Foreign Income
U.S. Income Taxation of Nonresident Alien Individuals (907 2nd)
Portfolio Description
Tax Management Portfolio, U.S. Income Taxation of Nonresident Alien Individuals, No. 907-2nd, analyzes the U.S. income tax laws applicable to non-U.S. citizens (i.e., "aliens") who are classified as "nonresident aliens" rather than as "resident aliens" under the Internal Revenue Code.
To the extent that nonresident aliens are subject to U.S. income tax, their U.S. taxable income is divided into one of two categories: U.S.-source income that is not "effectively connected" with the conduct of a trade or business within the United States, taxable at the rate of 30% under §871(a) without the allowance of deductions, and income that is "effectively connected" with a U.S. trade or business, taxable at graduated rates on a net basis under §871(b). However, numerous special exceptions and rules apply for specific types of income.
Whether an alien is classified as a "resident alien" or a "nonresident alien" is based on detailed rules in §7701(b) and the regulations thereunder. For the most part, these rules are "mechanical," so that in most factual situations it is possible to know with certainty whether a particular alien is a resident alien or a nonresident alien on a particular day. The rules in §7701(b) may be overridden by the "tie-breaker" provisions of a tax treaty, however, where it is shown that an alien is also classified as an income tax resident of another country having an income tax treaty with the United States.
If a nonresident alien realizes U.S.-source income subject to tax on a gross basis, payments related to that income are normally subject to withholding tax at a 30% rate under §1441. Where a nonresident alien is taxable on a net basis on income that is effectively connected with a U.S. trade or business, he must file a federal income tax return on Form 1040NR. The calculation of his taxable income and of his tax is similar to the rules for U.S. citizens and resident aliens, but with certain important differences. Special rules can apply where an alien comes to the United States to work, becomes a resident, and later receives deferred compensation or pension income from the United States after moving abroad and resuming nonresident alien status.
Many nonresident aliens who are present in the United States and who plan to depart from the United States are required to make a personal visit to an IRS office and apply for a so-called "tax clearance certificate" (or "sailing permit").
This Portfolio may be cited as Bissell, 907-2nd T.M. , U.S. Income Taxation of Nonresident Alien Individuals.
Thomas St.G. Bissell, B.A., Harvard College (1964); LL.B., Columbia Law School (1967); LL.M. in Taxation, New York University (1971); Member, New York Bar; Certified Public Accountant, State of New Jersey; Member, Tax Management International Advisory Board, American Bar Association, American Institute of Certified Public Accountants, International Fiscal Association, Canadian Tax Foundation; former Attorney-Advisor, Office of International Tax Counsel, US Treasury Department, Washington, D.C.; retired tax partner, Coopers & Lybrand LLP; author of numerous articles in professional tax publications.
