Tax Information

Top Ten Frequently Asked Questions

  1. Am I a “resident” or a “nonresident” alien for U.S. income tax purposes?

The Internal Revenue Service (“IRS”) utilizes two tests to determine if a foreign person is a resident or a nonresident alien for U.S. income tax purposes.  The first test is the “green card test” – if you hold a green card then you are a permanent resident alien for U.S. income tax purposes.  The second test is the “substantial presence test” – if you are present in the United States for at least 31 days in the current tax year and for at least 183 days over the past three years (counting all of the days in the current year, 1/3 of the days in the first preceding year and 1/6 of the days in the second preceding year) then you are deemed a resident alien for U.S. income tax purposes.

  1. What is the tax difference between a “resident alien” and a “nonresident alien”?

A resident alien is taxed in the United States in the same manner as a U.S. citizen, i.e. a resident alien is taxed on his/her worldwide income and is entitled to the same filing statuses and deductions available to all U.S. citizens.  A nonresident alien is taxed only on his/her U.S. source income and is limited to certain filing statuses and deductions.

 

  1. What is “U.S. source income”?

U.S. source income is income that is generated from sources within the United States and that falls into the category of either effectively connected income, (“ECI”), i.e. “business income”  or non-effectively connected income (“Non-ECI”), i.e. “passive income”.  ECI refers to income connected with the conduct of a trade or business within the United States.  ECI is taxed after deductible expenses and at graduated rates because it is attributable to business activities. Non-ECI is generally taxed at the flat rate of 30%( except as reduced by the United States/ United Kingdom Income Tax Treaty) with no deduction allowed for allocable expenses.

 

  1. When am I required to file a U.S. income tax return?

A resident alien is required to file an annual U.S. income tax return the same as a U.S. citizen.  A nonresident alien is generally required to file a U.S. tax return when he/she has U.S. source income in any tax year.

 

  1. Does the United Kingdom have an income tax  treaty with the United States?

Yes, the United States has entered into an income tax treaty and an estate tax treaty with the United Kingdom.  Tax benefits may be available to United Kingdom residents/United States nonresident aliens.

 

  1. What is an Individual Taxpayer Identification Number?

An Individual Taxpayer Identification Number, (“ITIN”), is issued by the IRS” for resident and nonresident alien individuals who are ineligible to obtain a United States Social Security Number but may be required to file a U.S. tax return.   An ITIN is a nine-digit number which always begins with the number 9 and has a 7 or 8 in the fourth digit, e.g. 9XX-7X-XXXX.   The number is primarily for tax reporting purposes and is not to be used for identification or other non-tax purposes.

 

  1. How do I obtain an ITIN?

An ITIN is applied for with the IRS on a properly completed Form W-7, Application for an Individual Taxpayer Identification Number, and it must have proper documentation of identity attached.  Acceptable documents include either an original passport (or a notarized or certified copy) or at least two of the following:

  • National identification card with photo, name, current address, date of birth, and expiration date
  • U.S. or foreign driver’s license
  • Civil birth certificate
  • U.S. state identification card
  • Foreign voter registration card
  • U.S. or foreign military identification card
  • Visa
  • U.S. Citizenship and Immigration Services (USCIS) photo identification
  • For dependents only, medical or school records

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  1. When do I have to apply for an ITIN?

The IRS requires that all ITIN applications show a specific tax purpose; therefore, most ITIN applications are filed with the alien individual’s initial United States income tax return filing.  Other reasons that may require an alien individual to obtain an ITIN are if the individual has:

  • Passive income – treaty benefits or third party withholding
  • Other income (wages, salary, compensation) – treaty benefits or foreign student receiving scholarship or fellowship
  • Mortgage interest
  • A Disposition of U.S. real property interest – FIRPTA withholding

 

  1. What are FIRPTA and the FIRPTA withholding tax?

The disposition of a U.S. real property interest ("USRPI"), generally real estate, by a foreign person is generally subject to income tax withholding under the Foreign Investment in Real Property Tax Act (“FIRPTA”) provisions of the Internal Revenue Code.  Specifically, the buyer must deduct and withhold a tax equal to 10% of the total amount realized on the disposition (i.e., 10% of the purchase price) rather than the residual tax of 15% of the long term capital gain.  A disposition is defined as any transfer of USRPI by sale, exchange, gift, or any other transfer.  This tax can often be quite substantial considering that the purchase price is usually much greater than the gain the transferor will recognize on the transaction.  The obligation to withhold this tax rests with the buyer, who can be held liable for the tax if the proper withholding does not occur.

 

  1. Are there any exceptions to the FIRPTA withholding requirements?

The IRS does give the transferee three exceptions to the general withholding requirement on the exchange of USRPI to a foreign person.  In the first exception, if the transferee acquires property for use as a personal residence and the amount realized (the sales price) is not more than $300,000, then the transferor will not be required to withhold the 10% tax.  The second exception applies when the transferor gives the transferee written notice that no recognition of any gain or loss on the transfer is required because of a nonrecognition provision in the Internal Revenue Code or a provision in a U.S. tax treaty.  The third exception upon which a transferee may rely is a withholding certificate from the IRS which excuses or reduces withholding to a rate other than the required 10%.  Each exception requires certain documents to be presented and certain filing requirements to be met.

Top ten FAQ's kindly supplied by Cohen & Grigsby