Non-residents Taxation in the United States of America - Essay Example

Non-residents’ Taxation in the United s of America This is a study about the USA taxation system. It is set out to specifically analyze the rules and consequences of taxation to a non-resident alien who gets income from the US through business operations or other sources. To this, thus, the study is going to have a vivid explanation to provide an answer to the study question, “Which are the consequences of a non-resident when it comes to the taxation of his/her business or other income?” Besides the explanations, there will be a brief look at court cases in the context of the non-resident aliens’ taxation. As per the invest-faq.com, a non-resident alien is able to enjoy holding some investments in this nation (USA) while at the same time getting numerous tax exempts upon income gained from the investments. A good example is the situation where a citizen of the US does his job in the USA for a considerable time period and gets a good portfolio of securities while in the USA. This person can hold on to that portfolio perfectly regardless of whether she/he stays in the USA afterwards. The term or expression non-resident alien also encompasses such nationals from foreign countries who happen to reside in the USA such as students. These non-resident aliens who have US holdings are obliged to comply with the rules of the USA taxation system as the taxation authority of the US enforces such, the IRS. Since the taxation laws of the USA seem complicated, non-resident aliens need to consult tax advisors who have all taxation issues on their finger tips. Fundamentally, a non-resident in USA, for taxation purposes, has to spend a period of lesser than 183 days in the USA. The rule governing this is complex in a way since it considers the previous years as well, as per the publication number 519 of the IRS. (Invest-faq.com, 2009) Several court cases for non-resident alien taxation cases have been heard and resolved in court. Examples include Storerios and Catherine Hantzis versus CIR and Michel versus Commissioner among others. In the case of Storerios and Catherine Hantzis versus CIR, the initial circuit of the court of appeal for the USA stated that a full-time student of law who is unemployed and is residing in Boston and at the same time attending classes in the Harvard Law School which is in Cambridge, who decided to take up a job for summer in the New York for 10 weeks got a tax home in New York alone since New York was her employment location. Thus, being an employed full-time student kind of status in his residence, Boston was not enough to take that as her tax home was in Boston. The other case about Michel Versus Commissioner had the court state that if the concerned taxpayer’s anticipations were that his employment would continue perpetually or a significantly long time period, the stated deduction was thus disallowed. (irs.gov, 2009) According to the website of irs.gov, under the businesses category, non-residents are taxed as non-resident aliens. The definition of an alien is an individual(s) who happens to be a citizen or a USA national. Any non-resident alien is one who has not managed to pass a test of the substantial presence or a test of the green card. A non-resident alien falling under the categories listed here must file returns: Any individual who is a non-resident alien or one who is considered to have undertaken business transactions or trade in the USA during the taxation year. Under this category one has to file despite the facts that income did not emanate from business or trade which has been conducted in the nation of US or has been exempted from income tax. Such individuals may not file tax returns if the source of income wages is lower than the amount of personal exemption. Other individuals who must file for tax are non-resident aliens who are not in engagement of business or trade in the USA with income from the US upon which the liability of tax was not covered by tax withholding at source. Another group of individuals who are non-resident aliens and who must file returns are representatives or even agents who are supposed to act on behalf of the taxpayer, a non-resident aliens’ fiduciary trust or state. All individuals considered as non-resident alien teachers, students or even trainees who have temporary presence in US upon “J”,”F”,”Q”, and “M” visas, who happen to be engaged in business operations or trade in USA have to file Form 1040NR-EZ. This is only if such individuals have got income liable to taxation like tips, wages as well as fellowship dividends and grants An income tax file return for all individuals with non-resident aliens in inclusion must be overpaid or over-withheld tax. Tax benefits come in on any credits or deductions. For instance; if a non-resident has no business operations in the USA, but has income resulting from real property which such an individual chooses to be treated as income that is effectively connected, he/she must file a tax return in a timely manner and ensure that such is accurate so as to take any allowable type of deduction against the income in question. Income for non-resident aliens that is subject to USA income tax is classified into two. These classes include effectively connected income with business or trade in the USA and source income from the USA that is determinable, fixed, yearly or periodical. The income that is effectively connected is taxed subsequent to allowable deductions and at granted rates. These said rates also apply similarly to the citizens of the USA as well as residents. The four taxable incomes of non-residents under class two cover the passive investment kinds of income. This passive investment type of income in theory refers to any type of income, though. The four-fold income kinds are taxed at 30%, which is a flat rate or the rate of lower treaty. No deductions are allowed under the four types of income. The income that is effectively connected is reported upon the first page of Form 1040NR. The four-fold income of class two is reported upon the fourth page of form 1040NR. Each and every non-resident alien who must file a return of income tax must utilize forms 1040NR or 1040NR-EZ so long as they qualified. The time of filing for the tax returns for self employed individuals, employees, those who earn wages or even non employee type of compensation liable to USA’s income taxation withholding and/or those who have pales of businesses or offices in the US, is the fourth month’s fifteenth day after the end of tax year. If a person is basically utilizing the calendar year this translates to the 15th day of April. If a non-resident does not possess the aspects mentioned, he/she must file the returns on or before the fifteenth day of the sixth month subsequent to the tax year end. A calendar year would therefore, mean the 15th day of June. If an individual is not able to file his/her returns on time, he/she should file Form 4868 on or before the regular date of filling returns. An alien who is departing has to obtain a compliance certificate before leaving the USA. The departing alien has to also secure a sailing permit from the IRS prior to departing the USA. A sailing permit is obtained after filing either form 1040-C or 1040-C upon departure, he has to file a yearly USA taxation return. (irs.gov, 2009) Filing of returns for a non-residential alien is allowed to a resident agent in the nation of USA. As a matter of fact the formal Decisions as well as extensive correspondence Treasury Department has specified that in the entire cases that call for resident agents’ responsibility for the interests of the US of their principals to such an extent they are in charge of property owned even a business operation carried upon, such agents, who are residents, have to make the income returns. In the case of resident agency to a non-resident alien tax return matters, resident agents are allowed to take action in full for the principal and can even swear to such return as well as pay the assessed tax. Besides, the resident agent can be an individual or even a corporation. In case a corporation takes the role of a resident agent, it can sign- through a responsible officer, the principal’s return. The return in focus in this agency case is the return of yearly net income by a non-resident alien, but not the withholding return of the agent required in a scenario of tax deduction at source. The entire income accruing to a resident alien from the USA is liable to deduction of a normal type of tax at source. However, this does not apply to dividends upon the corporation’s stock liable to income tax. This is in accordance to the September 1916’s law requirement, which was amended by the Act of war Revenue in October 1917. It is also vital to note that a non-resident alien should not include filing his/her return the amounts in form of dividends upon the stock held in the foreign companies. This is regardless of whether such dividends should be in the returns inclusion. (Scott, 2008 pp69, 70) While concluding it is good to note that non-resident aliens are treated in almost a similar way as residents as seen earlier in the study. Non-resident aliens carry tax obligations on all incomes from investments in accordance to these rules; that no tax is levied on the interests earned from bank, that there is no taxation upon interest on portfolio, that there is no taxation upon both short and long term gains on capital on disposing stacks. That there are no taxes on both short and long term gains that are realized on capital by an investment company that is regulated or by a mutual fund. On dividends, there is a flat rate of tax of 30%, also upon interest that is not paid by a portfolio or a bank there is a flat tax rate of 30%. There are also no personal deductions or exemptions that can be applied against income from investment. If an alien happens to be a non-resident if she/he, in a given year spends 183 days and above in the USA, any gains from capital are liable to a flat rate of tax of 30%. (Invest-faq.com, 2009) This is while answering the study question, “Which are the consequences of a non-resident when it comes to the taxation of his/her business or other income?” Work cited: invest-faq.com. Subject: Tax Code - Non-Resident Aliens and US Holdings. (2009). Retrieved December 10, 2009 http://invest-faq.com/cbc/tax-non-us-nat.html irs.gov. Taxation of Non-resident Aliens. (2009). Retrieved December 10, 2009 http://www.irs.gov/businesses/small/international/article/0,,id=96477,00.html Scott, Joseph Jay. The Income Tax and Other Federal Taxes. BiblioBazaar, LLC, 2008. pp69,70. irs.gov. Nonresident Alien Students And the Tax Home Concept. (2009). Retrieved December 10, 2009 http://www.irs.gov/businesses/small/international/article/0,,id=129432,00.html Read More