Taxation of foreign nationals by the US—2016 Taxation of foreign nationals by the US—2016 2 Taxation of foreign nationals by the US—2016 Contents Executive summary 5 Chapter 1: Resident aliens 7 Chapter 2: Nonresident aliens 17 Chapter 3: Filing requirements 20 Chapter 4: Foreign investment in real property 22 Chapter 5: Other taxes 28 Chapter 6: Tax planning 33 Chapter 7: Immigration, visa, and nationality considerations 39 Appendix A: Key figures 48 Appendix B: US Federal tax rates 49 Appendix C: United States income tax treaties 51 Appendix D: Family-based immigration categories 54 Appendix E: Employment-based immigration categories 55 Appendix F: Countries whose citizens may be eligible for the Visa Waiver Program 56 Appendix G: Nonimmigrant (temporary) visa categories 57 Appendix H: Countries whose citizens may be eligible for E Treaty Trader (E-1) or Treaty Investor (E-2) visas 62 Appendix I: IRS forms and statements location information 65 3 Taxation of foreign nationals by the US—2016 4 Taxation of foreign nationals by the US—2016 Executive summary A foreign national may be subject to one Tax treaties and other foreign investments should, of two drastically different systems of For many nonresident aliens, the burden of therefore, be reviewed before beginning taxation by the United States depending on US tax is reduced by tax treaties between or ending an assignment in the United whether he/she is classified as a resident or the United States and their home countries. States. Additionally, the United States has a nonresident alien of the United States. The Further, treaties may modify US income a large and sophisticated body of rules determination of residency status is critical. taxation (for example, in determining dealing with the taxation of certain US As a rule, classification as a nonresident residency status) and should be reviewed resident shareholders on income earned foreign national may provide distinct tax in every tax-planning situation involving a by foreign corporations that they control advantages, but, in individual cases, the foreign national. (whether or not the income is distributed) advantages of resident versus nonresident and noncontrolled foreign corporations that status may vary from year to year. Therefore, Foreign investment in real property are primarily investment vehicles, as well as it is important for foreign nationals coming US real property can be a secure, diversified with taxation of the income of certain trusts to the United States to annually review investment for foreign nationals. Many real to their creators. It is almost impossible to the options available to minimize their tax estate investments in personal residences mitigate the effects of these rules once one liability in the United States as well as in are converted into rental properties, and has become a US resident, but there may their home countries. Taxation of Foreign special rules apply to their treatment. be planning opportunities if the rules are Nationals by the United States provides a Depreciation rules (relating to property addressed before a move into the United basic overview of US taxes and how they placed in service after 1998) increase the States. affect foreign nationals. period over which deductions are spread. Passive loss rules may further reduce Immigration, visa, and nationality Resident aliens current tax benefits. Gains on sales of considerations The rules defining residency for US income US real property are taxable regardless Those who want to be employed in the tax purposes are very specific, with only of the residency status of the investor. United States must obtain visas to do so. limited exceptions once the objective criteria Nonresident aliens, however, may have Most visas allowing employment in the or mechanical tests are met. Individuals fewer opportunities to defer capital gains United States require approval by the US classified as resident aliens are taxed on (for example, through such techniques Citizenship and Immigration Services (USCIS) their worldwide income derived from any as like-kind exchanges or corporate prior to visa issuance at US consular posts source. Tax rates are graduated and income reorganization) than residents or citizens. abroad. Additionally, a valid Visa authorizing is determined in the same manner as for US Special reporting and withholding rules may employment in the US, rather than merely citizens. Various elections may be available apply when nonresident aliens own US real allowing an alien individual to reside in the in the first year of residency to reduce the property or “US real property interests” (for US, also authorizes the individual to receive US tax liability. example, stock in a US corporation whose a social security number (SSN). Nonresident principal assets are US real property). and resident aliens who are not eligible for Nonresident aliens SSNs must apply for a taxpayer identification Nonresident aliens are normally taxed Other taxes number following IRS prescribed only on income derived from US sources. In addition to federal income tax, foreign procedures. US-source income that is considered nationals may be subject to social security “effectively connected” with a US trade or and estate, gift, and state taxes. These Certain similar terms have different business, such as salary and other forms of should all be considered in evaluating the meanings when they are used in the compensation, is taxed at graduated rates. tax effects of a US assignment. immigration context than when they are Taxable income from US trade or business discussed for tax purposes. Residency entities can include some kinds of foreign- Tax planning status for tax purposes is different from source income, as well as US-source income. Timing of income recognition and the residency status for immigration purposes. US investment income is generally taxed at length of an assignment can significantly Under certain circumstances, a person a flat 30% tax rate, which may be reduced affect a foreign national’s US tax liability. may be a nonimmigrant for immigration by a tax treaty. Certain types of investment Also, the tax basis (tax cost) of assets may purposes and yet be considered a US income may be exempt from US tax. not be computed for US tax purposes in resident for tax purposes. For immigration the same way as in the foreign national’s purposes, a nonimmigrant is an alien home country. Unrealized appreciation temporarily in the United States who or loss inherent in a personal residence plans eventually to return abroad at the 5 Taxation of foreign nationals by the US—2016 conclusion of his or her stay. A lawful Taxation of Foreign Nationals by the United permanent resident is an immigrant, holds States should serve only as a preliminary a “green card,” and has the right to reside guide. Coordination between foreign and permanently in the United States until he US tax professionals is essential to achieving or she surrenders or abandons permanent overall income tax savings and effective residency. US citizens are immune from asset management in the United States. deportation and may retain their US Deloitte Tax advisers are available to assist citizenship irrespective of where they live. in this important process. 6 Taxation of foreign nationals by the US—2016 Chapter 1: Resident aliens Resident alien defined Under the substantial presence test, Exempt individuals may exclude some days A resident alien of the United States is a an individual must meet the following from this calculation (see p. 8). foreign national who meets either of two conditions to be considered a resident alien: Several substantial presence test objective tests: the lawful permanent • He/she must be physically present in the calculations are provided in Example 1.1. residence test or the substantial presence United States for thirty-one days in the test. An alien who meets neither test is current year, and The weighting formula permits an alien a nonresident alien for federal income • He/she must be physically present in the to spend up to 121 days each year in tax purposes for that year. (The test of United States for a weighted average of the United States without becoming an residence is different for federal estate and 183 days over a three-year testing period income tax resident. Also, the alien will not gift tax purposes, and certain states may that comprises the current and the two be considered a US resident for any year impose their own residency rules.) preceding years. Days of US presence are in which he/she has been present in the computed under a weighting formula that Under the lawful permanent residence United States fewer than thirty-one days. counts the following days of presence: test (also known as the green card test), – All days in the current year an individual is considered a resident alien – One-third of the days in the from the day that he/she is admitted to preceding year the United States as a lawful permanent – One-sixth of the days in the second resident (that is, given a “green card”) until preceding year the day that this status is officially revoked or judicially found to be abandoned. While the alien officially has lawful permanent resident status, he/she is considered a US tax resident even while living outside the United States. Example 1.1: In each of the cases below, the individual will be considered a resident alien in the current year for federal income tax purposes under the substantial presence test. Case Days present in Percentage (%) Days counted the United States in test Case 1: Current year 183 100 183 First preceding year 0 33.33 0 Second preceding year 0 16.67 0 183 Case 2: Current year 122 100 122 First preceding year 122 33.33 40.66 Second preceding year 122 16.67 20.34 183 Case 3: Current year 60 100 60 First preceding year 360 33.33 120 Second preceding year 18 16.67 3 183 7 Taxation of foreign nationals by the US—2016 A day of US presence is acquired if an The teacher—trainee and student statuses period, and the other reports income and individual is physically present in the United are conditional on the terms of the visa that deductions for the non-residency period.