U.S. federal taxation of individuals depends significantly upon the status of the individual as either a U.S. resident or a nonresident. An individual is a U.S. resident for U.S. federal tax purposes if the individual is a U.S. citizen, holds a U.S. green card or meets the substantial presence test. A U.S. green card holder who is considered to be a dual resident of the United States and another country may rely on the tie-breaker rules under a U.S. tax treaty to determine which country has the jurisdiction to impose tax. An individual is a U.S. resident based on the substantial presence test if:
Certain individuals are exempt from the substantial presence test, including employees of international organizations and foreign governments; students, teachers and academic trainees; and professional athletes.
If an individual is a U.S. resident, then the individual is subject to U.S. federal taxation on worldwide income. A U.S. resident individual must comply with all applicable U.S. federal tax reporting obligations, including the filing of Foreign Bank Account Reports, Form 8938 to report ownership of specified foreign assets and other forms to report ownership of a foreign company. A U.S. resident individual is generally required to file U.S. federal Form 1040 individual income tax return on an annual basis.
A nonresident individual is subject to U.S. federal nonresident tax withholding at a rate of 30% on gross amounts of passive income referred to as fixed, determinable, annual or periodic (“FDAP’) income. The types of income subject to the 30% withholding include interest, dividends, rents, royalties, annuities and compensation for personal services performed in the United States as an independent contractor. The 30% U.S. federal withholding tax rate could be reduced under the provision of an applicable U.S. tax treaty. Nonresident individuals are also subject to U.S. federal taxation on income that is effectively connected with a U.S. trade or business. A nonresident individual who has effectively connected income (“ECI”) is required to file a U.S. federal Form 1040NR nonresident individual income tax return. A nonresident individual is considered to have ECI from the sale of a U.S. real property interest or from the distributive share of income from a U.S. partnership. A nonresident who works in the United States as an employee is generally considered to have ECI and must report the U.S.-source wages on the U.S. federal Form 1040NR.
A U.S. resident who claims relief under the tie-breaker rules of a U.S. tax treaty must file a U.S. federal Form 1040NR and attach a Form 8833 for a treaty-based return position disclosure. The filing is necessary for the individual elect to be treated as a nonresident for U.S. federal tax purposes.
Please consult your Aronson LLC tax advisor or Alison Dougherty, International Tax Services at 301.231.6290 for more information.