U.S. Income Taxation of Nonresident Alien Individuals (Portfolio 6400)
This Portfolio analyzes the U.S. income tax laws applicable to non-U.S. citizens (i.e., “aliens”) who are classified as “nonresident aliens” rather than as “resident aliens” under the Internal Revenue Code.
To the extent that nonresident aliens are subject to U.S. income tax, their U.S. taxable income is divided into one of two categories: (i) U.S.-source income that is not “effectively connected” with the conduct of a trade or business within the United States, taxable at the rate of 30% under §871(a) without the allowance of deductions; and (ii) income that is “effectively connected” with a U.S. trade or business, taxable at graduated rates on a net basis under §871(b). However, numerous special exceptions and rules apply for specific types of income.
Whether an alien is classified as a resident alien or a nonresident alien is based on detailed rules in §7701(b) and the regulations thereunder. For the most part, these rules are “mechanical,” so that in most factual situations it is possible to know with certainty whether a particular alien is a resident alien or a nonresident alien on a particular day. The rules in §7701(b) may be overridden by the “tie-breaker” provisions of a tax treaty, however, where it is shown that an alien is also classified as an income tax resident of another country having an income tax treaty with the United States. Special issues arise concerning the IRS reporting forms that may have to be filed by individuals who are classified as resident aliens under the Code but as nonresident aliens by virtue of a treaty tie-breaker provision.
Table of Contents
II. Principal Differences Between Resident Alien and Nonresident Alien Status
III. Determination of Resident Alien Status
IV. Resident Alien Starting Date and Termination Date
V. Interplay of Income Tax Treaties with § 7701(b)
VI. Income Taxation of Nonresident Aliens – General Rules
VII. Calculation of Taxable ECI from Rendering Services
VIII. Tax Return Filing Procedures
IX. Special Categories of Aliens
X. Deferred Compensation and Pensions
XI. Tax Clearance for Departing Aliens
XII. “Anti-Expatriation” Rules of §877 and §877A
XIII. Tax Planning for Aliens Moving to the United States