By Vernon K. Jacobs,
CPA
& J. Richard Duke,
J.D., LLM
| U.S. Taxation of
Non-Resident Aliens
By Vernon K. Jacobs,
CPA |
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The USA is a tax haven for the rest of the world -- but not for it's own citizens or permanent residents.
Citizens and permanent residents of the USA are subject to tax on their world-wide income. Non resident aliens (NRA) with income from U.S. sources are only subject to U.S. tax on their U.S. source income. (Depending on their country of permanent residence, they may also be subject to tax on their world-wide income.) However, certain kinds of U.S. source investment income may be tax exempt for an NRA.
The citizens of other countries who do not reside in the U.S. for more than 183 days in a single year or more than an average of 120 days per year, and who do not have a "green card" (to permit them to live and work in the U.S. indefinitely), can invest in an assortment of U.S. securities on a tax favored basis.
Basically, a non-resident alien (NRA) can invest in the bonds of the U.S. government or U.S. banks or most other kinds of financial institutions on a tax free basis. They may be subject to tax in their own country, but the interest on U.S. corporate bonds may be exempt from tax for the NRA if the bonds are only available for purchase by non-residents and non-citizens of the U.S.
In addition, an NRA who realizes a gain on the sale of stocks or bonds in U.S. securities is not subject to any capital gains tax.
For these reasons, many U.S. citizens or permanent residents would like to be able to become an NRA and to then enjoy the investment tax advantages mentioned above. However, the U.S. tax law is diabolically designed to prevent easy tax avoidance through the use of intermediate foreign entities. To enjoy the tax advantage of an NRA investor, the U.S. person must become an expatriate and relinquish his or her U.S. citizenship or resident status. Even then, there are complex tax rules that are designed to ensure that any unrealized gains from tax deferred investments are eventually subject to U.S. taxation.
Dividends on U.S. stocks are subject to tax by an NRA and are subject to withholding at a rate of 30%. However, if the US has a treaty with the country in which the NRA is a resident, the rate of withholding may be less than 30%.
If an NRA purchases U.S. real estate, there is a 10% withholding tax that must be withheld by the seller when the property is sold. If the actual tax is less than the withholding tax, the NRA can file a U.S. income tax return to secure a refund of any excess withholding.
If an NRA is employed in the U.S. on a
temporary basis, the NRA is
subject to payroll tax withholding the same as a U.S. person. In most
cases, the NRA is also subject to U.S. social security taxes on income
earned in the U.S. However, when the NRA files a tax return on Form
1040-NR, the allowable exemptions and deductions are different from a
U.S. taxpayer.
If an NRA is engaged in a trade or business in the U.S., the NRA is subject to U.S. on that income, but with different rules for the allowable exemptions and deductions that may be claimed.
A corporation or partnership that is not domiciled in the U.S. but which has a U.S. employee, agent or other "substantial presence" is generally subject to U.S. tax on the U.S. source income but not on their foreign source income.
An NRA may be subject to U.S. estate or gift taxes on certain U.S. based (source) assets. The NRA is not permitted the same exemption amount as a U.S. citizen or resident.
The preceding comments are a very brief and non-technical summary of the key tax rules that apply to a person who is a citizen of another country and is not a permanent resident of the U.S.
This information is an excerpt
from Offshore Tax Strategies, by Vernon Jacobs
and Richard Duke.
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About the
authors:
Vernon Jacobs
is a CPA who
provides tax
accounting and consulting services for clients with international
interests. He edits and publishes the Jacobs Report on
International Financial Planning. J. Richard
Duke,
JD, LLM is an attorney who specializes in international tax law and is
an Adjunct Professor of international tax law.
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