Taxing Regime For Non-U.S. Residents
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Dual Taxing Regime for Non-U.S. Residents
Although resident aliens are generally subject to the same tax rules as U.S. citizens, nonresident aliens are treated quite differently under the Tax Code. Unlike residents who report their worldwide income, nonresident aliens report only income received from sources within the United States, or connected with a U.S. trade or business.
Additionally, there are two separate taxing regimes for aliens. You might receive:
- Income that is effectively connected with a U.S. trade or business, and/or
- Income that is not effectively connected with a U.S. trade or business (IRC Sec. 871).
Effectively Connected Income for Nonresident Aliens
Income that is effectively connected with a U.S. trade or business includes business and personal service income and is taxed at the same graduated rates that residents use (IRC Sec. 871(b)). So, if you earn a wage while working in the United States, you are taxed under the graduated rate structure (just as if you were a resident). This is shown on page one of Form 1040NR.
Non-Effectively Connected Income for Nonresident Aliens
Non-effectively connected income is any income produced from passive assets (see the rental real estate election, below). Examples of non-effectively connected income include interest, dividends, rents, and pension and annuity income. Additionally, non-effectively connected income also includes capital gains. Generally, capital gains on anything other than the sale of real property are exempt from taxation for nonresident aliens (IRC Sec. 871(a)(2)). Non-effectively connected income is taxed at a flat rate of 30% on the gross amount (IRC Sec. 871(a)), unless a lower treaty rate applies. Deductions are not allowed for non-effectively connected income.