Treaty Income A nonresident alien's treaty income is the gross income on whichthe tax is limited by a tax treaty. Treaty income includes, forexample, dividends from sources in the United States that are subjectto tax at a tax treaty rate not to exceed 15%. Nontreaty income is thegross income other than treaty income of a nonresident alien. Figure the tax on treaty income on each separate item of income atthe reduced rate that applies to that item under the terms of thetreaty. To determine tax on nontreaty income, figure a partial tax onnontreaty income either at the flat 30% rate or the graduated rate,depending upon whether or not the income is effectively connected withyour trade or business in the United States. Your tax liability is the sum of the tax on treaty income plus thepartial tax on nontreaty income, but cannot be more than the taxliability figured as if the tax treaty had not come into effect. Example.Arthur Banks is a nonresident alien who is single and a resident ofa foreign country that has a tax treaty with the United States. Hereceived gross income of $25,500 during the tax year from sourceswithin the United States, consisting of the following items: Dividends on which the tax is limited to a 15%rate by the tax treaty $1,400 Compensation for personal services onwhich the tax is not limitedby the tax treaty             24,100 Total gross income            $25,500 Arthur was engaged in business in the United States during the taxyear. His dividends are not effectively connected with that business.He has no deductions other than his own personal exemption. His tax liability, figured as though the tax treaty had not comeinto effect, is $3,626, determined as follows: Total compensation $24,100 Less: Personal exemption              2,750 Taxable income            $21,350 Tax determined by graduated rate (Tax Tablecolumn for single taxpayers) $3,206 Plus: Tax on gross dividends ($1,400 30%)                420 Tax determined as though treaty had notcome into effect             $3,626 Arthur's tax liability, figured by taking into account the reducedrate on dividend income as provided by the tax treaty, is $3,416,determined as follows: Tax determined by graduated rate (same asfigured above) $3,206 Plus: Tax on gross dividends ($1,400 15%)                210 Tax on compensation and dividends             $3,416 His tax liability, therefore, is limited to $3,416, the taxliability figured using the tax treaty rate on the dividends.