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Perspectives

Taxation of foreign nationals by the United States—2016

The United States taxation system can be difficult to understand, especially for foreign nationals. This guide helps foreign nationals navigate the US tax rules and the key considerations facing them.

Guide for foreign nationals

A foreign national may be subject to one of two drastically different systems of taxation by the United States depending on whether he/she is classified as a resident or a nonresident alien of the United States. The determination of residency status is critical.

As a rule, classification as a nonresident foreign national may provide distinct tax advantages, but, in individual cases, the advantages of resident versus nonresident status may vary from year to year. Therefore, it is important for foreign nationals coming to the United States to annually review the options available to minimize their tax liability in the United States as well as in their home countries. Taxation of foreign nationals by the United States provides a basic overview of US taxes and how they affect foreign nationals.

Resident aliens
The rules defining residency for US income tax purposes are very specific, with only limited exceptions once the objective criteria or mechanical tests are met. Individuals classified as resident aliens are taxed on their worldwide income derived from any source. Tax rates are graduated and income is determined in the same manner as for US citizens. Various elections may be available in the first year of residency to reduce the US tax liability.

Nonresident aliens
Nonresident aliens are normally taxed only on income derived from US sources. US-source income that is considered “effectively connected” with a US trade or business, such as salary and other forms of compensation, is taxed at graduated rates.

Taxable income from US trade or business entities can include some kinds of foreign-source income, as well as US-source income. US investment income is generally taxed at a flat 30 percent tax rate, which may be reduced by a tax treaty. Certain types of investment income may be exempt from US tax.

This publication should serve only as a preliminary guide to the rules and issues foreign nationals face when living and working in the United States. Coordination between foreign and US tax professionals is essential to achieving overall income tax savings and effective asset management in the United States. Deloitte Tax advisers are available to assist in this important process.

What’s inside?

This publication addresses the following topics for foreign nationals:

  • Chapter 1: Resident aliens
  • Chapter 2: Nonresident aliens
  • Chapter 3: Filing requirements
  • Chapter 4: Foreign investment in real property
  • Chapter 5: Other taxes
  • Chapter 6: Tax planning
  • Chapter 7: Immigration, visa, and nationality considerations
  • Appendix A: Key figures
  • Appendix B: US federal tax rates
  • Appendix C: US income tax treaties
  • Appendix D: Family-based immigration categories
  • Appendix E: Employment-based immigration categories
  • Appendix F: Countries whose citizens may be eligible for the Visa Waiver Program
  • Appendix G: Nonimmigrant (temporary) visa categories
  • Appendix H: Countries whose citizens may be eligible for E Treaty Trader (E-1) or Treaty Investor (E-2) visas
  • Appendix I: IRS forms and statements location information
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