ALI-ABA Course of Study International Trust and Estate Planning ...

16
V. INCOME TAXATION OF ALIENS
Under the Code, the manner in which an alien is subject to income tax depends on
whether the alien is classified as a resident or a nonresident with respect to the United States. 55
A. Resident Aliens
Resident aliens, like U.S. citizens, are subject to U.S. federal income tax on their
worldwide taxable income (i.e., on all of their income, no matter what the source, taking into
account any allowable deductions) at graduated rates that can reach as high as 35%.
B. Nonresident Aliens
complicated. 56 1.
The manner in which nonresident aliens are taxed is somewhat more
Effectively Connected Income
If a nonresident alien is engaged in a trade or business within the United States,
then he is subject to U.S. federal income tax on his taxable income that is effectively connected
with the conduct of that trade or business ("Effectively Connected Income") at the same
graduated rates that apply to U.S. citizens and resident aliens. 57
A nonresident alien's income will be considered Effectively Connected Income
under the following circumstances:
A nonresident alien's U.S. source fixed or determinable annual or
periodical income (e.g., salaries, wages, interest, rents, dividends, and royalties) and U.S.
source gain or loss from the sale or exchange of capital assets is considered Effectively
Connected Income if either:
The income, gain, or loss is derived from assets used in or
held for use in the conduct of the U.S. trade or business; or
The activities of the U.S. trade or business were a material
factor in the realization of the income, gain, or loss. 58
All other U.S. source income, gain, or loss of a nonresident alien
who is engaged in a trade or business within the United States is deemed to be Effectively
Connected Income. 59
Certain foreign source rents, royalties, dividends, interest, and gain
or loss derived from the sale or exchange of inventory property will be considered
Effectively Connected Income if the nonresident alien is engaged in a trade or business
55
56
57
58
59
For a discussion of the classification of aliens as residents or nonresidents with respect to
the United States for income tax purposes, see supra Section II.A.
See §2(d) (providing that Sections 1 and 55 apply to nonresident aliens only as provided
by Sections 871 and 877).
871(b).
§864(c)(2).
§864(c)(3). The so-called "force of attraction."
{00187507-1} 12