Dual Status Aliens - Special Tax Return Filing Requirements

Like - Click this link to Add this page to your bookmarks Share - Click this link to Share this page through email or social media Print - Click this link to Print this pawhege

Dual status aliens determine their residency status under both the Internal Revenue Code and tax treaties.  When you status changes in the middle of a year from a resident to a nonresident you must file a dual status tax return. This return includes a form 1040 for the part of the year you are a US resident and a 1040NR for the part of the year you are a nonresident. This usually occurs when you surrender your green card (permanent residency) or surrender your US Citizenship.

Dual Status Alien

If you change status during the current year-

• from a nonresident alien to a resident alien, or
• from a resident alien to a nonresident alien

Aliens who make such a change are Dual Status Aliens and must file a special tax return called a Dual Status Return as described in Publication 519, U.S. Tax Guide for Aliens.

Dual Status Alien - First Year Choice

If you are a Nonresident Alien who will become a Resident Alien under the Substantial Presence test in the year following this taxable year, you may elect to be treated as a Dual Status Alien for this taxable year and a Resident Alien for the next taxable year if you meet certain tests. Refer to the First Year Choice area, under Dual-Status Aliens, of Chapter 1 in Publication 519, U.S. Tax Guide for Aliens.

Tax Treaties

Most Tax Treaties contain an article which defines tax residency for purposes of the Tax Treaty. Tax residency determined under the residency article of a tax treaty may differ from the residency provisions of the Internal Revenue Code.

Dual Status Aliens Married to U.S. Citizens or Resident Aliens

A dual status alien married to a U.S. citizen or to a resident alien may elect to file a joint income tax return with his/her U.S. citizen or resident alien spouse. Refer to Nonresident Spouse Treated as a Resident.

These rules are complex.  We can help you prepare your dual status return or review one you prepare on your own or answer your questions. Email us at ddnelson@gmail.com 

When is A Nonresident Doing Business Subject to US Income Tax?

Like - Click this link to Add this page to your bookmarks Share - Click this link to Share this page through email or social media Print - Click this link to Print this page

US Nonresident Effectively Connected Income (ECI) subject to US Income Tax

Generally, when a foreign person engages in a trade or business in the United States, all income from sources within the United States connected with the conduct of that trade or business is considered to be Effectively Connected Income (ECI). This applies whether or not there is any connection between the income, and the trade or business being carried on in the United States, during the tax year.

Generally, you must be engaged in a trade or business during the tax year to be able to treat income received in that year as ECI. You usually are considered to be engaged in a U.S. trade or business when you perform personal services in the United States. Whether you are engaged in a trade or business in the United States depends on the nature of your activities. Deductions are allowed against ECI, and it is taxed at the graduated rates or lesser rate under a tax treaty. The discussions that follow will help you determine whether you are engaged in a trade or business in the United States.

Certain kinds of Fixed, Determinable, Annual, or Periodical (FDAP) income are treated as ECI income because:

• Certain Internal Revenue Code Sections require the income to be treated as ECI,
• Certain Internal Revenue Code Sections allow elections to treat the income as ECI,
• Certain kinds of investment income are treated as ECI if they pass either of the two following tests:
  • The Asset-Use Test - The income must be associated with U.S. assets used in, or held for use in, the conduct of a U.S. trade or business.
  • Business Activities Test - The activities of that trade or business conducted in the United States are a material factor in the realization of the income.

In limited circumstances, some kinds of foreign source income may be treated as effectively connected with a trade or business in the United States. Refer to Publication 519, U.S. Tax Guide for Aliens.

The following categories of income are usually considered to be connected with a trade or business in the United States.

• You are considered to be engaged in a trade or business in the United States if you are temporarily present in the United States as a nonimmigrant on an "F," "J," "M," or "Q" visa. The taxable part of any U.S. source scholarship or fellowship grant received by a nonimmigrant in "F," "J," "M," or "Q" status is treated as effectively connected with a trade or business in the United States.
• If you are a member of a partnership that at any time during the tax year is engaged in a trade or business in the United States, you are considered to be engaged in a trade or business in the United States.
• You usually are engaged in a U.S. trade or business when you perform personal services in the United States.
• If you own and operate a business in the United States selling services, products, or merchandise, you are, with certain exceptions, engaged in a trade or business in the United States. For example, profit from the sale in the United States of inventory property purchased either in this country or in a foreign country is effectively connected trade or business income.
• Gains and losses from the sale or exchange of U.S. real property interests (whether or not they are capital assets) are taxed as if you are engaged in a trade or business in the United States. You must treat the gain or loss as effectively connected with that trade or business.
• Income from the rental of real property may be treated as ECI if the taxpayer elects to do so.

NOTE: If your only U.S. business activity is trading in stocks, securities, or commodities (including hedging transactions) through a U.S. resident broker or other agent, you are NOT engaged in a trade or business in the United States.

Need help.  Email us at Nonresident Tax Attorney

Foreign Owners of US LLCs and LLPs Must Disclose Owners on Form 5472

Treasury announces forthcoming regs requiring U.S. LLCs to disclose foreign beneficial owners
The U.S. Treasury Department has indicated that it will be issuing proposed regs that will required foreign-owned, single-member U.S. limited liability companies (LLCs) to disclose to IRS their beneficial owners under Code Sec. 6038A. Penalties for non-compliance may be significant.

Background on Section 6038A. Code Sec. 6038A requires certain foreign-owned U.S. corporations to file a Form 5472 (Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in U.S. Trade or Business). The filing requirement generally applies where more than 25% of the voting power or value of all classes of stock of a U.S. corporation are owned by a single foreign owner.

New proposed regs. According to the announcement, the Form 5472 filing requirement will be extended to foreign-owned, single-member U.S. LLCs, by treating such LLCs as corporations solely for the purposes of Code Sec. 6038A. As such, such LLCs will be required to obtain U.S. taxpayer identification numbers and report the identity of their foreign owners to the IRS.

Failing to file the Form 5472 when due in the manner prescribed may result in a $10,000 penalty, with additional incremental penalties of $10,000 if the failure continues for more than 90 days after notification by IRS. There is no cap on the total penalty.

US Taxation of Nonresidents- Everything you need to know

An alien is any individual who is not a U.S. citizen or U.S. national. A nonresident alien is an alien who has not passed the green card test or the substantial presence test.

A.  Who Must File

If you are any of the following, you must file a return:

1. A nonresident alien individual engaged or considered to be engaged in a trade or business in the United States during the year.
   • However, if your only U.S. source income is wages in an amount less than the personal exemption amount (see Publication 501, Exemptions, Standard Deduction, and Filing Information), you are not required to file.
2. A nonresident alien individual who is not engaged in a trade or business in the United States and has U.S. income on which the tax liability was not satisfied by the withholding of tax at the source.
3. A representative or agent responsible for filing the return of an individual described in (1) or (2),
4. A fiduciary for a nonresident alien estate or trust, or
5. A resident or domestic fiduciary, or other person, charged with the care of the person or property of a nonresident individual may be required to file an income tax return for that individual and pay the tax (Refer to Treas. Reg. 1.6012-3(b)).

NOTE: If you were a nonresident alien student, teacher, or trainee who was temporarily present in the United States on an "F,""J,""M," or "Q" visa, you are considered engaged in a trade or business in the United States. You must file Form 1040NR, U.S. Nonresident Alien Income Tax Return (or Form 1040NR-EZ, U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents) only if you have income that is subject to tax, such as wages, tips, scholarship and fellowship grants, dividends, etc. Refer to Foreign Students and Scholars for more information.

Claiming a Refund or Benefit

You must also file an income tax return if you want to:

1. Claim a refund of overwithheld or overpaid tax, or
2. Claim the benefit of any deductions or credits. For example, if you have no U.S. business activities but have income from real property that you choose to treat as effectively connected income, you must timely file a true and accurate return to take any allowable deductions against that income.

B.  Which Income to Report

A nonresident alien's income that is subject to U.S. income tax must generally be divided into two categories:

• Income that is Effectively Connected with a trade or business in the United States
• U.S. source income that is Fixed, Determinable, Annual, or Periodical (FDAP)

Effectively Connected Income, after allowable deductions, is taxed at graduated rates. These are the same rates that apply to U.S. citizens and residents. Effectively Connected Income should be reported on page one of Form 1040NR, U.S. Nonresident Alien Income Tax Return. FDAP income generally consists of passive investment income; however, in theory, it could consist of almost any sort of income. FDAP income is taxed at a flat 30 percent (or lower treaty rate, if qualify) and no deductions are allowed against such income. FDAP income should be reported on page four of Form 1040NR.

C.  Which Form to File

Nonresident aliens who are required to file an income tax return must use:

• Form 1040NR, U.S. Nonresident Alien Income Tax Return or, 
• Form 1040NR-EZ, U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents, if qualified. Refer to the Instructions for Form 1040NR-EZ to determine if you qualify.

Find more information at Which Form to File.

When and Where To File

If you are an employee or self-employed person and you receive wages or non-employee compensation subject to U.S. income tax withholding, or you have an office or place of business in the United States, you must generally file by the 15th day of the 4th month after your tax year ends. For a person filing using a calendar year this is generally April 15.

If you are not an employee or self-employed person who receives wages or non-employee compensation subject to U.S. income tax withholding, or if you do not have an office or place of business in the United States, you must file by the 15th day of the 6th month after your tax year ends. For a person filing using a calendar year this is generally June 15.

File Form 1040NR-EZ and Form 1040NR at the address shown in the instructions for Form 1040NR-EZ and 1040NR.

Extension of time to file

If you cannot file your return by the due date, you should file Form 4868 to request an automatic extension of time to file. You must file Form 4868 by the regular due date of the return.

You Could Lose Your Deductions and Credits

To get the benefit of any allowable deductions or credits, you must timely file a true and accurate income tax return. For this purpose, a return is timely if it is filed within 16 months of the due date just discussed. The Internal Revenue Service has the right to deny deductions and credits on tax returns filed more than 16 months after the due dates of the returns. For additional details, refer to When To File in the Filing Information chapter of Publication 519, U.S. Tax Guide for Aliens.

Departing Alien

Before leaving the United States, all aliens (with certain exceptions) must obtain a certificate of compliance. This document, also popularly known as the sailing permit or departure permit, must be secured from the IRS before leaving the U.S. You will receive a sailing or departure permit after filing a Form 1040-C, U.S. Departing Alien Income Tax Return, or Form 2063, U.S. Departing Alien Income Tax Statement.

Even if you have left the United States and filed a Form 1040-C on departure, you still must file an annual U.S. income tax return. If you are married and both you and your spouse are required to file, you must each file a separate return, unless one of the spouses is a U.S. citizen or a resident alien, in which case the departing alien could file a joint return with his or her spouse (Refer to Nonresident Spouse Treated as a Resident).

References/Related Topics

• Source of Income
• Exclusions From Income
• Real Property
• Figuring Your Tax
• Tax Treaties
• The Taxation of Capital Gains of Nonresident Alien Students, Scholars and Employees of Foreign Governments
• Tax Withholding on Foreign Persons
• Taxpayer Identification Numbers (TIN)
• Some Nonresidents with U.S. Assets Must File Estate Tax Returns

9 US Tax Rules for Nonresidents Filing Form 1040NR for US source income.

• Nonresidents pay not capital gains taxes on the purchase and sale of US publicly traded stocks.
• Nonresidents (absent a treaty provision with their home country that reduces the rate) must pay 30% interest on interest income (other than from US banks, Treasury Bonds and the Portfolio interest exception mentioned below) paid from the US.
• Nonresidents (absent a treaty provision that reduces the tax) must pay a 30% tax on US source dividends.
• There are no restrictions on nonresidents owning US real estate, corporations and businesses.
• If a nonresident has an operating business in the US operating as a partnership, sole proprietorship or through an LLC, they pay the same income tax rate on that income as a tax resident of the US,
• Nonresidents pay the same income tax rates as tax residents on rental income from  US  real estate (if they make the proper election on their tax return).  The profit from the sale of US real estate is taxed at the same reduced capital gain tax rate as paid by a US tax resident.
• Nonresidents making loans to US business can avoid paying any tax on the interest they receive from the US borrower by structuring the loan and its related documents to comply with the Portfolio Interest rules.
• A business operated by a nonresident can be held to have a US tax situs and be required to file US tax returns for keeping inventory in the US, or even having an agent represent it in the US.
• In most countries in the world if a nonresident must pay US income taxes on its US source income, those taxes can be claimed as a credit against any tax in their home country on that income.

If you need help as a nonresident planning for your US activities or possible US sourced income including filing all required tax returns please email us at ddnelson@gmail.com.   Thank You. Don D. Nelson, Tax Attorney at Law.  All conversations and communications with us are protected by attorney client privilege.

Nonresidents can Earn Interest Tax Free When Loaning Money to US Individuals or Businesses

Normally, except for interest paid on savings accounts and Treasury Bills, interest paid on loans from US nonresidents to US residents is subject to a 30 percent tax. That tax must be withheld from the interest payments to the nonresident lender. This rules applies to individual borrowers and US business borrowers.

A gigantic exception to the rule is the portfolio interest exception. Loans that comply with the IRS portfolo interest loan requirements are not subject to US income  tax or withholding. Those loans are also not US situs assets and therefore exempt from the US estate tax which applies to US situs assets held by deceased nonresidents. Loans balances outside of this exception are most often US situs assets and subject to the up to 39% US estate tax if the value of all assets located in the US exceeds $60,000 US dollars.

Whats  is require  of a nonresident to obtain this tax free benefit for loans made to US businesses and persons?

• The loan document must comply with the IRS requirements which is relatively simple.
• The loan document must be registered as defined in IRC

If you as a nonresident want to structure your next loan to a US taxpayer so the interest will be tax free contact us at ddnelson@gmail.com.

Taxation of Nonresidents in Mexico Under Their Tax System

TAXATION OF AMERICANS (GRINGOS) UNDER MEXICAN TAX SYSTEM

Review and download this excellent PWC book on taxation of nonresidents in Mexico.  HERE  If you need help filing or planning for your US income Taxes while living, working or operating your business in Mexico contact us atwww.TaxMeLess.com or email ddnelson@gmail.com