by our US tax adviser, Marc J. Strohl, CPA

The goal of this article is to provide a comprehensive checklist of information for the foreign national to consider prior to accepting an assignment in the US.. This article is not designed to teach you the technical competence required to perform self compliance; however it will certainly arm you with the knowledge to determine if your US tax preparer knows all that they should know to provide you with technically competent professional services.

If:

All US nonresident aliens are taxable in the US, only on US source income. Internal Revenue Code (IRC) Sec. 861 governs US sourced income, Sec. 862 governs Non US sourced income and Sec. 865 governs sourcing rules for personal property sales.

However US negotiated income tax treaties may override the source of specific items taxed, and therefore the applicable income tax treaties always need to be consulted in tandem with domestic US law treatment. Additionally in the case of US persons- citizens and green card holders- the US has conveniently slipped in to most income treaties a provision usually, under Miscellaneous Rules, to enable them to continue to tax their people as if the income tax treaty did not exist. This is typically referred to as a “Savings Clause” or “Limitation on Benefits” clause.

Where and How:

Where on the tax return that income is taxed and how it is taxed depends upon whether the income is effectively connected with a US trade or business, which includes compensation income but excludes passive income, or is non effectively connected income. IRC Sec. 871 governs which US sourced income is effectively connected with a US trade or business and which income is non US effectively connected income.

Effectively connected income is reported on Form 1040NR page 1 and is taxed at US regular graduated tax rates and non effectively connected income is reported on Form 1040NR page 4 and is taxed at a flat rate tax of 30%, or reduced treaty rates.

However there is one exception below, in the case of Capital Assets not effectively connected with a US trade or business. Under this one instance if a taxpayer is present in the US physically for 183 days or less in the tax year, the gain from the Capital Asset is not taxable. More than 183 days and the gain is considered not effectively connected with a US trade or business. This is the only clause in IRC Sec. 871 that deals specifically with the “If”.

If and Where and How:

We have constructed a table to facilitate these determinations:

For enquiries about the US tax filing service offered by expat taxation specialist Marc Strohl, please click here.