GUIDE TO UNITED STATES INCOME TAX FOR FOREIGNERS

This Guide is addressed to non-US persons who have bank or brokerage accounts in the United States, or who have real property there. We will discuss how the US federal income tax might apply to you.

The first step is to determine if you are a "resident alien" or "non-resident alien" of the US. If you are classified as a "resident alien," then you will be treated for the most part the same as if you are a US citizen for tax purposes. This means that all income, wherever earned, must be reported and taxed. Therefore, it is important to understand the rules which define a "resident alien," since if you are not a resident alien, then you will be classified as a "non-resident alien."

Who is a resident alien?

There are two tests: the "green card" test and the substantial presence test. All holders of permanent residency are resident aliens. The substantial presence test depends mainly on the length of time you are in US. To meet this test, you must be physically present in the United States on at least: 31 days during the current year, and 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting: All the days you were present in the current year, and 1/3 of the days you were present in the first year before the current year, and 1/6 of the days you were present in the second year before the current year.

Example. You were physically present in the United States on 120 days in each of the years 1997, 1998, and 1999. To determine if you meet the substantial presence test for 1999, count the full 120 days of presence in 1999, 40 days in 1998 ( 1/3 of 120), and 20 days in 1997 ( 1/6 of 120). Since the total for the 3-year period is 180 days, you are not considered a resident under the substantial presence test for 1999.

Note that the time you spend in Puerto Rico is not counted.

Even if you meet the substantial presence test, you can be treated as a non-resident alien if you: (1) Are present in the United States for less than 183 days during the year, (2) Maintain a tax home in a foreign country during the year, and (3) Have a closer connection during the year to one foreign country in which you have a tax home than to the United States.

A nonresident alien usually is subject to U.S. income tax only on U.S. source income. Generally, income from U.S. sources includes interest, dividends, rents, royalties, and capital gains. Interest income includes that paid on bonds, notes, or other interest-bearing obligations of U.S. residents or domestic corporations. Interest from U.S. sources also includes interest paid by a domestic or foreign partnership or foreign corporation engaged in a U.S. trade or business at any time during the tax year. In addition, all interest received by a nonresident alien individual from a state, the District of Columbia, or the U.S. Government during the tax year is income from U.S. sources. The place or manner of payment is immaterial in determining the source of the income.

In most cases, dividend income received from domestic corporations is U.S. source income. Dividend income from foreign corporations is usually foreign source income.