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
addressed the significant changes made by the American
Jobs Creation Act of 2004 (AJCA) to the tax and information
reporting rules affecting individuals who lost 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 provided
that former citizens and long-term residents would
continue to be taxed as US citizens or residents until
they (1) notified the Department of State of loss
of citizenship or the Department of Homeland Security
of termination of permanent resident status and (2)
filed an initial expatriation information statement
with the IRS.
On
June 17, 2008, President Bush signed into law the
Heroes Earnings Assistance and Relief Tax Act of 2008
(P.L. 110-245). The Act significantly changed the
taxation of expatriating citizens and long-term residents.
Under the Act, an individual ceases to be a U.S. citizen
for U.S. tax purposes upon relinquishment of his or
her U.S. citizenship.
RC
877A(g)(4) provides that a citizen will be treated
as relinquishing his or her U.S. citizenship on the
earliest of four possible dates: (1) the date the
individual renounces his or her U.S. nationality before
a diplomatic or consular officer of the U.S., provided
the renunciation is subsequently approved by the issuance
to the individual of a certificate of loss of nationality
by the U.S. Department of State; (2) the date the
individual furnishes to the U.S. Department of State
a signed statement of voluntary relinquishment of
U.S. nationality confirming the performance of an
act of expatriation specified in paragraph (1), (2),
(3), or (4) of section 349(a) of the Immigration and
Nationality Act (8 U.S.C. 1481(a)(1)-(4)), provided
the voluntary relinquishment is subsequently approved
by the issuance to the individual of a certificate
of loss of nationality by the U.S. Department of State;
(3) the date the U.S. Department of State issues to
the individual a certificate of loss of nationality;
or (4) the date a U.S. court cancels a naturalized
citizen’s certificate of naturalization. For
a long-term resident, residency for tax purposes terminates
if the individual is treated as a national of a country
with which the US has a tax treaty. The change applies
to expatriation after June 17, 2008.
Form
8854, Initial and Annual Expatriation Information
Statement, had been revised to permit individuals
to meet the new notification and information reporting
requirements imposed by AJCA. In particular, Form
8854 had been expanded so that it functioned 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. A further revision of Form 8854 took place
after the Relief Tax Act of 2008 became law and individuals
now have complete the parts relevant to their date
of expatriation.
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