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Investment Taxation for Expats in the United States Of America

Submitted: October 2013

Taxable income in this category includes:

  • interest from bank and building society deposits
  • interest from government and corporate stocks (bonds)
  • rental income from properties both in the USA and abroad
  • dividends, and
  • capital gains.

As a non-resident, you will generally be liable for withholding tax on investment income sourced in the USA. As a resident you will generally not be subject to withholding tax and investment income should be reported in your annual tax return as ordinary income. 

Interest

For residents interest income is generally treated as ordinary taxable income in the USA and must be reported on your tax return. A withholding tax of 28% may apply if you do not provide your TIN to the interest payer. For information on how to obtain a TIN see Taxation - Employment Taxation for Expats in the USA. If you are a resident you will also have to pay tax on interest received from other countries, and may be subject to withholding taxes in the country of origin. If the country of origin of interest payments has a suitable tax treaty with the USA, the amount of tax that can be charged by the country of origin is generally reduced.

US source interest income for non-residents is generally subject to a 30% withholding tax deducted at source. There are some exemptions for what is known as ‘portfolio’ interest. Foreign source income may be liable to withholding tax in the country of origin. If the country of origin has a suitable tax treaty with the USA, the amount of withholding tax that can be charged is generally reduced.

Rental income

Generally rental income is treated as ordinary income for residents and must be reported on your tax return. If you are a resident you will also have to pay tax on rental income from outside the USA and may be subject to withholding taxes in the country of origin. Withholding tax may be reduced if the country of origin has a tax treaty with the USA.

Rental income for non-residents is generally subject to a 30% withholding tax deducted at source. However a non-resident can elect to have US source net rental income taxed at the same graduated income tax rates as residents. Once this choice is made it is permanent, unless the IRS agrees to a change.

Dividends

For residents, ordinary dividend income from US sources must be reported with all your other income on your tax return and is taxed at your marginal rate. Certain ‘qualified’ dividend income is treated and taxed differently. Residents also have to pay income tax on dividends received from other countries, and may be subject to withholding taxes in the country of origin. If the country of origin of dividend payments has a suitable tax treaty with the USA, the amount of tax withheld by the country of origin can be substantially reduced.

For non residents your dividend income will have a 30% withholding tax deducted at source. If your country of origin has a suitable tax treaty with the USA, the amount of withholding tax charged can be substantially reduced.

Capital gains

For residents, long capital gains accrued in the USA and abroad are generally taxed at rates of 0%, 5%, 15%, 20%, 25% or 28% depending on the nature of both the asset and the taxpayer. There is some information about capital gains tax here. Short-term capital gains on assets held for less than one year are taxed as ordinary income. Both must be reported on your tax return. Residents also have to pay tax on capital gains made in other countries.

Generally non-residents are not subject to capital gains tax if they are not in the USA for more than 183 days in a year, as long as the gain is not connected with a trade or business in the USA. Once they have stayed in the USA for longer than 183 days, capital gains are subject to tax at rate of 30%.

 

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