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DETERMINING TAX STATUS OF FOREIGN NATIONALS

According to the Bureau of National Affairs. Resident aliens are treated no differently than US citizens when it comes to withholding and paying payroll taxes on their wages. However, significant differences exist in the withholding roles for nonresident aliens.

While US citizens and resident aliens are taxed on their worldwide income, nonresident aliens are taxed only on their income derived from US sources. Wages paid to nonresident aliens are subject to Federal Income Taxes withholding based on the usual graduated withholding tables. Non wage income such as interest, dividends, rents, etc. paid to a nonresident and payments to self employed nonresidents aliens also are subject to Federal Withholding at a flat 30% The US has negotiated tax treaties with a number of countries that can reduce or eliminate the Federal Withholding for nonresidents Internal Revenue Code Section 871,901,904,905.911,3306, and IRS Publication 54, tax guide for US Citizens and Resident Aliens Abroad.

In general FICA taxes apply to wages for employment services in the US, regardless of the citizenship or residency o f the employee. However, bilateral totalization agreements that the US Social Security Administration has negotiated with various foreign governments my exempt from FICA coverage nonresident aliens who temporarily transfer to the US from a treaty country, provided they continue to contribute to their home country's social security system On the other hand totalization agreements also allow exempting their US wages from their home country's social security taxes. SSA Section 233 (c)(1)(B), Rev Proc. 84-54.

Foreign nationals authorized to work in the US are classified as either residents or nonresidents for US taxation purposes. The distinction between these two classification is important since resident aliens like US citizens, are taxed on their worldwide income while nonresident aliens are taxed merely on their US source income. However special rules apply to the taxation of the income of nonresident aliens, depending on whether the income in from investments or from work related activities.

According to IRS Publication 519 US Tax Guide for Aliens. In general, resident alien's status is established in one of three ways:

1) Resident Alien Election - Nonresident alien may make a special election to be treated as a resident for the first year in which they are present in the US. This election is subject to several restrictions one of which is that the individual must satisfy the substantial presence test in the year following the election.

2) The Substantial Presence Test - Under this test, the foreign national is a resident if s/he is present in the US at least 31 days in the current year and 183 days during the current year and the two preceding years, as counted under a weighted formula (All the days in the current year plus 1/3 of the days present in the preceding year, 1/6 of the next preceding year. For example, John, an alien, was physically present in the US on 120 days of each of the following years 1997, 1998, 1999. To determine if John meets the test in 1999, count the full days of presence in 1999, 120, 40 in 1998 (1/3 of 120) and 20 days in 1997 (1/6 of 120). Since 120+40+20 =180 is less than 183 days then John is not substantially present in the US

3) The Green Card Test - Foreign Nationals who enter the US with immigrant visas confers resident status on such individual. Individuals generally are treated as residents for the entire tax year if they lawfully hold a green card at any time during that year.

To keep good crew of all nationalities on board either a US yacht or a yacht touring in the US it becomes necessary to understand the Non Residents Aliens tax strategy. For a better understanding please call Eric Yankwitt (954) 763-2829, WWW.mytaxguru.com Advisory Tax Service, Inc. 1975 East Sunrise Blvd., Suite 522, Ft. Lauderdale, Florida 33304

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