Form 1040-C 2016 Tax Filing Checklist For Departing Aliens
Uniqueness of Form 1040-C for 2016
Form 1040-C for 2016 is filed exclusively by departing aliens and nonresident aliens seeking to leave the United States, not by domestic taxpayers filing regular income tax returns. Unlike Schedule C (Form 1040), used by sole proprietors to report business income, Form 1040-C requires a certificate of compliance from the IRS Field Assistance Area Director before departure from the United States. The form applies the substantial presence test and the green card test for determining residency status.
It separates filers into three distinct groups with different tax treatment: Group I for resident aliens taxed on worldwide income, Group II for nonresident aliens with income effectively connected to a U.S. trade or business, and Group III for other nonresident aliens with U.S.-source income not effectively connected to a trade or business.
Year-Specific 2016 Rules Applicable to Form 1040-C
For tax year 2016, individuals who expatriated or terminated U.S. long-term resident status must file Form 8854 (Initial and Annual Expatriation Statement) with their Form 1040-C income tax return. Resident aliens and long-term residents leaving the United States during 2016 may be subject to income tax under Section 877A on net unrealized gains in property as if the property were sold on the day before expatriation, computed on Form 8854.
This mark-to-market tax applies to covered expatriates who meet certain income, net worth, or tax compliance thresholds. The 2016 standard mileage rate for business vehicle use in connection with a trade or business is 54 cents per mile, down from 57.5 cents per mile in 2015.
Mandatory 10-Step 1040-C 2016 Filing Checklist
Step 1: Determine Residency Status Using 2016 Tests
Confirm whether you meet the green card test by holding a USCIS-issued alien registration card (green card) at any time during 2016, or the substantial presence test by being physically present in the United States for at least 31 days during 2016 and meeting the weighted presence formula across 2016, 2015, and 2014 (current year days plus one-third of prior year days plus one-sixth of second prior year days equals 183 or more).
For tax purposes, you are usually considered a resident alien if you meet either test. If you don't meet either test, or if you do meet the substantial presence test but qualify for the closer connection exception by keeping a closer connection to a foreign country, you are a nonresident alien. You must file Form 1040-C if departing the United States.
Step 2: Verify Certificate of Compliance Requirement and Timing
If required to file Form 1040-C, appear in person at an IRS office at least two weeks before leaving the United States, but no more than 30 days before your planned departure date. Obtain a certificate of compliance (also known as a sailing permit or departure permit) on Form 1040-C or Form 2063 from the IRS Field Assistance Area Director.
The certificate cannot be issued more than 30 days before your departure date and serves as proof that you have satisfied your U.S. tax obligations or made arrangements for payment before leaving. Specific individuals are exempt from the certificate requirement, including diplomatic personnel, students, and exchange visitors on certain visa types with limited income, as well as people who had no taxable income in the current or preceding year.
Step 3: Determine Your Filer Group Classification
Review the line 1 descriptions on Form 1040-C thoroughly to determine which filer group pertains to your situation. Group I consists of resident aliens who are taxed on worldwide income similar to U.S. citizens. Group II consists of nonresident aliens with income effectively connected with a U.S. trade or business, which is taxed at graduated rates on that effectively connected income.
Group III consists of other nonresident aliens with U.S.-source income that is not effectively connected to a trade or business, typically taxed at a flat 30% rate or a lower treaty rate. Different tax calculation rules and lines on Form 1040-C apply to each group. Use lines 15 through 22 if you are Group I or Group II, and lines 23 through 24 if you are Group III.
Step 4: Gather Required Documentation for 2016 Full-Year Income
Collect your valid passport, along with your alien registration card or current visa documentation. Gather copies of all U.S. income tax returns filed for the past two years, or for all years you have been in the United States if fewer than two years. Obtain receipts and documentation proving income taxes paid to federal, state, and local governments.
Collect bank records and canceled checks proving deductions and business expenses you plan to claim. Obtain employer statements showing wages paid and federal income tax withheld from January 1, 2016, through your departure date. Collect Forms W-2, 1099-MISC, 1099-INT, 1099-DIV, and other information returns that document all income received or anticipated in 2016.
Step 5: Calculate Gross Receipts and Schedule A Income for the Entire 2016 Tax Year
Report all income received or reasonably expected to be received for the entire calendar year 2016 from January 1 through December 31, not just the period before your departure. Form 1040-C requires the reporting of annual income, even though it is filed before the end of the year. If you are self-employed or operate a business, prepare Schedule A (Income) showing all U.S.-source business income and Schedule B (Gains and Losses) showing all capital gains and losses through year-end, including income expected but not yet received.
Estimate your total annual income as accurately as possible based on income received through the departure date and reasonably anticipated income for the remainder of the year. You will file a final yearly return on Form 1040, Form 1040-NR, or Form 1040NR-EZ after the year ends to report actual income received.
Step 6: Report Business Expenses Connected to U.S. Trade or Business Only
If you are a nonresident alien in Group II or Group III reporting business income on Schedule A, claim only deductions directly connected to your U.S. trade or business income. General personal deductions, such as the standard deduction, personal exemptions, or itemized deductions for state and local taxes, mortgage interest, or charitable contributions, are not available to Group II nonresident aliens unless allowed explicitly by tax treaty.
Group III nonresident aliens generally cannot claim any deductions. Attach a detailed statement of all ordinary and necessary business expenses incurred in 2016 through the date of departure if you are self-employed. Expenses must be documented with receipts, invoices, and records that clearly show the business purpose, dates, and amounts.
Step 7: Complete Part III (Figuring Your Income Tax) Using Correct Group Tax Rates
For Group I resident aliens: Use the graduated tax rates applicable to U.S. citizens on your worldwide income for 2016. Claim personal exemptions (amount is $4,050 per exemption for 2016) and standard deduction or itemized deductions as allowed. Calculate tax using the 2016 Tax Rate Schedules for your filing status.
For Group II nonresident aliens with effectively connected income: Use graduated tax rates on your effectively connected income only. You may claim one personal exemption and itemized deductions directly connected to the production of effectively connected income.
For Group III other nonresident aliens: Apply the 30% statutory rate to your U.S.-source income not effectively connected with a U.S. trade or business, unless a lower rate applies under an income tax treaty between the United States and your country of residence.
Step 8: Determine and Report Any Estimated Tax Payments and Tax Liability
Bring proof of all estimated tax payments made for 2016 and any prior years, including Forms 1040-ES payment vouchers or bank records showing electronic payments. Calculate your total tax liability on Form 1040-C and pay all tax shown as due at the time of your IRS office visit. Failure to pay the full amount due may result in the certificate of compliance being issued only after posting a bond or making full payment.
The certificate of compliance applies only to the specific departure for which it is issued. If you are leaving and returning to the United States multiple times, you may need to obtain a new certificate for each departure unless you qualify for an exemption.
Step 9: File Form 8854 if Expatriating or Terminating Residency in 2016
Suppose you expatriated by renouncing U.S. citizenship or relinquishing your green card after holding it for at least 8 of the prior 15 years (long-term resident status) in 2016. In that case, you must file Form 8854 (Initial and Annual Expatriation Statement) with your Form 1040-C return. Report net unrealized gains on property as if all property were sold for fair market value on the day before your expatriation date.
Calculate the mark-to-market tax on Form 8854 for the excess of net unrealized gain over $693,000 (the 2016 exemption amount). Include the completed Form 8854 with your Form 1040-C submission. Form 8854 must also be filed with your final Form 1040 or Form 1040-NR for the year of expatriation and for the two following years.
Step 10: Submit Original and One Copy of Completed 1040-C with All Schedules and Attachments
File one original and one copy of Form 1040-C for the 2016 tax year in which you plan to leave the United States. If you are departing between January 1 and April 18, 2016, you must also file Form 1040-NR or Form 1040 for tax year 2015, if you have not already done so. Attach Schedule A (Income) showing all sources of income for 2016, Schedule B (Gains and Losses) if you have capital gains or losses, Schedule C (Itemized Deductions) if you are claiming itemized deductions as a resident alien, and Form 8854 if you are expatriating.
Also, attach any other required forms, such as Form 2555 for foreign earned income exclusion if eligible, or documentation supporting treaty benefits if claiming reduced withholding rates. The IRS will review your submission and issue the certificate of compliance if all requirements are met.
2016 Form 1040-C Considerations
Form 1040-C serves as a preliminary departure return and certificate of compliance application, not as your final annual income tax return. After the calendar year ends, you must file a final yearly return on Form 1040 if you were a resident alien for the whole year or part of the year and choose to be treated as a resident, Form 1040-NR if you were a nonresident alien for the entire year, or Form 1040NR-EZ if you qualify for the simplified nonresident return. The final annual return reports your actual income received for the complete year and allows you to claim any additional deductions, credits, or refunds.
Departing aliens who operate a business report business income on Form 1040-C Schedule A (Income) and claim business deductions on detailed statements attached to the form. This is different from the Schedule C (Form 1040) used by domestic sole proprietors. Final annual tax reporting with Schedule C (Form 1040) for business income occurs on the final Form 1040 or Form 1040-NR filed after the end of the complete tax year. The standard mileage rate for 2016 business vehicle use is 54 cents per mile. If using certain heavy highway vehicles, such as trucks, truck-trailers, tractor-trailers, or buses in your trade or business, you may be subject to federal highway motor vehicle use tax on Form 2290.
Any tax paid with Form 1040-C is credited against your final tax liability when you file your year-end return. If you overpaid, you will receive a refund when you file the final return. If you underpaid because your actual income exceeded your estimate on Form 1040-C, you will owe additional tax with your final return. Estimated tax payments made during the year are also credited on your final return.
For professional assistance with your 2016 Form 1040-C departing alien tax return or any tax filing questions, contact our tax experts at (888) 260-9441.
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This checklist is for educational purposes only and does not constitute tax or legal advice. Always review official IRS instructions and consult a qualified professional for guidance.
