International investors who either move to the U.S. or invest in U.S. assets (with U.S. source income) face multiple U.S. tax issues:
1. U.S. Income Tax Residents, For those international investors who become U.S. income tax residents, under either the “Green Card Test”, or the “Substantial Presence Test” (i.e. they are in the U.S. 183 days in one year or 122 days per year over three years) they are subject to world-wide tax on their income and must annually declare this income under their Form 1040/ Individual Income Tax Returns, file Form TDF 90-22.1 (“FBAR Filings”) to report ownership, or control over, foreign accounts with more than $10,000, file Form 8938 (“FATCA filing”) to report ownership of foreign assets over $50,000.
2. U.S. Estate/Gift Tax Residents. For those international investors who relocate their domicile (i.e. permanent home) to the U.S. (which according to the IRS includes “Green Card Holders”) they are subject to a 40% estate/gift tax on assets over $5.25M (2013).
International investors who maintain their domicile in a foreign country, and own U.S. real estate, tangible personal property or stock in U.S. corporations at their death are subject to a 40% U.S. estate tax on their assets (with a $60,000 estate tax exclusion).
There is no gift tax exclusion for non-U.S. gift tax residents (who do not pay gift tax on transfers of stock in U.S. corporations).
3. NRAs (Non-Resident Aliens). Those international investors who maintain non-U.S. income tax status as non-resident aliens are subject to 30% income tax withholding on the receipt of U.S. source “FDAP Income” (i.e. fixed or determinable annual or periodic gains, profits or income; e.g. dividends, interest, rents and royalties, et al.) with no deductions allowed.
They are not subject to U.S. tax withholding on U.S. capital gains but must file tax returns (Form 1040 NR) and report capital gains and losses on Form 8949 and report the totals on Schedule D.
Gain or loss on the disposition of a U.S. real property interest is taxed as if the gain or loss were effectively connected with the conduct of a U.S. trade or business and reported on Schedule D (Form 1040) and Form 1040NR, line 14.
A non-resident alien who is engaged in a U.S. trade or business is taxed at graduated U.S. income tax rates on all “effectively connected income”; i.e. all income, gain or loss from sources within the U.S., after allowable deductions. The graduated U.S. income tax rates are the same tax rates that apply to U.S. citizens and tax residents.
A NRA receives effectively connected income if they are a nonresident alien engaged in a trade or business in the U.S. during the tax year. Income the NRA receives through the sale or exchange of property, or the performance of services is treated as effectively connected in that year it would have been effectively connected, the year the transaction took place or the services were performed.