Nonresident Alien US Bonds
Nonresident Alien US Bonds: Interest vs Bond Fund Dividend: There are many US tax benefits for nonresident aliens who invest in the United States. For example, oftentimes Capital Gains are not taxable unless it is connected with certain businesses/real estate — or the Nonresident alien fails the IRS 183 day-rule (different than Substantial Presence Test). In addition, most U.S. borne interest income is not considered US sourced from a tax perspective. Therefore, when a nonresident alley invests in a US find in the United states they can oftentimes avoid any tax on the interest. This can become infinitely more complicated — and a heavy tax burden on the taxpayer — when the bond is actually a “bond fund.”
Because dividends in the US are taxable to nonresident aliens:
Bond Interest vs Bond Fund Dividend
Bond Interest and US Tax for Foreign Nationals is relatively straight-forward. In a typical example, a nonresident alien expatriate still wants to invest in the United states because the US Treasury bonds are relatively stable. Therefore, the expatriate may purchase millions of dollars worth of bonds in order to generate some stable income. Since the bond income is interest income and it is US sourced — it is not taxable to the nonresident alien owner of the bond.
Bond Dividend ETF for Foreign Nationals
Oftentimes, taxpayers do not want to invest in individual bonds and instead prefer to purchase bond funds. For example, Vanguard has many different bond funds, tax-exempt funds and municipal (Muni) Funds. the difference between and individual fund and a bond is that with an ETF fund, the fund does not generally payout interest — but rather the fund is an investment and the investment pays out dividends.
As a result, for the nonresident alien who may have otherwise avoided or circumvented U.S. tax by purchasing US bonds and generating interest income is now subject to U.S. tax on dividends which is considered FDAP — and is withheld the 30% unless there is a tax treaty with the nonresident alien’s country
A Bit of Tax Planning can Go A Long Way
In conclusion, when nonresident aliens seek to invest in the United states in order to generate interest income which is considered non-taxable from a U.S. tax perspective — it is important that they evaluate the investment carefully. Ss in the example provided in this article, tax-free interest can quickly become a taxable dividend without careful tax planning.
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