Information
provided on this site is for general guidance only
and is often simplified. Actual IRS procedures are
complex, and taxpayers should obtain professional
assistance or use IRS sources for complete information.
Taxation
of Non-Resident Aliens
The US
tax position of a non-resident alien is reasonably
favourable. A non-resident alien must file Form 1040NR
or Form 1040NR-EZ if engaged in a trade or business
in the US, or has any other US source income on which
the tax was not fully paid by the amount withheld.
While an individual is a non-resident alien, he or
she should file Form W-8BEN (it replaces older Forms
W-8 and 1001) with each of his or her mutual funds
or brokers every 3 or 4 years, so that they will automatically
withhold tax from the investment income. Since an
individual has to indicate his or her country of residence
for tax purposes on this form, the investment income
payor will know what tax treaty, if any, applies.
Tax is
due on US-source income, and may be withheld by an
employer. Taxable
income from US sources includes, but is not limited
to:
-
Wages, salaries, commissions, fees, tips, etc, for
services performed in the United States;
- Interest
(with certain exceptions) and dividends;
-
Rents and royalties;
-
Profits or losses from the sale of merchandise within
the United States;
-
Gains and losses from the sale of certain property,
and
-
Certain gambling winnings.
Under limited circumstances, the following kinds of
foreign source income are treated as effectively connected
with a trade or business in the United States:
-
Rents and royalties;
-
Dividends or interest from the conduct of certain
businesses; and
- Income,
gain or loss from the sale of certain property.
There
is no tax on capital gains. This means that a brokerage
or a mutual fund should withhold nothing when an individual
sells shares or when capital distributions are made.
In addition, no income tax is due on bank or portfolio
interest unless a person spends more than 183 days
in the US during a given year. Other types of interest
are charged with a 30% withholding tax. Dividends
are also charged with 30% withholding tax. No personal
exemption or deductions can be applied against investment
income (which is, technically, "income not effectively
connected with a US trade or business").
The
Internal Revenue Code provides an exemption from self-employment
tax on the self-employment income of non-resident
aliens. The business income of non-resident aliens
is taxed on a net basis (income minus any allowable
deductions) at the graduated rates that apply to US
citizens or residents.
An
employee receiving wages subject to US income tax
withholding should file Form 1040NR by the 15th day
of the 4th month after the tax year ends. Otherwise,
Form 1040NR is due by the 15th day of the 6th month
after the tax year ends. Form 1040NR must be sent
to the Internal Revenue Service Center, Philadelphia,
PA 19255, U.S.A.
If
a non-resident alien has significant taxable income
from which no US income tax is withheld, she may have
to pay estimated tax, and must make the first payment
of estimated tax by the due date for filing the previous
year's Form 1040NR.
US taxation
rules are highly complex, and professional advice
is strongly advised for any individual whose situation
is other than very straightforward.
In
April, 2005, the US Treasury and the IRS announced
the release of Notice 2005-36 and revised Form 8854,
Initial and Annual Expatriation Information Statement.
The notice and the revised form and its instructions
address the significant changes made by the American
Jobs Creation Act of 2004 (AJCA) to the tax and information
reporting rules affecting individuals who lose their
US citizenship or long-term resident status after
June 3, 2004.
In
addition to imposing new information reporting requirements
on former citizens and long-term residents, AJCA provides
that former citizens and long-term residents will
continue to be taxed as US citizens or residents until
they (1) notify the Department of State of loss of
citizenship or the Department of Homeland Security
of termination of permanent resident status and (2)
file an initial expatriation information statement
with the IRS.
Form
8854, Initial and Annual Expatriation Information
Statement, has been revised to permit individuals
to meet the new notification and information reporting
requirements imposed by AJCA. In particular, Form
8854 has been expanded so that it functions as both
the initial and the annual expatriation information
statements required by AJCA. Revised Form 8854 and
its instructions also address how individuals should
certify (in accordance with the new law) that they
have met their federal tax obligations for the five
preceding taxable years and what constitutes notification
to the Department of State or the Department of Homeland
Security.
Notice
2005-36 provides special rules for individuals who
file the revised Form 8854 by June 15, 2005. Treasury
and the IRS recognize that until the revised Form
8854 was released, individuals who lost US citizenship
or terminated long-term resident status after June
3, 2004 did not know how to meet the new notification
and information reporting requirements imposed by
AJCA. Accordingly, Notice 2005-36 provides that if
an individual who loses US citizenship or terminates
long-term resident status after June 3, 2004 files
the revised Form 8854 by June 15, 2005, the individual
will be treated as having met his or her reporting
obligations on the date on which the taxpayer provided
the requisite notice to the Department of State or
the Department of Homeland Security.
Form
8854 and its instructions are available at the agency
Web site, IRS.gov, but will no longer be obtainable
from US embassies or consulates abroad.
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