How US Taxes NRA Income After You Expatriated (Non-US Person)

How US Taxes NRA Income After You Expatriated (Non-US Person)

How US Taxes NRA Income After You Expatriated 

Unlike US Persons who are taxed on their worldwide income, nonresident aliens are not subject to US tax on their worldwide income. Rather, nonresident aliens are subject to US tax on their US-sourced income. US-sourced income for nonresident aliens can be broken down into two main topics: FDAP (Fixed, Determinable, Annual, and Periodic) and ECI (Effectively Connected Income to US trade or business). The tax rules for nonresident aliens can be a bit harsh, especially in the realm of FDAP – which is typically the different passive types of income. Let’s take a brief look at the difference between FDAP and ECI.

FDAP 30% withholding

In general, FDAP refers to passive types of income. For example, if a non-resident alien receives dividends or interest income from US sources, this type of income is referred to as FDAP. Whether or not a non-resident alien will be taxed on their income is based on various factors such as the source of income, whether there is a treaty country, and whether or not the income is otherwise exempt from taxation for non-resident aliens. The tax rate for this type of income is 30% and it applies to the gross amount of income. In other words, deductions cannot generally be taken from FDAP income. When it comes to Social Security benefits, FDAP includes 85%, although it may be exempt depending on whether or not the taxpayer is in a treaty country and qualifies to make a treaty election. If the taxpayer is seeking to reduce the withholding they may submit a W-8 BEN to the withholding agent.

ECI Progressive Tax Rate

Unlike FDAP, ECI is taxed at the progressive tax rate as if the person was a US person, although deductions and expenses may be more limited than if they were a US person. For example, if a non-resident alien was to open a business in the United States, then the income generated from the business would be considered ECI.  Another common example is if a non-resident alien owns a US rental property and makes an election to change FDAP income to ECI – so that the non-resident can take the necessary deductions in order to make the rental property business profitable. One of the more complicated aspects of ECI is determining whether or not it is actually Effectively Connected Income or not because the definition of ECI is convoluted – and there are many exceptions.  Similar to FDAP, depending on whether or not the non-resident alien resides in a treaty country or not they reduce or eliminate the tax on certain income generated from ECI. In addition, whether or not the taxpayer is a permanent establishment or not but also impacts the taxation rules under the ECI guidelines.

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