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American tax issues for Non-Residents
1. Tax obligation for Non-residents Individuals who are not citizens or residents of the
U.S. are taxed generally only on their income from U.S. sources.
Form 1040-NR is typically used to report this income. 2. Tax Treaties Residents of countries with tax treaties with the U.S. may
receive more favourable U.S. tax treatment than residents of
non-treaty countries. If you take the position that any U.S. tax is
overruled or otherwise reduced by a U.S. treaty, you generally must
disclose that position on Form 8833 and attach it to your tax
return. For more information on tax treaties see IRS Publication
901. 3. Resident or Non-Resident IRS Publication 519 is a guide for non-residents. You are a
resident of the U.S. if you hold a green card or meet the
'substantial presence' test. Under the 'substantial presence' test,
an individual who spends a certain number of days in the U.S.
during a calendar year (and the two preceding years) will generally
be considered a resident. 4. Withholding Tax The U.S. imposes a 30% withholding tax on certain non-business
income paid to a non-resident from U.S. sources, including
interest, dividends, rental income, annuity income, etc. Generally,
the U.S. payor of such income must withhold the tax. Special
exceptions from taxation do apply. The 30% withholding tax does not apply if the non-resident has
income effectively connected with a U.S. trade or business. Income
is taxed in the same manor as a U.S. person. A non-resident will be
considered to be in a U.S. trade or business if he or she conducts
relatively continuous business activities from a fixed location in
the U.S. 5.Rental Income Rental income from real property located in the U.S. and the gain from
its sale will always be U.S. source income subject to tax in the United States
regardless of the foreign investor's personal tax status and regardless of
whether the U.S. has an income treaty with the foreign investor's home country.
The method by which rental income will be taxed depends on whether or not
the foreign person who owns the property is considered "engaged in a U.S. trade
or business." Ownership of real property is not considered a U.S. trade or
business if it consists of merely passive activity such as a net lease in
which the lessee pays rent, as well as all taxes, operating expenses, repairs,
mortgage interest, and insurance in connection with the property. Such passive
rental income is subject to a flat 30% withholding tax applied to the gross income
rather than the "net rent" received.
Foreign individuals may elect to have their passive rental income taxed as if
it were effectively connected with the U.S. trade or business. Once such an election
is made by attaching a declaration to a timely filed income tax return, there is no
obligation to withhold even in a net-lease situation.
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