Academic journal article Journal of Accountancy

U.S. Income Taxation of Foreign Nationals; Income Source Could Be a Problem for Nonresident Aliens

Academic journal article Journal of Accountancy

U.S. Income Taxation of Foreign Nationals; Income Source Could Be a Problem for Nonresident Aliens

Article excerpt

Many foreign nationals could find themselves subject to U.S. tax because either they spend time in this country or they have investments here. Without proper planning, these people may be considered resident aliens (see "From The Tax Adviser," JofA, Oct.01, page 106), with significant income income tax ramifications and requirements.

The first factor that must be determined is whether the foreign national's income is connected to a U.S. trade or business.

NO U.S. TRADE OR BUSINESS

A foreign national who does not spend much time in the United States should qualify as a nonresident alien and be taxed at a 30% rate on investment income from U.S. sources not connected to a U.S. trade or business. This tax is generally withheld at the source and is assessed on interest, dividends, rents, royalties and other, similar types of income.

Interest. There is an exception to the withholding requirement for interest on the most common types of debt obligations. In addition, there may be exemptions from withholding for interest from bank deposits, deposits with domestic savings and loan associations and amounts held by insurance companies under agreements to pay interest.

Dividends, U.S.-source dividends are generally subject to the 30% withholding tax. However, there is an exception for dividends paid by domestic companies that derive at least 80% of their income from business transacted overseas.

Capital gains. Capital gains are generally exempt from withholding, unless they are the proceeds from sales of intellectual property, the price of which is contingent on the property's productivity, use or disposition.

Compensation. Payments for a foreign national's services will be treated as though it were from foreign sources (and therefore not subject to U.S. taxation) if

* The foreign national is present in the United States for no more than 90 days during the tax year. …

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