IN the previous issue we defined: 1) who are resident aliens, nonresident aliens or both, 2) who are exempt individuals, and 3) closer connection exception.
Do not forget to remember that U.S. tax laws controlling principles are whether you are a resident alien or nonresident alien. On the other hand, immigration laws refer to three categories such as immigrant, nonimmigrant, and illegal or undocumented alien. Do not confuse yourself tax laws with immigration laws.
How are resident alien and nonresident aliens taxed?
• Resident aliens are taxed on their worldwide income like U.S. citizens.
• Nonresident aliens are taxed on their income generated within the U.S. or income effectively connected with U.S. trade or business.
Income is considered U.S. sourced if:
• In general if paid by: a domestic corporation, an entity formed under the U.S. laws, resident alien, and by a U.S. citizen. Refer also to IRC 861 -865.
• If an income is considered effectively connected income or ECI: a) Income generated from the conduct of trade or business; b) subject to the graduated income tax rates and not the 30% rate; c) U.S. payer or a withholding agent is subject to reporting requirements; d) foreign person with ECI is required to file U.S. income tax return; e) ECI is not subject to a withholding.
• Fixed, determinable, annual or periodic also known as FDAP U.S. sourced non-business income: a) Income from non-OID interest income, dividends, annuities, rents, salaries and wages; b) foreign person is not required to file U.S. income tax return if is withheld subject to lower treaty rate or 30 percent from FDAP income.
FDAP income may become ECI income if income if sourced from assets used in the conduct of trade or business or US activities trade or business is a material factor in the achievement of that income,
• Income subject to 30 percent withholding or tax treaty rate: a) Income from gain on sale or exchange where payments are contingent to productivity like patents, copyright; b) payments to non-resident aliens 85 percent of U.S. social security benefits; c) excess of U.S. source gains over losses from sales or exchanges to nonresident alien present in the U.S. for 183 days or more during the taxable year; d) payments on bond with OID received upon disposition.
Withholding requirement and employee issues: Nonresident aliens and foreign workers working within the U.S. is required to file withholding documents with the withholding agent or U.S. employer.
How to claim exemption from withholding: Use Form 8233 to claim tax treaty exemption from withholding and provide copy to the U.S. employer. Within five days of acceptance after review and signing the form, should forward a copy to the IRS and wait at least 10 days for the IRS to issue any objections to the withholding. Refer also to Publication 515 to see tax treaties of different countries with the U.S.
To be continued in the next issue.
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Disclaimer: Any accounting, business or tax advice contained in this communication is neither intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.
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Al-os & Associates Accountancy Corporation provides accounting and tax services to individuals, corporations, LLCs and business entities. The Firm has a niche in defending taxpayers audited by the IRS and other governmental agencies.