United States Expatriate Tax Site:Taxation of Non-Resident Aliens

Introduction And Residence
Generally speaking, the US is not an attractive location for resident expatriate executives seeking to limit taxation.

Taxation Of Resident Alien
Tax-resident foreign nationals in the US are taxed just about on the same basis as a US national.

Taxation Of Non-Resident Aliens
The US tax position of a non-resident alien is reasonably favourable.

Tax Treaties
A resident or nonresident alien from a country with which the United States has an income tax treaty may qualify for certain benefits.

Services For Foreign Employer
If a non-resident alien is paid by a foreign employer, his or her US source income may be exempt from US tax.

Social Security And Medicare Taxes
The liability of aliens for US social security taxes.

Totalization Agreements
If a non-resident alien is paid by a foreign employer, his or her US source income may be exempt from US tax.

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 has traditionally been no tax on capital gains. This has meant that a brokerage or a mutual fund should withhold nothing when an individual sells shares or when capital distributions are made.

However, in 2008, the IRS had this to say on the subject, in its US Tax Guide for Aliens:

"Beginning in 2008, the exemption from 30% tax on certain interest related dividends and short term capital gain dividends received from a mutual fund or other regulated investment company will no longer apply."

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, Austin, TX 73301-0215.

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, was 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 addressed 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.