The United States of America has an ever-growing market. It attracts lots of foreign investors. Even if you are not a US citizen but have the U.S based income source you still need to pay income tax in the U.S. A person who is not a citizen of the U.S. and someone who has not passed the green card or substantial presence tests to determine tax status is called a non-resident alien. A non-resident alien needs to always file for or pay income tax on any income that is sourced from the U.S. They don’t require to pay any tax on income that is foreign earned. Having a good knowledge of all the tax regulations can help non-residents save a lot of tax. 

The U.S. Income Tax Treatment of Non-resident Alien

The non-resident aliens are obligated to the U.S. tax withholding on dividends paid by the U.S. based companies. It is also applicable for FDAP income which is fixed or determinable, annual or periodic income. The default withholding tax rate on U.S. dividends is 30%. The income tax treaties provide for lower rates which is usually more or less 15%. If the withholding is done correctly the foreign investors do not have an obligation for complying with taxes in the U.S. The non-resident aliens need to complete the W-8BEN form and furnish it to a broker. The broker then withholds taxes on incomes sourced from the U.S. and other FDAP income at appropriate rates according to a tax treaty.

The 183 Days Rule

The non-resident aliens who pay tax in their home country and were not in the U.S. for 183 days are usually not required to pay taxes in the U.S. 

Income Tax Treaties

The U.S. has tax treaties with many foreign countries. With the help of these treaties, one can reduce or eliminate US tax. This is applicable to various types of personal services and other income such as pensions, interest, royalties and capital gains. 

The U.S. Estate Tax

The default exemption for non-resident aliens on the estate tax is $60,000. Many estate tax treaties may, however, provide higher rates. A beneficiary from the estate tax treaty may be exempted from the U.S. estate tax completely on the U.S. financial assets. The non-resident aliens can form a foreign corporation, partnership or trust to open a brokerage account with the U.S. broker. This helps avoid potential the U.S. estate tax.

Open the U.S. Partnership Account

It is recommended that non-resident alien should have the U.S. LLC entity account rather than a foreign entity account. This U.S. entity account is not subject to tax withholding on dividends by the broker. It is always beneficial to have a spousal-member LLC account than a single-member LLC account for filing a partnership return. According to chapter 3 withholding regulation, there is no U.S. withholding on the partnership formed under U.S. laws. The U.S. partnership takes the role of tax withholding agent to issue the 1042-S to the IRS. There is no estate tax on the U.S. partnership interest in an investment company.