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Tax Law (Questions About Taxes)/Effectively connected income or not


I am a nonresident alien living outside the US. I received a compensation payment for lost wages as part of a class action settlement against a former US employer. I did not work for the employer or live in the US during the year of the payment. The income was reported on forms W-2 and 1099-Misc.

I need to file 1040NR but I am unsure whether the income is effectively connected or not as I was not involved in trade or business with the US during the year.

Dear Sean,

Compensation for lost wages reported on form W-2 is income effectively connected and thus taxable to you.

Income reported on 1099 will be treated differently. Whether it is taxable or not depends on where on the form it is reported and income description.

Most likely this is a compensatory part of the settlement on top of the direct payment of lost wages. That part should be reported too but may be exempt through by Tax Treaty.

I.J.Zemelman, EA

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IJ Zemelman, EA MBA


I am an IRS-authorized EA and principal of a Tax Preparation firm focusing on U.S. Expatriates. We specialize in all tax issues faced by American citizens living abroad - such as foreign earned income, tax treaties, foreign spouse, etc. Visit our website - - for more information.


18 years professional tax experience, 12 with expatriate taxes.

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