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How Income Sourcing Tax Rules Work for Nonresident Aliens
Income Sourcing Tax Rules for Nonresident Aliens
When it comes to nonresident aliens and US Tax, for the most part, the United States is unable to tax nonresident aliens unless they have some US-sourced income. The tax regime in the United States for nonresident aliens is different than it is for US Persons (US Citizens, Lawful Permanent Residents, or Foreign Nationals) who meet the Substantial Presence Test. That is because if you are considered a US Person, then the US taxes you on your worldwide income — whether or not you reside in the United States or abroad and whether or not the income is sourced in the United States or outside of United States – exceptions may apply in situations in which people either make a treaty election, qualify for the foreign earned income exclusion or may qualify for the closer connection exception or other Treaty position. One key ingredient in determining whether US income will be taxed to the nonresident alien is whether or not it is considered sourced in the United States or sourced abroad. Let’s take a look at the basics of sourcing rules for income for non-resident aliens.
Non-Resident Alien (NRA) Income Sourcing Rule Basics
As provided by the IRS:
A nonresident alien (NRA) usually is subject to U.S. income tax only on U.S. source income. The general rules for determining U.S. source income that apply to most nonresident aliens are shown below:
See Chapter Two of Publication 519, U.S. Tax Guide for Aliens for additional details.
Summary of Source Rules for Income of Nonresident Aliens |
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| Item of Income | Factor Determining Source |
|
Where services performed |
|
Where services performed |
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Where sold |
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Where produced (Allocation may be necessary) |
|
Residence of payer |
|
Whether a U.S. or foreign corporation* |
|
Location of property |
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Location of property |
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Where property is used |
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Location of property |
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Seller’s tax home (but see Personal Property, in Chapter 2 of Publication 519, for exceptions) |
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Where services were performed that earned the pension |
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Generally, the residence of the payer |
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Allocation based on fair market value of product at export terminal. For more information, see IRC section 1.863–1(b) of the regulations. |
| *Exceptions include:
a) Part of a dividend paid by a foreign corporation is U.S. source if at least 25% of the corporation’s gross income is effectively connected with a U.S. trade or business for the 3 tax years before the year in which the dividends are declared. |
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