IRS OVDP – International Investors and U.S. Income Tax

International investors are subject to tax reporting and tax payment of U.S. income taxes as either a U.S. income tax resident, or as a non-resident alien.

Resident aliens (under either the “Green Card” or “Substantial Presence Tests”) are subject to taxation on their world-wide income which includes annual tax filings: Form 1040 (report world-wide income), Form 8938 (report ownership of foreign assets over $50,000), TDF 90-22.1 (“FBAR filing”) for foreign financial accounts with over $10,000, where taxpayer has ownership or signatory authority).

Non-Resident Aliens (“NRA”) are taxed on U.S. source income:

1. 30% withholding tax (withheld at the source, with no deductions) on U.S. Fixed or Determinable Annual Periodical Income (“FDAP”), which includes passive income: interest, dividends, rents, royalties, et al.

2. Net basis income tax (at graduated U.S. tax rates) on income “effectively connected” with a U.S. business. U.S. real estate gains are treated as effectively connected income.

3. In the event of dual residency, with the NRA’s country of citizenship/tax residency, the treaty tie-breaker rules may act as a “Treaty Override” and obviate U.S. income tax.

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