In the US taxation system, a foreign person includes non-resident alien individual as well as foreign corporation, foreign partnership, foreign estate and anyone who is not a US citizen. Here, non-resident alien means an individual who is not a US citizen and not a resident alien. A data suggests that income paid to a foreign person by US sources amounts to around $140 billion each year. The US source income is subject to a withholding tax of 30%. This amount may be reduced if it’s covered by some exception or stipulated in an applicable tax treaty.
US Tax Treaty With Other Countries
The United States has signed tax treaties with a large number of countries. The residents of foreign countries or foreign persons, who are getting their income paid by US sources, are taxed at a reduced rate or can avail of exemption from US income taxes on certain items of income. The rate of reduction of taxes varies among countries and specific items of income.
Many individual states of the US also tax their residents on their income. Some of the states do not honor the provisions of the US tax treaties with other countries, while some states do. If you are a foreign person, then you should consult a tax professional before filing taxes to know about your state’s standing in this matter.
Basic Rules
Foreigners are subject to US income tax laws irrespective of where and in which form their income is earned. To eliminate double taxation of these persons, tax treaties are used. Foreign tax credits are also available to income that is subjected to double taxation.
Several factors can affect tax rates for the foreign persons. This includes marital status, acquisition of a Green Card, intention to stay in the US and investments or ownership or partnership of a business in the country. If you are a foreigner living and working in the US, you can reduce your tax liability by tax deductions allowed for certain expenses like property taxes, investment interest expense and by donating to US charities. The timing of sales of capital assets and donation of property can also reduce your tax burden with help of careful planning.
Tax Withholding Rules And Terms
The employer or any person who makes a payment of US source income to a foreign person must withhold the applicable amount of tax. This payment must be reported in Form 1042-S and by March 15th of the year following the payments; this should be filed in Form 1042.
Withholding agent: You are a withholding agent if you are a foreign person who has control of any item of income that is subject to withholding. As a tax payer, it is your personal responsibility to pay any tax that’s required to be paid on withheld items.
Rental Income Received By Foreign Persons
Many foreign persons acquire US real estate for investment or in some cases to conduct a US business. US tax rules that apply to ownership of US real estate by foreigners are different in some aspects from the rules that apply to US citizens. Thus, it is important for US real estate professionals to know how to properly deal with foreign investors in compliance with federal tax laws affecting real estate transactions.
Under US tax law, a taxpayer can depreciate a property. For residential and commercial properties, the depreciation rates are different. The annual depreciation is deducted from the income of the foreign person as an expense on an income tax return. But this deduction may be recaptured if the property is sold.