ez form   In some cases, you may be able to reduce your tax liability by including scholarships in income. Free ez form If you are claiming an education credit for a claimed dependent who received a scholarship, you may be able to reduce your tax liability if the student includes the scholarship in income. Free ez form The scholarship must be one that may (by its terms) be applied to expenses (such as room and board) other than qualified education expenses. Free ez form Example 1—No scholarship. Free ez form Judy Green, who is unmarried, is taking courses at a public community college to be recertified to teach in public schools. Free ez form Her AGI and her MAGI, for purposes of the credit, are $27,000. Free ez form Judy takes the standard deduction of $5,950 and personal exemption of $3,800, reducing her AGI to taxable income of $17,250 and her tax before credits is $2,156. Free ez form She claims no credits other than the lifetime learning credit. Free ez form In July 2013 she paid $700 for the summer 2013 semester; in August 2013 she paid $1,900 for the fall 2013 semester; and in December 2013 she paid another $1,900 for the spring semester beginning in January 2014. Free ez form Judy and the college meet all requirements for the lifetime learning tax credit. Free ez form She can use all of the $4,500 tuition she paid in 2013 when figuring her 2013 lifetime learning credit. Free ez form She claims a $900 lifetime learning credit and her tax after credits is $1,256. Free ez form Example 2—Scholarship excluded from income. Free ez form The facts are the same as in Example 1—No scholarship, except that Judy was awarded a $1,500 scholarship. Free ez form Under the terms of her scholarship, it may be used to pay any educational expenses, including room and board. Free ez form If Judy excludes the scholarship from income, she will be deemed (for purposes of computing her education credit) as having used the scholarship to pay for tuition, required fees, and course materials. Free ez form Only $3,000 of the $4,500 tuition she paid in 2013 could be used when figuring her 2013 lifetime learning credit. Free ez form Her lifetime learning credit would be reduced to $600 and her tax after credits would be $1,556. Free ez form Example 3—Scholarship included in income. Free ez form The facts are the same as in Example 2—Scholarship excluded from income. Free ez form If, unlike Example 2, Judy includes the $1,500 scholarship in income, she will be deemed to have used the entire scholarship to pay for room and board. Free ez form Judy's AGI will increase to $28,500, her taxable income would be $18,750, and her tax before credits would be $2,381. Free ez form She would be able to use the $4,500 of adjusted qualified education expenses to figure her credit. Free ez form Judy could claim a $900 lifetime learning credit and her tax after credits would be $1,481. Free ez form Expenses That Do Not Qualify Qualified education expenses do not include amounts paid for: Insurance, Medical expenses (including student health fees), Room and board, Transportation, or Similar personal, living, or family expenses. Free ez form This is true even if the amount must be paid to the institution as a condition of enrollment or attendance. Free ez form Sports, games, hobbies, and noncredit courses. Free ez form   Qualified education expenses generally do not include expenses that relate to any course of instruction or other education that involves sports, games or hobbies, or any noncredit course. Free ez form However, if the course of instruction or other education is part of the student's degree program or is taken by the student to acquire or improve job skills, these expenses can qualify. Free ez form Comprehensive or bundled fees. Free ez form   Some eligible educational institutions combine all of their fees for an academic period into one amount. Free ez form If you do not receive or do not have access to an allocation showing how much you paid for qualified education expenses and how much you paid for personal expenses, such as those listed above, contact the institution. Free ez form The institution is required to make this allocation and provide you with the amount you paid (or were billed) for qualified education expenses on Form 1098-T. Free ez form See Figuring the Credit , later, for more information about Form 1098-T. Free ez form Who Is an Eligible Student For purposes of the lifetime learning credit, an eligible student is a student who is enrolled in one or more courses at an eligible educational institution (as defined under Qualified Education Expenses , earlier). Free ez form Who Can Claim a Dependent's Expenses If there are qualified education expenses for your dependent during a tax year, either you or your dependent, but not both of you, can claim a lifetime learning credit for your dependent's expenses for that year. Free ez form For you to claim a lifetime learning credit for your dependent's expenses, you must also claim an exemption for your dependent. Free ez form You do this by listing your dependent's name and other required information on Form 1040 (or Form 1040A), line 6c. Free ez form IF you. Free ez form . Free ez form . Free ez form THEN only. Free ez form . Free ez form . Free ez form claim an exemption on your tax return for a dependent who is an eligible student you can claim the lifetime learning credit based on that dependent's expenses. Free ez form The dependent cannot claim the credit. Free ez form do not claim an exemption on your tax return for a dependent who is an eligible student (even if entitled to the exemption) the dependent can claim the lifetime learning credit. Free ez form You cannot claim the credit based on this dependent's expenses. Free ez form Expenses paid by dependent. Free ez form   If you claim an exemption on your tax return for an eligible student who is your dependent, treat any expenses paid (or deemed paid) by your dependent as if you had paid them. Free ez form Include these expenses when figuring the amount of your lifetime learning credit. Free ez form    Qualified education expenses paid directly to an eligible educational institution for your dependent under a court-approved divorce decree are treated as paid by your dependent. Free ez form Expenses paid by you. Free ez form   If you claim an exemption for a dependent who is an eligible student, only you can include any expenses you paid when figuring the amount of the lifetime learning credit. Free ez form If neither you nor anyone else claims an exemption for the dependent, only the dependent can include any expenses you paid when figuring the lifetime learning credit. Free ez form Expenses paid by others. Free ez form   Someone other than you, your spouse, or your dependent (such as a relative or former spouse) may make a payment directly to an eligible educational institution to pay for an eligible student's qualified education expenses. Free ez form In this case, the student is treated as receiving the payment from the other person and, in turn, paying the institution. Free ez form If you claim an exemption on your tax return for the student, you are considered to have paid the expenses. Free ez form Example. Free ez form In 2013, Ms. Free ez form Allen makes a payment directly to an eligible educational institution for her grandson Todd's qualified education expenses. Free ez form For purposes of claiming a lifetime learning credit, Todd is treated as receiving the money from his grandmother and, in turn, paying his qualified education expenses himself. Free ez form Unless an exemption for Todd is claimed on someone else's 2013 tax return, only Todd can use the payment to claim a lifetime learning credit. Free ez form If anyone, such as Todd's parents, claims an exemption for Todd on his or her 2013 tax return, whoever claims the exemption may be able to use the expenses to claim a lifetime learning credit. Free ez form If anyone else claims an exemption for Todd, Todd cannot claim a lifetime learning credit. Free ez form Tuition reduction. Free ez form   When an eligible educational institution provides a reduction in tuition to an employee of the institution (or spouse or dependent child of an employee), the amount of the reduction may or may not be taxable. Free ez form If it is taxable, the employee is treated as receiving a payment of that amount and, in turn, paying it to the educational institution on behalf of the student. Free ez form For more information on tuition reductions, see Qualified Tuition Reduction in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Free ez form Figuring the Credit The amount of the lifetime learning credit is 20% of the first $10,000 of qualified education expenses you paid for all eligible students. Free ez form The maximum amount of lifetime learning credit you can claim for 2013 is $2,000 (20% × $10,000). Free ez form However, that amount may be reduced based on your MAGI. Free ez form See Effect of the Amount of Your Income on the Amount of Your Credit , later. Free ez form Example. Free ez form Bruce and Toni Harper are married and file a joint tax return. Free ez form For 2013, their MAGI is $75,000. Free ez form Toni is attending a local college (an eligible educational institution) to earn credits toward a degree in nursing. Free ez form She already has a bachelor's degree in history and wants to become a nurse. Free ez form In August 2013, Toni paid $5,000 of qualified education expenses for her fall 2013 semester. Free ez form Bruce and Toni can claim a $1,000 (20% × $5,000) lifetime learning credit on their 2013 joint tax return. Free ez form Form 1098-T. Free ez form   To help you figure your lifetime learning credit, the student should receive Form 1098-T. Free ez form Generally, an eligible educational institution (such as a college or university) must send Form 1098-T (or acceptable substitute) to each enrolled student by January 31, 2014. Free ez form An institution may choose to report either payments received (box 1), or amounts billed (box 2), for qualified education expenses. Free ez form However, the amounts in boxes 1 and 2 of Form 1098-T might be different from what you paid. Free ez form When figuring the credit, use only the amounts you paid or are deemed to have paid in 2013 for qualified education expenses. Free ez form   In addition, Form 1098-T should give other information for that institution, such as adjustments made for prior years, the amount of scholarships or grants, reimbursements or refunds, and whether the student was enrolled at least half-time or was a graduate student. Free ez form    The eligible educational institution may ask for a completed Form W-9S, or similar statement to obtain the student's name, address, and taxpayer identification number. Free ez form Effect of the Amount of Your Income on the Amount of Your Credit The amount of your lifetime learning credit is phased out (gradually reduced) if your MAGI is between $53,000 and $63,000 ($107,000 and $127,000 if you file a joint return). Free ez form You cannot claim a lifetime learning credit if your MAGI is $63,000 or more ($127,000 or more if you file a joint return). Free ez form Modified adjusted gross income (MAGI). Free ez form   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return. Free ez form MAGI when using Form 1040A. Free ez form   If you file Form 1040A, your MAGI is the AGI on line 22 of that form. Free ez form MAGI when using Form 1040. Free ez form   If you file Form 1040, your MAGI is the AGI on line 38 of that form, modified by adding back any: Foreign earned income exclusion, Foreign housing exclusion, Foreign housing deduction, Exclusion of income by bona fide residents of American Samoa, and Exclusion of income by bona fide residents of Puerto Rico. Free ez form You can use Worksheet 3-1 to figure your MAGI. Free ez form Worksheet 3-1. Free ez form MAGI for the Lifetime Learning Credit 1. Free ez form Enter your adjusted gross income  (Form 1040, line 38)   1. Free ez form   2. Free ez form Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45, or Form 2555-EZ, line 18)   2. Free ez form       3. Free ez form Enter your foreign housing deduction (Form 2555, line 50)   3. Free ez form       4. Free ez form Enter the amount of income from Puerto Rico you are excluding   4. Free ez form       5. Free ez form Enter the amount of income from American Samoa you are excluding (Form 4563, line 15)   5. Free ez form       6. Free ez form Add the amounts on lines 2, 3, 4, and 5   6. Free ez form   7. Free ez form Add the amounts on lines 1 and 6. Free ez form  This is your modified adjusted  gross income. Free ez form Enter this amount  on Form 8863, line 14   7. Free ez form   Phaseout. Free ez form   If your MAGI is within the range of incomes where the credit must be reduced, you will figure your reduced credit using lines 10-18 of Form 8863. Free ez form The same method is shown in the following example. Free ez form Example. Free ez form You are filing a joint return with a MAGI of $112,000. Free ez form In 2013, you paid $6,600 of qualified education expenses. Free ez form You figure the tentative lifetime learning credit (20% of the first $10,000 of qualified education expenses you paid for all eligible students). Free ez form The result is a $1,320 (20% x $6,600) tentative credit. Free ez form Because your MAGI is within the range of incomes where the credit must be reduced, you must multiply your tentative credit ($1,320) by a fraction. Free ez form The numerator of the fraction is $127,000 (the upper limit for those filing a joint return) minus your MAGI. Free ez form The denominator is $20,000, the range of incomes for the phaseout ($107,000 to $127,000). Free ez form The result is the amount of your phased out (reduced) lifetime learning credit ($990). Free ez form   $1,320 × $127,000 − $112,000  $20,000 = $990   Claiming the Credit You claim the lifetime learning credit by completing Form 8863 and submitting it with your Form 1040 or 1040A. Free ez form Enter the credit on Form 1040, line 49, or Form 1040A, line 31. Free ez form Note. Free ez form In Appendix A, Illustrated Example of Education Credits at the end of this publication, there is an example illustrating the use of Form 8863 when both the American opportunity credit and the lifetime learning credit are claimed on the same tax return. Free ez form Prev  Up  Next   Home   More Online Publications
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Free ez form Publication 515 - Main Content Table of Contents Withholding of TaxWithholding Agent Withholding and Reporting Obligations Persons Subject to NRA WithholdingIdentifying the Payee Foreign Persons DocumentationBeneficial Owners Foreign Intermediaries and Foreign Flow-Through Entities Standards of Knowledge Presumption Rules Income Subject to NRA WithholdingSource of Income Fixed or Determinable Annual or Periodical Income (FDAP) Withholding on Specific IncomeEffectively Connected Income Income Not Effectively Connected Pay for Personal Services Performed Artists and Athletes (Income Codes 42 and 43) Other Income Foreign Governments and Certain Other Foreign Organizations U. Free ez form S. Free ez form Taxpayer Identification NumbersUnexpected payment. Free ez form Depositing Withheld TaxesWhen Deposits Are Required Adjustment for Overwithholding Returns RequiredJoint owners. Free ez form Electronic reporting. Free ez form Partnership Withholding on Effectively Connected IncomeWho Must Withhold Foreign Partner Publicly Traded Partnerships U. Free ez form S. Free ez form Real Property InterestForeign corporations. Free ez form Domestic corporations. Free ez form U. Free ez form S. Free ez form real property holding corporations. Free ez form Partnerships. Free ez form Trusts and estates. Free ez form Domestically controlled QIE. Free ez form Late filing of certifications or notices. Free ez form Certifications. Free ez form Liability of agent or qualified substitute. Free ez form Reporting and Paying the Tax Withholding Certificates Tax Treaty TablesTable 1 Table 2 Table 3 How To Get Tax HelpLow Income Taxpayer Clinics (LITCs). Free ez form Withholding of Tax In most cases, a foreign person is subject to U. Free ez form S. Free ez form tax on its U. Free ez form S. Free ez form source income. Free ez form Most types of U. Free ez form S. Free ez form source income received by a foreign person are subject to U. Free ez form S. Free ez form tax of 30%. Free ez form A reduced rate, including exemption, may apply if there is a tax treaty between the foreign person's country of residence and the United States. Free ez form The tax is generally withheld (NRA withholding) from the payment made to the foreign person. Free ez form The term “NRA withholding” is used in this publication descriptively to refer to withholding required under sections 1441, 1442, and 1443 of the Internal Revenue Code. Free ez form In most cases, NRA withholding describes the withholding regime that requires withholding on a payment of U. Free ez form S. Free ez form source income. Free ez form Payments to foreign persons, including nonresident alien individuals, foreign entities, and governments, may be subject to NRA withholding. Free ez form NRA withholding does not include withholding under section 1445 of the Code (see U. Free ez form S. Free ez form Real Property Interest, later) or under section 1446 of the Code (see Partnership Withholding on Effectively Connected Income , later). Free ez form A withholding agent (defined next) is the person responsible for withholding on payments made to a foreign person. Free ez form However, a withholding agent that can reliably associate the payment with documentation (discussed later) from a U. Free ez form S. Free ez form person is not required to withhold. Free ez form In addition, a withholding agent may apply a reduced rate of withholding (including an exemption from withholding) if it can reliably associate the payment with documentation from a beneficial owner that is a foreign person entitled to a reduced rate of withholding. Free ez form Withholding Agent You are a withholding agent if you are a U. Free ez form S. Free ez form or foreign person that has control, receipt, custody, disposal, or payment of any item of income of a foreign person that is subject to withholding. Free ez form A withholding agent may be an individual, corporation, partnership, trust, association, nominee (under section 1446 of the Code), or any other entity, including any foreign intermediary, foreign partnership, or U. Free ez form S. Free ez form branch of certain foreign banks and insurance companies. Free ez form You may be a withholding agent even if there is no requirement to withhold from a payment or even if another person has withheld the required amount from the payment. Free ez form Although several persons may be withholding agents for a single payment, the full tax is required to be withheld only once. Free ez form In most cases, the U. Free ez form S. Free ez form person who pays an amount subject to NRA withholding is the person responsible for withholding. Free ez form However, other persons may be required to withhold. Free ez form For example, a payment made by a flow-through entity or nonqualified intermediary that knows, or has reason to know, that the full amount of NRA withholding was not done by the person from which it receives a payment is required to do the appropriate withholding since it also falls within the definition of a withholding agent. Free ez form In addition, withholding must be done by any qualified intermediary, withholding foreign partnership, or withholding foreign trust in accordance with the terms of its withholding agreement, discussed later. Free ez form Liability for tax. Free ez form   As a withholding agent, you are personally liable for any tax required to be withheld. Free ez form This liability is independent of the tax liability of the foreign person to whom the payment is made. Free ez form If you fail to withhold and the foreign payee fails to satisfy its U. Free ez form S. Free ez form tax liability, then both you and the foreign person are liable for tax, as well as interest and any applicable penalties. Free ez form   The applicable tax will be collected only once. Free ez form If the foreign person satisfies its U. Free ez form S. Free ez form tax liability, you are not liable for the tax but remain liable for any interest and penalties for failure to withhold. Free ez form Determination of amount to withhold. Free ez form   You must withhold on the gross amount subject to NRA withholding. Free ez form You cannot reduce the gross amount by any deductions. Free ez form However, see Scholarships and Fellowship Grants and Pay for Personal Services Performed , later, for when a deduction for a personal exemption may be allowed. Free ez form   If the determination of the source of the income or the amount subject to tax depends on facts that are not known at the time of payment, you must withhold an amount sufficient to ensure that at least 30% of the amount subsequently determined to be subject to withholding is withheld. Free ez form In no case, however, should you withhold more than 30% of the total amount paid. Free ez form Or, you may make a reasonable estimate of the amount from U. Free ez form S. Free ez form sources and put a corresponding part of the amount due in escrow until the amount from U. Free ez form S. Free ez form sources can be determined, at which time withholding becomes due. Free ez form When to withhold. Free ez form   Withholding is required at the time you make a payment of an amount subject to withholding. Free ez form A payment is made to a person if that person realizes income, whether or not there is an actual transfer of cash or other property. Free ez form A payment is considered made to a person if it is paid for that person's benefit. Free ez form For example, a payment made to a creditor of a person in satisfaction of that person's debt to the creditor is considered made to the person. Free ez form A payment also is considered made to a person if it is made to that person's agent. Free ez form   A U. Free ez form S. Free ez form partnership should withhold when any distributions that include amounts subject to withholding are made. Free ez form However, if a foreign partner's distributive share of income subject to withholding is not actually distributed, the U. Free ez form S. Free ez form partnership must withhold on the foreign partner's distributive share of the income on the earlier of the date that a Schedule K-1 (Form 1065) is provided or mailed to the partner or the due date for furnishing that schedule. Free ez form If the distributable amount consists of effectively connected income, see Partnership Withholding on Effectively Connected Income , later. Free ez form A U. Free ez form S. Free ez form trust is required to withhold on the amount includible in the gross income of a foreign beneficiary to the extent the trust's distributable net income consists of an amount subject to withholding. Free ez form To the extent a U. Free ez form S. Free ez form trust is required to distribute an amount subject to withholding but does not actually distribute the amount, it must withhold on the foreign beneficiary's allocable share at the time the income is required to be reported on Form 1042-S. Free ez form Withholding and Reporting Obligations You are required to report payments subject to NRA withholding on Form 1042-S and to file a tax return on Form 1042. Free ez form (See Returns Required , later. Free ez form ) An exception from reporting may apply to individuals who are not required to withhold from a payment and who do not make the payment in the course of their trade or business. Free ez form Form 1099 reporting and backup withholding. Free ez form    You also may be responsible as a payer for reporting on Form 1099 payments made to a U. Free ez form S. Free ez form person. Free ez form You must withhold 28% (backup withholding rate) from a reportable payment made to a U. Free ez form S. Free ez form person that is subject to Form 1099 reporting if any of the following apply. Free ez form The U. Free ez form S. Free ez form person has not provided its taxpayer identification number (TIN) in the manner required. Free ez form The IRS notifies you that the TIN furnished by the payee is incorrect. Free ez form There has been a notified payee underreporting. Free ez form There has been a payee certification failure. Free ez form In most cases, a TIN must be provided by a U. Free ez form S. Free ez form non-exempt recipient on Form W-9, Request for Taxpayer Identification Number and Certification. Free ez form A payer files a tax return on Form 945, Annual Return of Withheld Federal Income Tax, for backup withholding. Free ez form You may be required to file Form 1099 and, if appropriate, backup withhold, even if you do not make the payments directly to that U. Free ez form S. Free ez form person. Free ez form For example, you are required to report income paid to a foreign intermediary or flow-through entity that collects for a U. Free ez form S. Free ez form person subject to Form 1099 reporting. Free ez form See Identifying the Payee , later, for more information. Free ez form Also see Section S. Free ez form Special Rules for Reporting Payments Made Through Foreign Intermediaries and Foreign Flow-Through Entities on Form 1099 in the General Instructions for Certain Information Returns. Free ez form Foreign persons who provide Form W-8BEN, Form W-8ECI, or Form W-8EXP (or applicable documentary evidence) are exempt from backup withholding and Form 1099 reporting. Free ez form Wages paid to employees. Free ez form   If you are the employer of a nonresident alien, you generally must withhold taxes at graduated rates. Free ez form See Pay for Personal Services Performed , later. Free ez form Effectively connected income by partnerships. Free ez form   A withholding agent that is a partnership (whether U. Free ez form S. Free ez form or foreign) is also responsible for withholding on its income effectively connected with a U. Free ez form S. Free ez form trade or business that is allocable to foreign partners. Free ez form See Partnership Withholding on Effectively Connected Income , later, for more information. Free ez form U. Free ez form S. Free ez form real property interest. Free ez form   A withholding agent also may be responsible for withholding if a foreign person transfers a U. Free ez form S. Free ez form real property interest to the agent, or if it is a corporation, partnership, trust, or estate that distributes a U. Free ez form S. Free ez form real property interest to a shareholder, partner, or beneficiary that is a foreign person. Free ez form See U. Free ez form S. Free ez form Real Property Interest , later. Free ez form Persons Subject to NRA Withholding NRA withholding applies only to payments made to a payee that is a foreign person. Free ez form It does not apply to payments made to U. Free ez form S. Free ez form persons. Free ez form Usually, you determine the payee's status as a U. Free ez form S. Free ez form or foreign person based on the documentation that person provides. Free ez form See Documentation , later. Free ez form However, if you have received no documentation or you cannot reliably associate all or a part of a payment with documentation, then you must apply certain presumption rules, discussed later. Free ez form Identifying the Payee In most cases, the payee is the person to whom you make the payment, regardless of whether that person is the beneficial owner of the income. Free ez form However, there are situations in which the payee is a person other than the one to whom you actually make a payment. Free ez form U. Free ez form S. Free ez form agent of foreign person. Free ez form   If you make a payment to a U. Free ez form S. Free ez form person and you have actual knowledge that the U. Free ez form S. Free ez form person is receiving the payment as an agent of a foreign person, you must treat the payment as made to the foreign person. Free ez form However, if the U. Free ez form S. Free ez form person is a financial institution, you may treat the institution as the payee provided you have no reason to believe that the institution will not comply with its own obligation to withhold. Free ez form   If the payment is not subject to NRA withholding (for example, gross proceeds from the sales of securities), you must treat the payment as made to a U. Free ez form S. Free ez form person and not as a payment to a foreign person. Free ez form You may be required to report the payment on Form 1099 and, if applicable, backup withhold. Free ez form Disregarded entities. Free ez form   A business entity that is not a corporation and that has a single owner may be disregarded as an entity separate from its owner (a disregarded entity) for federal tax purposes. Free ez form The payee of a payment made to a disregarded entity is the owner of the entity. Free ez form   If the owner of the entity is a foreign person, you must apply NRA withholding unless you can treat the foreign owner as a beneficial owner entitled to a reduced rate of withholding. Free ez form   If the owner is a U. Free ez form S. Free ez form person, you do not apply NRA withholding. Free ez form However, you may be required to report the payment on Form 1099 and, if applicable, backup withhold. Free ez form You may assume that a foreign entity is not a disregarded entity unless you can reliably associate the payment with documentation provided by the owner or you have actual knowledge or reason to know that the foreign entity is a disregarded entity. Free ez form Flow-Through Entities The payees of payments (other than income effectively connected with a U. Free ez form S. Free ez form trade or business) made to a foreign flow-through entity are the owners or beneficiaries of the flow-through entity. Free ez form This rule applies for purposes of NRA withholding and for Form 1099 reporting and backup withholding. Free ez form Income that is, or is deemed to be, effectively connected with the conduct of a U. Free ez form S. Free ez form trade or business of a flow-through entity is treated as paid to the entity. Free ez form All of the following are flow-through entities. Free ez form A foreign partnership (other than a withholding foreign partnership). Free ez form A foreign simple or foreign grantor trust (other than a withholding foreign trust). Free ez form A fiscally transparent entity receiving income for which treaty benefits are claimed. Free ez form See Fiscally transparent entity , later. Free ez form In most cases, you treat a payee as a flow-through entity if it provides you with a Form W-8IMY (see Documentation , later) on which it claims such status. Free ez form You also may be required to treat the entity as a flow-through entity under the presumption rules, discussed later. Free ez form You must determine whether the owners or beneficiaries of a flow-through entity are U. Free ez form S. Free ez form or foreign persons, how much of the payment relates to each owner or beneficiary, and, if the owner or beneficiary is foreign, whether a reduced rate of NRA withholding applies. Free ez form You make these determinations based on the documentation and other information (contained in a withholding statement) that is associated with the flow-through entity's Form W-8IMY. Free ez form If you do not have all of the information that is required to reliably associate a payment with a specific payee, you must apply the presumption rules. Free ez form See Documentation and Presumption Rules , later. Free ez form Withholding foreign partnerships and withholding foreign trusts are not flow-through entities. Free ez form Foreign partnerships. Free ez form    A foreign partnership is any partnership that is not organized under the laws of any state of the United States or the District of Columbia or any partnership that is treated as foreign under the income tax regulations. Free ez form If a foreign partnership is not a withholding foreign partnership, the payees of income are the partners of the partnership, provided the partners are not themselves a flow-through entity or a foreign intermediary. Free ez form However, the payee is the partnership itself if the partnership is claiming treaty benefits on the basis that it is not fiscally transparent and that it meets all the other requirements for claiming treaty benefits. Free ez form If a partner is a foreign flow-through entity or a foreign intermediary, you apply the payee determination rules to that partner to determine the payees. Free ez form Example 1. Free ez form A nonwithholding foreign partnership has three partners: a nonresident alien individual; a foreign corporation; and a U. Free ez form S. Free ez form citizen. Free ez form You make a payment of U. Free ez form S. Free ez form source interest to the partnership. Free ez form It gives you a Form W-8IMY with which it associates Form W-8BEN from the nonresident alien; Form W-8BEN from the foreign corporation; and Form W-9 from the U. Free ez form S. Free ez form citizen. Free ez form The partnership also gives you a complete withholding statement that enables you to associate a part of the interest payment to each partner. Free ez form You must treat all three partners as the payees of the interest payment as if the payment were made directly to them. Free ez form Report the payment to the nonresident alien and the foreign corporation on Forms 1042-S. Free ez form Report the payment to the U. Free ez form S. Free ez form citizen on Form 1099-INT. Free ez form Example 2. Free ez form A nonwithholding foreign partnership has two partners: a foreign corporation and a nonwithholding foreign partnership. Free ez form The second partnership has two partners, both nonresident alien individuals. Free ez form You make a payment of U. Free ez form S. Free ez form source interest to the first partnership. Free ez form It gives you a valid Form W-8IMY with which it associates a Form W-8BEN from the foreign corporation and a Form W-8IMY from the second partnership. Free ez form In addition, Forms W-8BEN from the partners are associated with the Form W-8IMY from the second partnership. Free ez form The Forms W-8IMY from the partnerships have complete withholding statements associated with them. Free ez form Because you can reliably associate a part of the interest payment with the Form W-8BEN provided by the foreign corporation and the Forms W-8BEN provided by the nonresident alien individual partners as a result of the withholding statements, you must treat them as the payees of the interest. Free ez form Example 3. Free ez form You make a payment of U. Free ez form S. Free ez form source dividends to a withholding foreign partnership. Free ez form The partnership has two partners, both foreign corporations. Free ez form You can reliably associate the payment with a valid Form W-8IMY from the partnership on which it represents that it is a withholding foreign partnership. Free ez form You must treat the partnership as the payee of the dividends. Free ez form Foreign simple and grantor trust. Free ez form   A trust is foreign unless it meets both of the following tests. Free ez form A court within the United States is able to exercise primary supervision over the administration of the trust. Free ez form One or more U. Free ez form S. Free ez form persons have the authority to control all substantial decisions of the trust. Free ez form   In most cases, a foreign simple trust is a foreign trust that is required to distribute all of its income annually. Free ez form A foreign grantor trust is a foreign trust that is treated as a grantor trust under sections 671 through 679 of the Code. Free ez form   The payees of a payment made to a foreign simple trust are the beneficiaries of the trust. Free ez form The payees of a payment made to a foreign grantor trust are the owners of the trust. Free ez form However, the payee is the foreign simple or grantor trust itself if the trust is claiming treaty benefits on the basis that it is not fiscally transparent and that it meets all the other requirements for claiming treaty benefits. Free ez form If the beneficiaries or owners are themselves flow-through entities or foreign intermediaries, you apply the payee determination rules to that beneficiary or owner to determine the payees. Free ez form Example. Free ez form A foreign simple trust has three beneficiaries: two nonresident alien individuals and a U. Free ez form S. Free ez form citizen. Free ez form You make a payment of interest to the foreign trust. Free ez form It gives you a Form W-8IMY with which it associates Forms W-8BEN from the nonresident aliens and a Form W-9 from the U. Free ez form S. Free ez form citizen. Free ez form The trust also gives you a complete withholding statement that enables you to associate a part of the interest payment with the forms provided by each beneficiary. Free ez form You must treat all three beneficiaries as the payees of the interest payment as if the payment were made directly to them. Free ez form Report the payment to the nonresident aliens on Forms 1042-S. Free ez form Report the payment to the U. Free ez form S. Free ez form citizen on Form 1099-INT. Free ez form Fiscally transparent entity. Free ez form   If a reduced rate of withholding under an income tax treaty is claimed, a flow-through entity includes any entity in which the interest holder must treat the entity as fiscally transparent. Free ez form The determination of whether an entity is fiscally transparent is made on an item of income basis (that is, the determination is made separately for interest, dividends, royalties, etc. Free ez form ). Free ez form The interest holder in an entity makes the determination by applying the laws of the jurisdiction where the interest holder is organized, incorporated, or otherwise considered a resident. Free ez form An entity is considered to be fiscally transparent for the income to the extent the laws of that jurisdiction require the interest holder to separately take into account on a current basis the interest holder's share of the income, whether or not distributed to the interest holder, and the character and source of the income to the interest holder are determined as if the income was realized directly from the source that paid it to the entity. Free ez form Subject to the standards of knowledge rules discussed later, you generally make the determination that an entity is fiscally transparent based on a Form W-8IMY provided by the entity. Free ez form   The payees of a payment made to a fiscally transparent entity are the interest holders of the entity. Free ez form Example. Free ez form Entity A is a business organization organized under the laws of country X that has an income tax treaty in force with the United States. Free ez form A has two interest holders, B and C. Free ez form B is a corporation organized under the laws of country Y. Free ez form C is a corporation organized under the laws of country Z. Free ez form Both countries Y and Z have an income tax treaty in force with the United States. Free ez form A receives royalty income from U. Free ez form S. Free ez form sources that is not effectively connected with the conduct of a trade or business in the United States. Free ez form For U. Free ez form S. Free ez form income tax purposes, A is treated as a partnership. Free ez form Country X treats A as a partnership and requires the interest holders in A to separately take into account on a current basis their respective shares of the income paid to A even if the income is not distributed. Free ez form The laws of country X provide that the character and source of the income to A's interest holders are determined as if the income was realized directly from the source that paid it to A. Free ez form Accordingly, A is fiscally transparent in its jurisdiction, country X. Free ez form B and C are not fiscally transparent under the laws of their respective countries of incorporation. Free ez form Country Y requires B to separately take into account on a current basis B's share of the income paid to A, and the character and source of the income to B is determined as if the income was realized directly from the source that paid it to A. Free ez form Accordingly, A is fiscally transparent for that income under the laws of country Y, and B is treated as deriving its share of the U. Free ez form S. Free ez form source royalty income for purposes of the U. Free ez form S. Free ez form -Y income tax treaty. Free ez form Country Z, on the other hand, treats A as a corporation and does not require C to take into account its share of A's income on a current basis whether or not distributed. Free ez form Therefore, A is not treated as fiscally transparent under the laws of country Z. Free ez form Accordingly, C is not treated as deriving its share of the U. Free ez form S. Free ez form source royalty income for purposes of the U. Free ez form S. Free ez form -Z income tax treaty. Free ez form Foreign Intermediaries In most cases, if you make payments to a foreign intermediary, the payees are the persons for whom the foreign intermediary collects the payment, such as account holders or customers, not the intermediary itself. Free ez form This rule applies for purposes of NRA withholding and for Form 1099 reporting and backup withholding. Free ez form You may, however, treat a qualified intermediary that has assumed primary withholding responsibility for a payment as the payee, and you are not required to withhold. Free ez form An intermediary is a custodian, broker, nominee, or any other person that acts as an agent for another person. Free ez form A foreign intermediary is either a qualified intermediary or a nonqualified intermediary. Free ez form In most cases, you determine whether an entity is a qualified intermediary or a nonqualified intermediary based on the representations the intermediary makes on Form W-8IMY. Free ez form You must determine whether the customers or account holders of a foreign intermediary are U. Free ez form S. Free ez form or foreign persons and, if the account holder or customer is foreign, whether a reduced rate of NRA withholding applies. Free ez form You make these determinations based on the foreign intermediary's Form W-8IMY and associated information and documentation. Free ez form If you do not have all of the information or documentation that is required to reliably associate a payment with a payee, you must apply the presumption rules. Free ez form See Documentation and Presumption Rules , later. Free ez form Nonqualified intermediary. Free ez form   A nonqualified intermediary (NQI) is any intermediary that is a foreign person and that is not a qualified intermediary. Free ez form The payees of a payment made to an NQI are the customers or account holders on whose behalf the NQI is acting. Free ez form Example. Free ez form You make a payment of interest to a foreign bank that is a nonqualified intermediary. Free ez form The bank gives you a Form W-8IMY and the Forms W-8BEN of two foreign persons, and a Form W-9 from a U. Free ez form S. Free ez form person for whom the bank is collecting the payments. Free ez form The bank also associates with its Form W-8IMY a withholding statement on which it allocates the interest payment to each account holder and provides all other information required to be on the withholding statement. Free ez form The account holders are the payees of the interest payment. Free ez form You should report the part of the interest paid to the two foreign persons on Forms 1042-S and the part paid to the U. Free ez form S. Free ez form person on Form 1099-INT. Free ez form Qualified intermediary. Free ez form   A qualified intermediary (QI) is any foreign intermediary (or foreign branch of a U. Free ez form S. Free ez form intermediary) that has entered into a qualified intermediary withholding agreement (discussed later) with the IRS. Free ez form You may treat a QI as a payee to the extent the QI assumes primary withholding responsibility or primary Form 1099 reporting and backup withholding responsibility for a payment. Free ez form In this situation, the QI is required to withhold the tax. Free ez form You can determine whether a QI has assumed responsibility from the Form W-8IMY provided by the QI. Free ez form   A payment to a QI to the extent it does not assume primary NRA withholding responsibility is considered made to the person on whose behalf the QI acts. Free ez form If a QI does not assume Form 1099 reporting and backup withholding responsibility, you must report on Form 1099 and, if applicable, backup withhold as if you were making the payment directly to the U. Free ez form S. Free ez form person. Free ez form Branches of financial institutions. Free ez form   Branches of financial institutions are not permitted to operate as QIs if they are located outside of countries having approved “know-your-customer” (KYC) rules. Free ez form The countries with approved KYC rules are listed on IRS. Free ez form gov. Free ez form QI withholding agreement. Free ez form   Foreign financial institutions and foreign branches of U. Free ez form S. Free ez form financial institutions can enter into an agreement with the IRS to be a qualified intermediary. Free ez form   A QI is entitled to certain simplified withholding and reporting rules. Free ez form In general, there are three major areas whereby intermediaries with QI status are afforded such simplified treatment. Free ez form   To apply for QI status, complete Form 14345, Qualified Intermediary Application, and Form SS-4, Application for Employer Identification Number. Free ez form These forms, and the procedures required to obtain a QI withholding agreement are available at www. Free ez form irs. Free ez form gov/Businesses/Corporations/Qualified-Intermediaries-(QI). Free ez form Documentation. Free ez form   A QI is not required to forward documentation obtained from foreign account holders to the U. Free ez form S. Free ez form withholding agent from whom the QI receives a payment of U. Free ez form S. Free ez form source income. Free ez form The QI maintains such documentation at its location and provides the U. Free ez form S. Free ez form withholding agent with withholding rate pools. Free ez form A withholding rate pool is a payment of a single type of income that is subject to a single rate of withholding. Free ez form   A QI is required to provide the U. Free ez form S. Free ez form withholding agent with information regarding U. Free ez form S. Free ez form persons subject to Form 1099 information reporting unless the QI assumes the primary obligation to do Form 1099 reporting and backup withholding. Free ez form   If a QI obtains documentary evidence under the “know-your-customer” rules that apply to the QI under local law, and the documentary evidence is of a type specified in an attachment to the QI agreement, the documentary evidence remains valid until there is a change in circumstances or the QI knows the information is incorrect. Free ez form This indefinite validity period rule does not apply to Forms W-8 or to documentary evidence that is not of the type specified in the attachment to the agreement. Free ez form Form 1042-S reporting. Free ez form   A QI is permitted to report payments made to its direct foreign account holders on a pooled basis rather than reporting payments to each direct account holder specifically. Free ez form Pooled basis reporting is not available for payments to certain account holders, such as a nonqualified intermediary or a flow-through entity (discussed earlier). Free ez form Collective refund procedures. Free ez form   A QI may seek a refund on behalf of its direct account holders. Free ez form The direct account holders, therefore, are not required to file returns with the IRS to obtain refunds, but rather may obtain them from the QI. Free ez form U. Free ez form S. Free ez form branches of foreign banks and foreign insurance companies. Free ez form   Special rules apply to a U. Free ez form S. Free ez form branch of a foreign bank subject to Federal Reserve Board supervision or a foreign insurance company subject to state regulatory supervision. Free ez form If you agree to treat the branch as a U. Free ez form S. Free ez form person, you may treat the branch as a U. Free ez form S. Free ez form payee for a payment subject to NRA withholding provided you receive a Form W-8IMY from the U. Free ez form S. Free ez form branch on which the agreement is evidenced. Free ez form If you treat the branch as a U. Free ez form S. Free ez form payee, you are not required to withhold. Free ez form Even though you agree to treat the branch as a U. Free ez form S. Free ez form person, you must report the payment on Form 1042-S. Free ez form   A financial institution organized in a U. Free ez form S. Free ez form possession is treated as a U. Free ez form S. Free ez form branch. Free ez form The special rules discussed in this section apply to a possessions financial institution. Free ez form   If you are paying a U. Free ez form S. Free ez form branch an amount that is not subject to NRA withholding, treat the payment as made to a foreign person, irrespective of any agreement to treat the branch as a U. Free ez form S. Free ez form person for amounts subject to NRA withholding. Free ez form Consequently, amounts not subject to NRA withholding that are paid to a U. Free ez form S. Free ez form branch are not subject to Form 1099 reporting or backup withholding. Free ez form   Alternatively, a U. Free ez form S. Free ez form branch may provide you with a Form W-8IMY with which it associates the documentation of the persons on whose behalf it acts. Free ez form In this situation, the payees are the persons on whose behalf the branch acts provided you can reliably associate the payment with valid documentation from those persons. Free ez form See Nonqualified Intermediaries under  Documentation, later. Free ez form   If the U. Free ez form S. Free ez form branch does not provide you with a Form W-8IMY, then you should treat a payment subject to NRA withholding as made to the foreign person of which the branch is a part and the income as effectively connected with the conduct of a trade or business in the United States. Free ez form Withholding foreign partnership and foreign trust. Free ez form   A withholding foreign partnership (WP) is any foreign partnership that has entered into a WP withholding agreement with the IRS and is acting in that capacity. Free ez form A withholding foreign trust (WT) is a foreign simple or grantor trust that has entered into a WT withholding agreement with the IRS and is acting in that capacity. Free ez form   A WP or WT may act in that capacity only for payments of amounts subject to NRA withholding that are distributed to, or included in the distributive share of, its direct partners, beneficiaries, or owners. Free ez form A WP or WT acting in that capacity must assume NRA withholding responsibility for these amounts. Free ez form You may treat a WP or WT as a payee if it has provided you with documentation (discussed later) that represents that it is acting as a WP or WT for such amounts. Free ez form WP and WT withholding agreements. Free ez form   The WP and WT withholding agreements and the application procedures for the agreements are in Revenue Procedure 2003-64. Free ez form Also see the following items. Free ez form Revenue Procedure 2004-21. Free ez form Revenue Procedure 2005-77. Free ez form Employer identification number (EIN). Free ez form   A completed Form SS-4 must be submitted with the application for being a WP or WT. Free ez form The WP or WT will be assigned a WP-EIN or WT-EIN to be used only when acting in that capacity. Free ez form Documentation. Free ez form   A WP or WT must provide you with a Form W-8IMY that certifies that the WP or WT is acting in that capacity and a written statement identifying the amounts for which it is so acting. Free ez form The statement is not required to contain withholding rate pool information or any information relating to the identity of a direct partner, beneficiary, or owner. Free ez form The Form W-8IMY must contain the WP-EIN or WT-EIN. Free ez form Foreign Persons A payee is subject to NRA withholding only if it is a foreign person. Free ez form A foreign person includes a nonresident alien individual, foreign corporation, foreign partnership, foreign trust, foreign estate, and any other person that is not a U. Free ez form S. Free ez form person. Free ez form It also includes a foreign branch of a U. Free ez form S. Free ez form financial institution if the foreign branch is a qualified intermediary. Free ez form In most cases, the U. Free ez form S. Free ez form branch of a foreign corporation or partnership is treated as a foreign person. Free ez form Nonresident alien. Free ez form   A nonresident alien is an individual who is not a U. Free ez form S. Free ez form citizen or a resident alien. Free ez form A resident of a foreign country under the residence article of an income tax treaty is a nonresident alien individual for purposes of withholding. Free ez form Married to U. Free ez form S. Free ez form citizen or resident alien. Free ez form   Nonresident alien individuals married to U. Free ez form S. Free ez form citizens or resident aliens may choose to be treated as resident aliens for certain income tax purposes. Free ez form However, these individuals are still subject to the NRA withholding rules that apply to nonresident aliens for all income except wages. Free ez form Wages paid to these individuals are subject to graduated withholding. Free ez form See Wages Paid to Employees—Graduated Withholding . Free ez form Resident alien. Free ez form   A resident alien is an individual who is not a citizen or national of the United States and who meets either the green card test or the substantial presence test for the calendar year. Free ez form Green card test. Free ez form An alien is a resident alien if the individual was a lawful permanent resident of the United States at any time during the calendar year. Free ez form This is known as the green card test because these aliens hold immigrant visas (also known as green cards). Free ez form Substantial presence test. Free ez form An alien is considered a resident alien if the individual meets the substantial presence test for the calendar year. Free ez form Under this test, the individual must be physically present in the United States on at least: 31 days during the current calendar year, and 183 days during the current year and the 2 preceding years, counting all the days of physical presence in the current year, but only 1/3 the number of days of presence in the first preceding year, and only 1/6 the number of days in the second preceding year. Free ez form   In most cases, the days the alien is in the United States as a teacher, student, or trainee on an “F,” “J,” “M,” or “Q” visa are not counted. Free ez form This exception is for a limited period of time. Free ez form   For more information on resident and nonresident status, the tests for residence, and the exceptions to them, see Publication 519. Free ez form Note. Free ez form   If your employee is late in notifying you that his or her status changed from nonresident alien to resident alien, you may have to make an adjustment to Form 941 if that employee was exempt from withholding of social security and Medicare taxes as a nonresident alien. Free ez form For more information on making adjustments, see chapter 13 of Publication 15 (Circular E). Free ez form Resident of a U. Free ez form S. Free ez form possession. Free ez form   A bona fide resident of Puerto Rico, the U. Free ez form S. Free ez form Virgin Islands, Guam, the Commonwealth of the Northern Mariana Islands (CNMI), or American Samoa who is not a U. Free ez form S. Free ez form citizen or a U. Free ez form S. Free ez form national is treated as a nonresident alien for the withholding rules explained here. Free ez form A bona fide resident of a possession is someone who: Meets the presence test, Does not have a tax home outside the possession, and Does not have a closer connection to the United States or to a foreign country than to the possession. Free ez form   For more information, see Publication 570, Tax Guide for Individuals With Income From U. Free ez form S. Free ez form Possessions. Free ez form Foreign corporations. Free ez form   A foreign corporation is one that does not fit the definition of a domestic corporation. Free ez form A domestic corporation is one that was created or organized in the United States or under the laws of the United States, any of its states, or the District of Columbia. Free ez form Guam or Northern Mariana Islands corporations. Free ez form   A corporation created or organized in, or under the laws of, Guam or the CNMI is not considered a foreign corporation for the purpose of withholding tax for the tax year if: At all times during the tax year less than 25% in value of the corporation's stock is owned, directly or indirectly, by foreign persons; and At least 20% of the corporation's gross income is derived from sources within Guam or the CNMI for the 3-year period ending with the close of the preceding tax year of the corporation (or the period the corporation has been in existence, if less). Free ez form Note. Free ez form   The provisions discussed below under U. Free ez form S. Free ez form Virgin Islands and American Samoa corporations will apply to Guam or CNMI corporations when an implementing agreement is in effect between the United States and that possession. Free ez form U. Free ez form S. Free ez form Virgin Islands and American Samoa corporations. Free ez form   A corporation created or organized in, or under the laws of, the U. Free ez form S. Free ez form Virgin Islands or American Samoa is not considered a foreign corporation for the purposes of withholding tax for the tax year if: At all times during the tax year less than 25% in value of the corporation's stock is owned, directly or indirectly, by foreign persons, At least 65% of the corporation's gross income is effectively connected with the conduct of a trade or business in the U. Free ez form S. Free ez form Virgin Islands, American Samoa, Guam, the CNMI, or the United States for the 3-year period ending with the close of the tax year of the corporation (or the period the corporation or any predecessor has been in existence, if less), and No substantial part of the income of the corporation is used, directly or indirectly, to satisfy obligations to a person who is not a bona fide resident of the U. Free ez form S. Free ez form Virgin Islands, American Samoa, Guam, the CNMI, or the United States. Free ez form Foreign private foundations. Free ez form   A private foundation that was created or organized under the laws of a foreign country is a foreign private foundation. Free ez form Gross investment income from sources within the United States paid to a qualified foreign private foundation is subject to NRA withholding at a 4% rate (unless exempted by a treaty) rather than the ordinary statutory 30% rate. Free ez form Other foreign organizations, associations, and charitable institutions. Free ez form   An organization may be exempt from income tax under section 501(a) of the Internal Revenue Code even if it was formed under foreign law. Free ez form In most cases, you do not have to withhold tax on payments of income to these foreign tax-exempt organizations unless the IRS has determined that they are foreign private foundations. Free ez form   Payments to these organizations, however, must be reported on Form 1042-S, even though no tax is withheld. Free ez form   You must withhold tax on the unrelated business income (as described in Publication 598, Tax on Unrelated Business Income of Exempt Organizations) of foreign tax-exempt organizations in the same way that you would withhold tax on similar income of nonexempt organizations. Free ez form U. Free ez form S. Free ez form branches of foreign persons. Free ez form   In most cases, a payment to a U. Free ez form S. Free ez form branch of a foreign person is a payment made to the foreign person. Free ez form However, you may treat payments to U. Free ez form S. Free ez form branches of foreign banks and foreign insurance companies (discussed earlier) that are subject to U. Free ez form S. Free ez form regulatory supervision as payments made to a U. Free ez form S. Free ez form person, if you and the U. Free ez form S. Free ez form branch have agreed to do so, and if their agreement is evidenced by a withholding certificate, Form W-8IMY. Free ez form For this purpose, a financial institution organized under the laws of a U. Free ez form S. Free ez form possession is treated as a U. Free ez form S. Free ez form branch. Free ez form Documentation In most cases, you must withhold 30% from the gross amount paid to a foreign payee unless you can reliably associate the payment with valid documentation that establishes either of the following. Free ez form The payee is a U. Free ez form S. Free ez form person. Free ez form The payee is a foreign person that is the beneficial owner of the income and is entitled to a reduced rate of withholding. Free ez form In most cases, you must get the documentation before you make the payment. Free ez form The documentation is not valid if you know, or have reason to know, that it is unreliable or incorrect. Free ez form See Standards of Knowledge , later. Free ez form If you cannot reliably associate a payment with valid documentation, you must use the presumption rules discussed later. Free ez form For example, if you do not have documentation or you cannot determine the part of a payment that is allocable to specific documentation, you must use the presumption rules. Free ez form The specific types of documentation are discussed in this section. Free ez form However, see Withholding on Specific Income , later, as well as the instructions to the particular forms. Free ez form As the withholding agent, you also may want to see the Instructions for the Requester of Forms W-8BEN, W-8ECI, W-8EXP, and W-8IMY. Free ez form Section 1446 withholding. Free ez form   Under section 1446 of the Code, a partnership must withhold tax on its effectively connected income allocable to a foreign partner. Free ez form In most cases, a partnership determines if a partner is a foreign partner and the partner's tax classification based on the withholding certificate provided by the partner. Free ez form This is the same documentation that is filed for NRA withholding, but may require additional information as discussed under each of the forms in this section. Free ez form Joint owners. Free ez form    If you make a payment to joint owners, you need to get documentation from each owner. Free ez form Form W-9. Free ez form   In most cases, you can treat the payee as a U. Free ez form S. Free ez form person if the payee gives you a Form W-9. Free ez form The Form W-9 can be used only by a U. Free ez form S. Free ez form person and must contain the payee's taxpayer identification number (TIN). Free ez form If there is more than one owner, you may treat the total amount as paid to a U. Free ez form S. Free ez form person if any one of the owners gives you a Form W-9. Free ez form See U. Free ez form S. Free ez form Taxpayer Identification Numbers , later. Free ez form U. Free ez form S. Free ez form persons are not subject to NRA withholding, but may be subject to Form 1099 reporting and backup withholding. Free ez form Form W-8. Free ez form   In most cases, a foreign payee of the income should give you a form in the Form W-8 series. Free ez form Until further notice, you can rely upon Forms W-8 that contain a P. Free ez form O. Free ez form box as a permanent residence address provided you do not know, or have reason to know, that the person providing the form is a U. Free ez form S. Free ez form person and that a street address is available. Free ez form You may rely on Forms W-8 for which there is a U. Free ez form S. Free ez form mailing address provided you received the form prior to December 31, 2001. Free ez form   If certain requirements are met, the foreign person can give you documentary evidence, rather than a Form W-8. Free ez form You can rely on documentary evidence in lieu of a Form W-8 for a payment made in a U. Free ez form S. Free ez form possession. Free ez form Other documentation. Free ez form   Other documentation may be required to claim an exemption from, or a reduced rate of, withholding on pay for personal services. Free ez form The nonresident alien individual may have to give you a Form W-4 or a Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual. Free ez form These forms are discussed in Pay for Personal Services Performed under Withholding on Specific Income. Free ez form Beneficial Owners If all the appropriate requirements have been established on a Form W-8BEN, W-8ECI, W-8EXP or, if applicable, on documentary evidence, you may treat the payee as a foreign beneficial owner. Free ez form Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding. Free ez form   This form is used by a foreign person to: Establish foreign status; Claim that such person is the beneficial owner of the income for which the form is being furnished or a partner in a partnership subject to section 1446 withholding; and If applicable, claim a reduced rate of, or exemption from, withholding under an income tax treaty. Free ez form   Form W-8BEN also may be used to claim that the foreign person is exempt from Form 1099 reporting and backup withholding for income that is not subject to NRA withholding. Free ez form For example, a foreign person may provide a Form W-8BEN to a broker to establish that the gross proceeds from the sale of securities are not subject to Form 1099 reporting or backup withholding. Free ez form Claiming treaty benefits. Free ez form   You may apply a reduced rate of withholding to a foreign person that provides a Form W-8BEN claiming a reduced rate of withholding under an income tax treaty only if the person provides a U. Free ez form S. Free ez form TIN and certifies that: It is a resident of a treaty country; It is the beneficial owner of the income; If it is an entity, it derives the income within the meaning of section 894 of the Internal Revenue Code (it is not fiscally transparent); and It meets any limitation on benefits provision contained in the treaty, if applicable. Free ez form   If the foreign beneficial owner claiming a treaty benefit is related to you, the foreign beneficial owner also must certify on Form W-8BEN that it will file Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), if the amount subject to NRA withholding received during a calendar year exceeds, in the aggregate, $500,000. Free ez form   An entity derives income for which it is claiming treaty benefits only if the entity is not treated as fiscally transparent for that income. Free ez form See Fiscally transparent entity discussed earlier under Flow-Through Entities. Free ez form   Limitations on benefits provisions generally prohibit third country residents from obtaining treaty benefits. Free ez form For example, a foreign corporation may not be entitled to a reduced rate of withholding unless a minimum percentage of its owners are citizens or residents of the United States or the treaty country. Free ez form   The exemptions from, or reduced rates of, U. Free ez form S. Free ez form tax vary under each treaty. Free ez form You must check the provisions of the tax treaty that apply. Free ez form Tables at the end of this publication show the countries with which the United States has income tax treaties and the rates of withholding that apply in cases where all conditions of the particular treaty articles are satisfied. Free ez form   If you know, or have reason to know, that an owner of income is not eligible for treaty benefits claimed, you must not apply the treaty rate. Free ez form You are not, however, responsible for misstatements on a Form W-8, documentary evidence, or statements accompanying documentary evidence for which you did not have actual knowledge, or reason to know, that the statements were incorrect. Free ez form Exceptions to TIN requirement. Free ez form   A foreign person does not have to provide a TIN to claim a reduced rate of withholding under a treaty if the requirements for the following exceptions are met. Free ez form Income from marketable securities (discussed next). Free ez form Unexpected payments to an individual (discussed under U. Free ez form S. Free ez form Taxpayer Identification Numbers ). Free ez form Marketable securities. Free ez form   A Form W-8BEN provided to claim treaty benefits does not need a U. Free ez form S. Free ez form TIN if the foreign beneficial owner is claiming the benefits on income from marketable securities. Free ez form For this purpose, income from a marketable security consists of the following items. Free ez form Dividends and interest from stocks and debt obligations that are actively traded. Free ez form Dividends from any redeemable security issued by an investment company registered under the Investment Company Act of 1940 (mutual fund). Free ez form Dividends, interest, or royalties from units of beneficial interest in a unit investment trust that are (or were upon issuance) publicly offered and are registered with the SEC under the Securities Act of 1933. Free ez form Income related to loans of any of the above securities. Free ez form Offshore accounts. Free ez form   If a payment is made outside the United States to an offshore account, a payee may give you documentary evidence, rather than Form W-8BEN. Free ez form   In most cases, a payment is made outside the United States if you complete the acts necessary to effect the payment outside the United States. Free ez form However, an amount paid by a bank or other financial institution on a deposit or account usually will be treated as paid at the branch or office where the amount is credited. Free ez form An offshore account is an account maintained at an office or branch of a U. Free ez form S. Free ez form or foreign bank or other financial institution at any location outside the United States. Free ez form   You may rely on documentary evidence given to you by a nonqualified intermediary or a flow-through entity with its Form W-8IMY. Free ez form This rule applies even though you make the payment to a nonqualified intermediary or flow-through entity in the United States. Free ez form In most cases, the nonqualified intermediary or flow-through entity that gives you documentary evidence also will have to give you a withholding statement, discussed later. Free ez form Documentary evidence. Free ez form   You may apply a reduced rate of withholding to income from marketable securities (discussed earlier) paid outside the United States to an offshore account if the beneficial owner gives you documentary evidence in place of a Form W-8BEN. Free ez form To claim treaty benefits, the documentary evidence must be one of the following: A certificate of residence that: Is issued by a tax official of the treaty country of which the foreign beneficial owner claims to be a resident, States that the person has filed its most recent income tax return as a resident of that country, and Is issued within 3 years prior to being presented to you. Free ez form Documentation for an individual that: Includes the individual's name, address, and photograph, Is an official document issued by an authorized governmental body, and Is issued no more than 3 years prior to being presented to you. Free ez form Documentation for an entity that: Includes the name of the entity, Includes the address of its principal office in the treaty country, and Is an official document issued by an authorized governmental body. Free ez form In addition to the documentary evidence, a foreign beneficial owner that is an entity must provide a statement that it derives the income for which it claims treaty benefits and that it meets one or more of the conditions set forth in a limitation on benefits article, if any, (or similar provision) contained in the applicable treaty. Free ez form Form W-8ECI, Certificate of Foreign Person's Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States. Free ez form   This form is used by a foreign person to: Establish foreign status, Claim that such person is the beneficial owner of the income for which the form is being furnished, and Claim that the income is effectively connected with the conduct of a trade or business in the United States. Free ez form (See Effectively Connected Income , later. Free ez form )   Effectively connected income for which a valid Form W-8ECI has been provided is generally not subject to NRA withholding. Free ez form   If a partner submits this form to a partnership, the income claimed to be effectively connected with the conduct of a U. Free ez form S. Free ez form trade or business is subject to withholding under section 1446. Free ez form If the partner has made, or will make, an election under section 871(d) or 882(d), the partner must submit Form W-8ECI, and attach a copy of the election, or a statement of intent to elect, to the form. Free ez form    If the partner's only effectively connected income is the income allocated from the partnership and the partner is not making the election under section 871(d) or 882(d), the partner should provide Form W-8BEN to the partnership. Free ez form Form W-8EXP, Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding. Free ez form   This form is used by a foreign government, international organization, foreign central bank of issue, foreign tax-exempt organization, foreign private foundation, or government of a U. Free ez form S. Free ez form possession to: Establish foreign status, Claim that such person is the beneficial owner of the income for which the form is being furnished, and Claim a reduced rate of, or an exemption from, withholding as such an entity. Free ez form   If the government or organization is a partner in a partnership carrying on a trade or business in the United States, the effectively connected income allocable to the partner is subject to withholding under section 1446. Free ez form   See Foreign Governments and Certain Other Foreign Organizations , later. Free ez form Foreign Intermediaries and Foreign Flow-Through Entities Payments made to a foreign intermediary or foreign flow-through entity are treated as made to the payees on whose behalf the intermediary or entity acts. Free ez form The Form W-8IMY provided by a foreign intermediary or flow-through entity must be accompanied by additional information for you to be able to reliably associate the payment with a payee. Free ez form The additional information required depends on the type of intermediary or flow-through entity and the extent of the withholding responsibilities it assumes. Free ez form Form W-8IMY, Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U. Free ez form S. Free ez form Branches for United States Tax Withholding. Free ez form   This form is used by foreign intermediaries and foreign flow-through entities, as well as certain U. Free ez form S. Free ez form branches, to: Represent that a foreign person is a qualified intermediary or nonqualified intermediary, Represent, if applicable, that the qualified intermediary is assuming primary NRA withholding responsibility and/or primary Form 1099 reporting and backup withholding responsibility, Represent that a foreign partnership or a foreign simple or grantor trust is a withholding foreign partnership or a withholding foreign trust, Represent that a foreign flow-through entity is a nonwithholding foreign partnership, or a nonwithholding foreign trust and that the income is not effectively connected with the conduct of a trade or business in the United States, Represent that the provider is a U. Free ez form S. Free ez form branch of a foreign bank or insurance company and either is agreeing to be treated as a U. Free ez form S. Free ez form person or is transmitting documentation of the persons on whose behalf it is acting, or Represent that, for purposes of section 1446, it is an upper-tier foreign partnership or a foreign grantor trust and that the form is being used to transmit the required documentation. Free ez form For information on qualifying as an upper-tier foreign partnership, see Regulations section 1. Free ez form 1446-5. Free ez form Qualified Intermediaries In most cases, a QI is any foreign intermediary that has entered into a QI withholding agreement (discussed earlier) with the IRS. Free ez form A foreign intermediary that has received a QI employer identification number (QI-EIN) may represent on Form W-8IMY that it is a QI before it receives a fully executed agreement. Free ez form The intermediary can claim that it is a QI until the IRS revokes its QI-EIN. Free ez form The IRS will revoke a QI-EIN if the QI agreement is not executed and returned to the IRS within a reasonable period of time after the agreement was sent to the intermediary for signature. Free ez form Responsibilities. Free ez form   Payments made to a QI that does not assume NRA withholding responsibility are treated as paid to its account holders and customers. Free ez form However, a QI is not required to provide you with documentation it obtains from its foreign account holders and customers. Free ez form Instead, it provides you with a withholding statement that contains withholding rate pool information. Free ez form A withholding rate pool is a payment of a single type of income, determined in accordance with the categories of income reported on Form 1042-S that is subject to a single rate of withholding. Free ez form A qualified intermediary is required to provide you with information regarding U. Free ez form S. Free ez form persons subject to Form 1099 reporting and to provide you withholding rate pool information separately for each such U. Free ez form S. Free ez form person unless it has assumed Form 1099 reporting and backup withholding responsibility. Free ez form For the alternative procedure for providing rate pool information for U. Free ez form S. Free ez form non-exempt persons, see the Form W-8IMY instructions. Free ez form   The withholding statement must: Designate those accounts for which it acts as a qualified intermediary, Designate those accounts for which it assumes primary NRA withholding responsibility and/or primary Form 1099 and backup withholding responsibility, and Provide sufficient information for you to allocate the payment to a withholding rate pool. Free ez form   The extent to which you must have withholding rate pool information depends on the withholding and reporting obligations assumed by the QI. Free ez form Primary responsibility not assumed. Free ez form   If a QI does not assume primary NRA withholding responsibility or primary Form 1099 reporting and backup withholding responsibility for the payment, you can reliably associate the payment with valid documentation only to the extent you can reliably determine the part of the payment that relates to each withholding rate pool for foreign payees. Free ez form Unless the alternative procedure applies, the qualified intermediary must provide you with a separate withholding rate pool for each U. Free ez form S. Free ez form person subject to Form 1099 reporting and/or backup withholding. Free ez form The QI must provide a Form W-9 or, in the absence of the form, the name, address, and TIN, if available, for such person. Free ez form Primary NRA withholding responsibility assumed. Free ez form   If you make a payment to a QI that assumes primary NRA withholding responsibility (but not primary Form 1099 reporting and backup withholding responsibility), you can reliably associate the payment with valid documentation only to the extent you can reliably determine the part of the payment that relates to the withholding rate pool for which the QI assumes primary NRA withholding responsibility and the part of the payment attributable to withholding rate pools for each U. Free ez form S. Free ez form person, unless the alternative procedure applies, subject to Form 1099 reporting and/or backup withholding. Free ez form The QI must provide a Form W-9 or, in the absence of the form, the name, address, and TIN, if available, for such person. Free ez form Primary NRA and Form 1099 responsibility assumed. Free ez form   If you make a payment to a QI that assumes both primary NRA withholding responsibility and primary Form 1099 reporting and backup withholding responsibility, you can reliably associate a payment with valid documentation provided that you receive a valid Form W-8IMY. Free ez form It is not necessary to associate the payment with withholding rate pools. Free ez form Example. Free ez form You make a payment of dividends to a QI. Free ez form It has five customers: two are foreign persons who have provided documentation entitling them to a 15% rate of withholding on dividends; two are foreign persons subject to a 30% rate of withholding on dividends; and one is a U. Free ez form S. Free ez form individual who provides it with a Form W-9. Free ez form Each customer is entitled to 20% of the dividend payment. Free ez form The QI does not assume any primary withholding responsibility. Free ez form The QI gives you a Form W-8IMY with which it associates the Form W-9 and a withholding statement that allocates 40% of the dividend to a 15% withholding rate pool, 40% to a 30% withholding rate pool, and 20% to the U. Free ez form S. Free ez form individual. Free ez form You should report on Forms 1042-S 40% of the payment as made to a 15% rate dividend pool and 40% of the payment as made to a 30% rate dividend pool. Free ez form The part of the payment allocable to the U. Free ez form S. Free ez form individual (20%) is reportable on Form 1099-DIV. Free ez form Smaller partnerships and trusts. Free ez form   A QI may apply special rules to a smaller partnership or trust (Joint Account Provision) only if the partnership or trust meets the following conditions. Free ez form It is a foreign partnership or foreign simple or grantor trust. Free ez form It is a direct account holder of the QI. Free ez form It does not have any partner, beneficiary, or owner that is a U. Free ez form S. Free ez form person or a pass- through partner, beneficiary, or owner. Free ez form   For information on these rules, see section 4A. Free ez form 01 of the QI agreement. Free ez form This is found in Appendix 3 of Revenue Procedure 2003-64. Free ez form Also see Revenue Procedure 2004-21. Free ez form Related partnerships and trusts. Free ez form    A QI may apply special rules to a related partnership or trust only if the partnership or trust meets the following conditions. Free ez form It is a foreign partnership or foreign simple or grantor trust. Free ez form It is either: A direct account holder of the QI, or An indirect account holder of the QI that is a direct partner, beneficiary, or owner of a partnership or trust to which the QI has applied this rule. Free ez form For information on these rules, see section 4A. Free ez form 02 of the QI agreement. Free ez form This is found in Appendix 3 of Revenue Procedure 2003-64. Free ez form Also see Revenue Procedure 2005-77. Free ez form Nonqualified Intermediaries If you are making a payment to an NQI, foreign flow-through entity, or U. Free ez form S. Free ez form branch that is using Form W-8IMY to transmit information about the branch's account holders or customers, you can treat the payment (or a part of the payment) as reliably associated with valid documentation from a specific payee only if, prior to making the payment: You can allocate the payment to a valid Form W-8IMY, You can reliably determine how much of the payment relates to valid documentation provided by a payee (a person that is not itself a foreign intermediary, flow- through entity, or U. Free ez form S. Free ez form branch), and You have sufficient information to report the payment on Form 1042-S or Form 1099, if reporting is required. Free ez form The NQI, flow-through entity, or U. Free ez form S. Free ez form branch must give you certain information on a withholding statement that is associated with the Form W-8IMY. Free ez form A withholding statement must be updated to keep the information accurate prior to each payment. Free ez form Withholding statement. Free ez form   In most cases, a withholding statement must contain the following information. Free ez form The name, address, and TIN (if any, or if required) of each person for whom documentation is provided. Free ez form The type of documentation (documentary evidence, Form W-8, or Form W-9) for every person for whom documentation has been provided. Free ez form The status of the person for whom the documentation has been provided, such as whether the person is a U. Free ez form S. Free ez form exempt recipient (U. Free ez form S. Free ez form person exempt from Form 1099 reporting), U. Free ez form S. Free ez form non-exempt recipient (U. Free ez form S. Free ez form person subject to Form 1099 reporting), or a foreign person. Free ez form For a foreign person, the statement must indicate whether the person is a beneficial owner or a foreign intermediary, flow-through entity, or a U. Free ez form S. Free ez form branch. Free ez form The type of recipient the person is, based on the recipient codes used on Form 1042-S. Free ez form Information allocating each payment, by income type, to each payee (including U. Free ez form S. Free ez form exempt and U. Free ez form S. Free ez form non-exempt recipients) for whom documentation has been provided. Free ez form The rate of withholding that applies to each foreign person to whom a payment is allocated. Free ez form A foreign payee's country of residence. Free ez form If a reduced rate of withholding is claimed, the basis for a reduced rate of withholding (for example, portfolio interest, treaty benefit, etc. Free ez form ). Free ez form In the case of treaty benefits claimed by entities, whether the applicable limitation on benefits statement and the statement that the foreign person derives the income for which treaty benefits are claimed, have been made. Free ez form The name, address, and TIN (if any) of any other NQI, flow-through entity, or U. Free ez form S. Free ez form branch from which the payee will directly receive a payment. Free ez form Any other information a withholding agent requests to fulfill its reporting and withholding obligations. Free ez form Alternative procedure. Free ez form   Under this alternative procedure the NQI can give you the information that allocates each payment to each foreign and U. Free ez form S. Free ez form exempt recipient by January 31 following the calendar year of payment, rather than prior to the payment being made as otherwise required. Free ez form To take advantage of this procedure, the NQI must: (a) inform you, on its withholding statement, that it is using the alternative procedure; and (b) obtain your consent. Free ez form You must receive the withholding statement with all the required information (other than item 5) prior to making the payment. Free ez form    This alternative procedure cannot be used for payments to U. Free ez form S. Free ez form non-exempt recipients. Free ez form Therefore, an NQI must always provide you with allocation information for all U. Free ez form S. Free ez form non-exempt recipients prior to a payment being made. Free ez form Pooled withholding information. Free ez form   If an NQI uses the alternative procedure, it must provide you with withholding rate pool information, as opposed to individual allocation information, prior to the payment of a reportable amount. Free ez form A withholding rate pool is a payment of a single type of income (as determined by the income categories on Form 1042-S) that is subject to a single rate of withholding. Free ez form For example, an NQI that has foreign account holders receiving royalties and dividends, both subject to the 15% rate, will provide you with information for two withholding rate pools (one for royalties and one for dividends). Free ez form The NQI must provide you with the payee specific allocation information (information allocating each payment to each payee) by January 31 following the calendar year of payment. Free ez form Failure to provide allocation information. Free ez form   If an NQI fails to provide you with the payee specific allocation information for a withholding rate pool by January 31, you must not apply the alternative procedure to any of the NQI's withholding rate pools from that date forward. Free ez form You must treat the payees as undocumented and apply the presumption rules, discussed later in Presumption Rules . Free ez form An NQI is deemed to have f