Taxation Of Nonresident Aliens Under United States

The various aspects of U.S. tax law which concern nonresident aliens working in the United States.

Gross Income

A nonresident alien is generally subject to U.S. tax on income from U.S. sources, with exceptions. This income is divided into two categories:

• Certain investment and other passive income: certain U.S. source income that is not effectively connected with a U.S. trade or business.
• Business income: income that is effectively connected with a U.S. trade or business, including compensation for services performed in the United States.

Each category is taxed separately. U.S. source gross income that is not effectively connected with a U.S. trade or business (e.g., investment income) is taxed at a flat 30-percent rate or, if applicable, at a lower treaty rate. Gross income that is effectively connected with a U.S. trade or business, less allowable deductions, is taxed at the regular graduated rates that apply to U.S. citizens and resident aliens.

Income from U.S. Sources

Income treated as U.S. source generally includes the following:

• Interest paid by U.S. residents, with exceptions;
• Dividends paid by U.S. corporations, with exceptions;
• Compensation (including stock option income) for personal services performed in the United States;
• Rents and royalties from property located or used in the United States;
• Gains from the disposition of U.S. real property interests;
• Income from the sale or exchange of personal property by an individual, including a nonresident alien, who has a tax home in the United States;

Certain Investments and Other Passive Income

Tax at 30 percent (or, if applicable, the lower treaty rate) applies to certain U.S. source income that is not effectively connected with a U.S. trade or business. The tax applies to gross income, without deductions. Items of gross income subject to this flat tax (or, if applicable, the lower treaty rate) include the following:

• Dividends;
• Certain interest, including original issue discount;
• Rents and royalties;
• Alimony;
• Certain capital gains;

Business Income

Income effectively connected with a U.S. trade or business is taxed at the regular graduated tax rates. This income generally includes:

• Compensation for personal services performed in the United States;
• Profits from the operation of a business in the United States;
• Income of a partner from a partnership engaged in a U.S. trade or business;
• Income from real property operated as a business;
• Income from real property held for investment if an election is made to treat the income as effectively connected with a U.S. trade or business;
• Income from the sale or certain other dispositions of U.S. real property interests;
• Income from the sale of certain business-related capital assets;
• Interest, dividends, and so forth, derived from assets or activities of a U.S. trade or business; and
• Foreign source income in limited circumstances.