Back to International Taxation

In General

  • 941. What is the difference between a resident alien and a nonresident alien?

    • A foreign individual who is not a U.S. citizen is labeled as an “alien” for U.S. tax purposes. An alien is either a nonresident alien or a resident alien. A resident alien is a foreign individual who meets either the green card test or the substantial presence test, discussed below, and a nonresident alien is any other foreign individual unless that individual is otherwise eligible to elect to be treated as a resident alien (see, for example, Q 943).

      A foreign individual meets the “green card test” if given permission to reside in the U.S. on a permanent basis by U.S. Citizenship and Immigration Services (or a predecessor) and such permission has not been revoked or judicially determined to have been abandoned by the individual.1

      A foreign individual meets the “substantial presence test” if physically present in the U.S. for at least (1) thirty-one days in 2019 and (2) 183 days during the three year period that includes 2019, 2018 and 2017, counting only a certain number of days that the individual is present in the U.S. per year, based on the following table:2

       Year  Days Counted Toward 183 Day Total
       2019  All days present in the U.S.
       2018  1/3 of days present in the U.S.
       2017  1/6 of days present in the U.S.

      In general, an individual is treated as being “physically present” in the U.S. for any day in which he or she is actually present in the U.S. at any time of the day. Despite this, an individual does not count the following as days as being physically present in the U.S.:

      (1)Days that the individual commutes into the U.S. for work from a residence in Canada or Mexico if that individual regularly commutes into the U.S. for work (meaning that the individual commutes on more than 75 percent of workdays during the individual’s working period);

      (2)Days that the individual is in the U.S. for less than twenty-four hours while in transit between two foreign countries;

      (3)Days that the individual is in the U.S. as a member of a crew of a foreign vessel;

      (4)Days that the individual is only in the U.S. because of a medical condition that arose while in the U.S. and that rendered that individual unable to leave the U.S.; and

      (5)Days that the individual was an exempt individual (including individuals temporarily present in the U.S. as foreign-government related individuals, teachers or trainees on a “J” or “Q” visa, individuals present in the U.S. on a student visa, and certain professional athletes in the U.S. for a charitable sports event).3

      A resident alien will be taxed much in the same way as a U.S. citizen, and thus will be subject to U.S. taxation on all worldwide income. Conversely, a nonresident alien will only become subject to U.S. taxation in the event that he engages in certain activities that create a connection between that individual and the U.S. (see Q 942).


      1 .See IRS Publication 519, available at http://www.irs.gov/publications/p519/index.html (last accessed March 29, 2019).

      2 .IRS Pub. 519, above.

      3 .IRS Pub. 519, above, and IRS Guidance, “Substantial Presence Test,” available at http://www.irs.gov/Individuals/International-Taxpayers/Substantial-Presence-Test (last accessed March 29, 2019).

  • 942. When does a foreign individual become a U.S. taxpayer who is required to file a U.S. tax return?

    • U.S. citizens and resident aliens (see Q 941) are taxed on worldwide income regardless of where they are located and must generally file a return (though a two-month filing extension will apply for U.S. citizens and residents who are residing overseas).1

      A foreign individual who is a nonresident alien may be required to file a U.S. tax return if any of the following occur:

      (1)A nonresident alien engaged in a trade or business in the U.S. during the tax year. If the nonresident alien’s only U.S. source income consists of wages that are less than the personal exemption amount ($4,200 in 2019),2 noting that the personal exemption itself was suspended for 2018-2025 that alien is not required to file;

      (2)A nonresident alien not engaged in a trade or business in the U.S., but who has U.S. income on which the tax liability was not satisfied by withholding at the source;

      (3)A representative responsible for filing the return of an individual described in (1) or (2);

      (4)A fiduciary for the estate or trust if any beneficiary of the estate or trust is a nonresident alien; or

      (5)A resident or other fiduciary, or other person charged with the care of the nonresident alien or his or her property, unless the nonresident alien files the return himself or makes other arrangements for a representative to file the return and pay the tax.3


      1. See IRS Guidance, “U.S. Citizens and Resident Aliens Abroad,” available at http://www.irs.gov/Individuals/International-Taxpayers/U.S.-Citizens-and-Resident-Aliens-Abroad (last accessed March 29, 2019).

      2. Rev. Proc. 2018-57.

      3. Treas. Reg. §1.6012-3. See also IRS Guidance, “Taxation of Nonresident Aliens,” available at http://www.irs.gov/Individuals/International-Taxpayers/Taxation-of-Nonresident-Aliens (last accessed March 29, 2019).

  • 943. What rules apply when a U.S. citizen or resident alien is married to a nonresident alien and the couple wishes to file a joint U.S. tax return?

    • If a U.S. citizen or resident alien (see Q 941) is married to a nonresident alien, the couple may elect to treat the nonresident alien as a U.S. resident for tax purposes. The couple may elect this treatment by attaching a statement to this effect to their U.S. tax return for the relevant tax year. The election may be made at the time of filing, or by filing an amended tax return for up to three previous tax years (though in this case, the couple must also elect such treatment for all tax returns that have been filed since the date of the amended return).

      The couple must file a joint tax return for the year in which the election is originally made, though separate returns may be filed in later years.

      While this election will result in the nonresident alien being treated as a resident alien for income tax purposes, the individual may continue to be treated as a nonresident alien for purposes of Social Security and Medicare taxes.1

      The election will apply until it is suspended or ended. The election is suspended if, during a later tax year, neither spouse is a U.S. citizen or resident alien. The election is ended if (a) it is revoked by either spouse, (b) one spouse dies, (c) the spouses are legally separated or (d) the spouses have failed to keep adequate records to prove their income tax liability.2 If the election is “ended,” neither spouse may apply to make the election in a subsequent tax year.


      1 .IRS Guidance, “U.S. Citizens and Resident Aliens Abroad – Nonresident Alien Spouse,” available at http://www.irs.gov/Individuals/International-Taxpayers/U.S.-Citizens-and-Resident-Aliens-Abroad—Nonresident-Alien-Spouse (last accessed March 29, 2019).

      2 .IRS Pub. 519.

  • 944. When a U.S. citizen is a resident of a foreign country and earns income in that foreign country, is that income included in the taxpayer’s gross income for U.S. tax purposes?

    • Yes. If a U.S. citizen is employed in a foreign country and files a tax return in that country, that individual will also be required to file a Form 1040 in the United States. A U.S. citizen is taxed on worldwide income, regardless of whether that taxpayer lives in the U.S. or in a foreign country.1

      Despite this, a U.S. citizen with foreign earned income may be eligible to exclude all or a portion of foreign earnings from calculation of his or her income for U.S. tax purposes (see Q 945).2 “Foreign earned income” includes amounts received by the individual from sources within a foreign country that are attributable to services performed by the individual.3 Pension and annuity income, amounts paid to the individual by the U.S. (or a U.S. agency) as an employee, and amounts paid to the individual under Section 402(b) (taxability of beneficiaries of nonexempt trusts) or Section 403(b) (taxability of beneficiaries under nonqualified annuities) are excluded from foreign earned income.4


      1 .See IRS Guidance on the Foreign Earned Income Exclusion, available at http://www.irs.gov/Businesses/Foreign-Earned-Income-Exclusion-1 (last accessed March 29, 2019).

      2 .IRC Sec. 911(a)(1).

      3 .IRC Sec. 911(b)(1)(A).

      4 .IRC Sec. 911(b)(1)(B).

  • 945. What is the foreign earned income exclusion?

    • The foreign earned income exclusion is available if the following requirements are met:

      (1)The individual has income received for work performed in a foreign country,

      (2)The individual has a tax home in a foreign country, and

      (3)The individual meets either (i) the bona fide residence test or (ii) the physical presence test (see Q 946).

      According to IRS guidance, an individual’s “tax home” is the general area of the individual’s principal place of business or employment. The individual’s principal place of residence is irrelevant for determining the individual’s tax home. However, if the individual is not consistently present in one business location, the location of that individual’s principal residence may be used as a factor in the tax home determination. If the individual has neither a regular principal place of business or residence, the individual is considered itinerant and his or her tax home is wherever he or she works. The individual’s tax home is not considered to be in a foreign country if that taxpayer’s “abode” is in the U.S.1

      Example: Joe is a U.S. citizen who is employed on a fishing enterprise in the waters of a foreign country. His schedule provides that he works one month on and one month off. Joe continues to maintain a residence in the U.S., where his family lives and where he returns on his “off” months. Joe is considered to have a “tax home” in the U.S. because his time is split equally between the U.S. and foreign waters. He is not entitled to take advantage of the foreign earned income exclusion, though he may be entitled to deduct his living expenses while living abroad as business travel expenses.2

      A taxpayer’s election to exclude foreign earnings under the foreign earned income exclusion may be revoked by the taxpayer by filing a statement to that effect with the IRS, but if the taxpayer attempts to claim the exclusion within five tax years after the revocation, he or she must apply for IRS approval.3


      1 .IRS Pub. 54 (2018), p.12

      2 .See IRS Guidance, “Foreign Earned Income Exclusion – Tax Home in Foreign Country,” available at http://www.irs.gov/Individuals/International-Taxpayers/Foreign-Earned-Income-Exclusion—Tax-Home-in-Foreign-Country (last accessed March 29, 2019).

      3 .See IRS Guidance: “Revocation of the Foreign Earned Income Exclusion,” available at http://www.irs.gov/Individuals/International-Taxpayers/Revocation-of-the-Foreign-Earned-Income-Exclusion (last accessed March 29, 2019).

  • 946. What are the bona fide residence and physical presence tests that can allow a U.S. individual to qualify for the foreign earned income exclusion?

    • A U.S. individual with foreign earned income must satisfy either the bona fide residence test or the physical presence test in order to be eligible to exclude all or a portion of foreign earned income from U.S. income (see Q 964).

      Editor’s Note: The IRS relaxed these requirements for 2020 in response to travel restrictions put in place in response to COVID-19.  An otherwise qualified individual may still exclude foreign earned income for the period in which the individual was actually present in the foreign country even if the individual fails to meet the time requirements. To qualify for relief, an individual must establish (1) he or she must have established residency, or have been physically present in either: China on or before December 1, 2019, or any other foreign country on or before February 1, 2020 and (2) the individual must have departed either: China (excluding Hong Kong and Macau) between December 1, 2019, and July 15, 2020, or any other foreign country between February 1, 2020, and July 15, 2020 and (3) individual would have met the requirements of either the bona fide residence test or the physical presence test, but for the COVID-19 emergency.[1]

       An individual may use the “bona fide residence test” to qualify for the exclusion if the individual is either (a) a U.S. citizen or (b) a U.S. resident alien who is a citizen of a country with which the U.S. has an income tax treaty in effect. The bona fide residence test, as the name suggests, is met if the individual has established a residence in a foreign country. The length of the individual’s stay and the nature of employment are factors considered in determining whether the individual has established a residence in a foreign country, but are not determinative—all of the facts and circumstances of the particular situation must be taken into account.

       The IRS has provided bright-line guidance so that the individual must reside in the foreign country for an uninterrupted period that includes an entire tax year, though every individual that resides in a foreign country for at least an entire tax period is not automatically considered to have established a residence.[2]

       Example: Shannon’s domicile (permanent home) is in Brooklyn, New York, but she is assigned to her employer’s London office for an indefinite duration. She rents an apartment in London with a one-year lease, though she intends to eventually return to Brooklyn. Assuming all other factors indicate that Shannon has established a residence in London, she will meet the bona fide residence test even though she plans to return to Brooklyn at some point in the future. If Shannon had, for example, been sent to London for a month-long work assignment with a definite return date, she would not be able to satisfy the bona fide residence test. If Shannon had been assigned to her work post in London for 16 months, she may not be able to meet the bona fide residence test because her presence in London is limited in duration.

       An individual (whether a U.S. citizen or resident alien) meets the physical presence test if physically present in a foreign country (or countries) for at least 330 days during a consecutive twelve-month period. The individual is not required to establish a residence and there are no requirements as to whether or not the individual intends to return to the U.S. at a specified time under the physical presence test. Unlike the tax home requirement, the individual can be in the foreign country during these days for any reason—there is no requirement that the presence abroad be motivated by business or employment reasons.[3]

       

      [1]      Rev. Proc. 2020-27.

      [2].     See IRS Guidance: “Foreign Earned Income Exclusion – Bona Fide Residence Test,” available at http://www.irs.gov/Individuals/International-Taxpayers/Foreign-Earned-Income-Exclusion—Bona-Fide-Residence-Test (last accessed March 29, 2019).

      [3].     See IRS Guidance: “Foreign Earned Income Exclusion – Physical Presence Test,” available at http://www.irs.gov/Individuals/International-Taxpayers/Foreign-Earned-Income-Exclusion—Physical-Presence-Test (last accessed March 29, 2019).

  • 947. What is the foreign housing exclusion (or deduction)?

    • The foreign housing exclusion applies to housing costs paid for with employer-provided funds (including amounts paid by the employer to the employee as taxable foreign earned income), while the foreign housing deduction applies to an individual who pays for foreign housing with self-employment earnings.

      The foreign housing exclusion (or deduction) allows an individual to exclude (or deduct) amounts spent on housing costs while residing abroad, provided that the individual’s tax home (see Q 944) is found to be in a foreign country and the taxpayer meets either the bona fide residence test or the physical presence test (see Q 946).1

      An individual’s “housing amount” is the total housing costs for the year minus a base amount that is tied to the maximum foreign earned income exclusion (see Q 944) for the year. The amount is 16 percent of the maximum foreign earned income exclusion ($107,600 in 2020, $105,900 in 2019, $103,900 in 2018, $102,100 in 2017, $101,300 in 2016, and $100,800 in 2015, as indexed for inflation),2 calculated on a daily basis, and multiplied by the number of days spent abroad in the tax year.3

      Housing expenses that qualify for the exclusion or deduction must be reasonable, and can also include housing expenses for the individual’s spouse and/or dependents if they live with the individual while abroad.4 The cost of purchasing real property, furniture, accessories or other improvements to increase the value of the property are excluded from the definition of housing expenses for purposes of the exclusion (or deduction). Expenses relating to housing, such as the cost of utilities and insurance, are included in the definition of housing expenses for purposes of the exclusion (or deduction).5

      The amount of a taxpayer’s foreign housing exclusion (or deduction) cannot exceed the amount of foreign-earned income for the tax year.


      1 .IRC Sec. 911(a)(2).

      2 .IR-2012-78 (October 18, 2012), IR-2013-87 (October 31, 2013), IR-2014-104 (Oct. 30, 2014), Rev. Proc. 2015-53, 2015-44 IRB 615, Rev. Proc. 2016-55, Rev. Proc. 2018-18, Rev. Proc. 2018-57.

      3 .IRC Sec. 911(c)(1).

      4 .IRC Sec. 911(c)(3).

      5 .IRC Sec. 911(c)(3).

  • 948. Can U.S. individuals employed in a foreign country receive U.S. Social Security credit?

    • In some cases, a U.S. individual will continue to earn U.S. Social Security credit if liable for Social Security and Medicare taxes on amounts earned while performing services as an employee in a foreign country. The IRS has issued guidance that provides that Social Security and Medicare taxes continue to apply to wages paid for services performed by a U.S. individual abroad if any of the following are true:

      (1)The individual is working for a U.S. employer,

      (2)The individual performs services in connection with a U.S. aircraft or vessel and the individual has (a) entered into an employment contract in the U.S. or (b) the vessel or aircraft touches down at a U.S. port while the individual is employed on it,

      (3)The individual is working in a country with which the U.S. has entered a Social Security agreement providing that the foreign earned income is subject to U.S. Social Security and Medicare taxes, or

      (4)The individual is working for a foreign affiliate (a foreign entity in which the U.S. employer has at least a 10 percent interest) of a U.S. employer under a voluntary agreement (under IRC Section 3121(l)) entered into by that employer and the U.S. Treasury Department.1

      The IRS guidance further provides that an individual is “working for a U.S. employer” for purposes of (1), above, if the individual is working for (a) the U.S. government (or instrumentality thereof), (b) another individual who is a U.S. resident, (c) a partnership in which at least two-thirds of the partners are U.S. residents, (d) a trust, in which all of the trustees are U.S. residents or (e) a corporation organized in the U.S., or in any U.S. state (including D.C., the Virgin Islands, Guam, American Samoa and the Northern Mariana Islands).2

      A U.S. employer who voluntarily enters into an agreement to extend Social Security coverage to its employees working in a foreign country is liable for the entire amount of the covered employees’ Social Security taxes that would otherwise apply under Sections 3101 and 3111 if those employees were employed domestically.3

      The IRS has advised that U.S. individuals who are working in a country with which the U.S. has entered a Social Security agreement providing that the individual’s income will not be subject to U.S. Social Security taxes obtain a statement from the relevant agency in the foreign country stating that the individual’s income is subject to Social Security coverage in that foreign country.

      The U.S. Social Security Administration (SSA) will issue determinations that a U.S. individual’s income is subject only to U.S. Social Security taxes if the employer contacts the SSA and provides certain basic identifying information about that individual and his or her employment abroad.


      1 .See IRS Guidance: “Social Security Tax Consequences of Working Abroad,” available at http://www.irs.gov/Individuals/International-Taxpayers/Social-Security-Tax-Consequences-of-Working-Abroad (last accessed March 29, 2019).

      2 .IRC Sec. 3121(h).

      3 .IRC Sec. 3121(l)(1)(A).

  • 949. What are some of the considerations that a U.S. citizen or resident should be aware of when participating in a retirement plan while residing in a foreign country?

    • While many U.S. citizens and residents who are transferred abroad by multinational employers may continue to be covered by the multinational’s U.S. retirement plan, in some cases, a U.S. individual may obtain benefits under a foreign plan. Because U.S. citizens and residents are taxed on their worldwide income, benefits accrued under foreign retirement plans may be subject to U.S. taxation absent a treaty provision that provides otherwise. Most treaties provide that a pension or annuity received from a foreign employer is taxed in the country of residence under its domestic laws.1

      Treaties with some countries provide for liberalized treatment of retirement accounts—for example, the treaty between the U.S. and the U.K. provides that U.S. citizens residing in the U.K. can deduct, for U.S. tax purposes, amounts contributed to a pension plan established in the U.K.2

      Further, while a U.S. individual residing abroad may exclude a portion of foreign earned income from U.S. gross income each year, the foreign earned income exclusion does not apply to income received as a pension or annuity while abroad3 (Q 3557).


      Planning Point: The IRS has released long-awaited proposed regulations clarifying the income tax withholding obligations when distributions from employer-sponsored plans (including pension, annuity, profit sharing, stock bonus or deferred compensation plans) are made to destinations outside the U.S.  While U.S. payees can elect to forgo withholding, non-U.S. payees cannot.  In general, the participant cannot elect to forgo withholding with respect to these distributions even if the participant provides a U.S. residential address, but directs funds to be delivered to a destination outside the U.S.  If the participant provides a non-U.S. residential address, withholding obligations cannot be waived even if the participant directs that the funds be distributed to a U.S. financial institution.  When the participant provides no residential address, withholding obligations cannot be waived.


      Technically, a plan established in a foreign country cannot be “qualified” under IRC Section 401, because of the requirement that a qualified trust be organized under U.S. law.4 Therefore, a U.S. individual participating in a foreign retirement plan would not be entitled to defer taxation of contributions to the foreign plan in the same manner as would be available in the U.S., absent a treaty provision to the contrary.

      However, plans established by certain U.S. multinationals that are established under foreign law may achieve the same tax result if the plan is otherwise qualified.5 IRC Section 404(a)(4) provides a special rule that allows for the qualification of a trust established outside of the U.S. if the employer contributing to the plan is a U.S. resident, corporation or other entity and the plan is otherwise qualified.


      1 .See IRS Guidance, “The Taxation of Foreign Pensions and Annuities,” available at http://www.irs.gov/Businesses/The-Taxation-of-Foreign-Pension-and-Annuity-Distributions (last accessed March 29, 2019).

      2 .See the Treasury Department Technical Explanation of the Convention between the U.S. and U.K, Article 17, available at http://www.treasury.gov/resource-center/tax-policy/treaties/Documents/teus-uk.pdf (last accessed March 29, 2019).

      3 .IRC Sec. 911(b)(1)(B).

      4 .IRC Sec. 401(a).

      5 .IRC Sec. 404(a)(4).

  • 950. Are employer contributions to a foreign retirement account on behalf of a U.S. individual exempt from U.S. reporting requirements?

    • U.S. individuals residing abroad may become subject to both the FBAR and FACTA reporting rules, and the corresponding penalties for noncompliance, based upon their participation in foreign retirement plans.

      Generally, a U.S. individual who has an interest in any “foreign account” is required to file an FBAR (Form TD F90-22.1) if the aggregate value of foreign accounts exceeds $10,000 at any time during the calendar year.1 The IRS has issued regulations that specifically exempt certain accounts, including plans that qualify under IRC Section 401 and IRA accounts, but these regulations do not provide a similar exemption for foreign retirement accounts.2 Therefore, whether FBAR reporting will be required for a U.S. individual’s foreign retirement accounts will likely turn upon whether the individual has a “financial interest” or “signature authority” over the foreign account.

      Penalties for failure to file an FBAR can be steep—for willful violations, the civil penalty can equal the greater of $100,000 or 50 percent of the account assets, and the IRS may be entitled to file criminal charges.3 For non-willful violations, the penalty can still equal up to $10,000 per violation unless the taxpayer can show that there was reasonable cause for failure to file, in which case no penalty is imposed.4

      Because of the steep penalties imposed upon taxpayers who do not comply with FBAR reporting obligations, the IRS has issued guidance to allow certain “low risk” nonresident U.S. taxpayers who have resided outside of the U.S. since January 1, 2009 to catch up on filing delinquent U.S. income tax returns and FBARs with respect to their foreign accounts. Whether an individual is “low risk” or not will be determined based on the amount of U.S. income tax owed (less than $1,500 per tax year is low risk), and these delinquent returns will be processed in a streamlined manner absent any other high risk factors.5 The plan is described by the IRS as a method to provide assistance to U.S. citizens residing abroad, including dual citizens, with foreign retirement plan issues.6

      In addition to FBAR filing requirements, a U.S. individual may be required to comply with FATCA and report any foreign financial assets with an aggregate value of over $50,000 (or higher amount, if the Secretary otherwise provides) on Form 8938, Statement of Specified Foreign Financial Assets, attached tohis or her U.S. tax return.7


      1 .See IRS “FAQs Regarding Report of Foreign Bank and Financial Accounts (FBAR) – Financial Accounts,” available at http://www.irs.gov/Businesses/Small-BusinessesSelf-Employed/FAQs-Regarding-Report-of-Foreign-Bank-and-Financial-Accounts-FBAR (last accessed March 29, 2019).

      2 .See IRS Guidance: “Report of Foreign Bank and Financial Accounts (FBAR),” available at http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Report-of-Foreign-Bank-and-Financial-Accounts-FBAR (last accessed March 29, 2019).

      3 .31 USC 5321(a)(5).

      4 .See IRS FS-2011-13 (December 2011).

      5 .See IRS Instructions for New Streamlined Filing Compliance Procedures for Nonresident, Non-Filer U.S. Taxpayers, available at http://www.irs.gov/Businesses/Corporations/Summary-of-FATCA-Reporting-for-U.S.-Taxpayers (last accessed March 29, 2019).

      6 .IR-2012-65 (June 26, 2012).

      7 .IRC Sec. 6038D(a).

  • 951. What assets of a foreign individual (nonresident alien) are subject to U.S. estate tax?

    • Unlike a U.S. citizen, who is subject to estate taxation on worldwide assets, the gross estate of a nonresident alien (meaning, a foreign individual who is not a U.S. citizen or resident alien) only includes property that is situated in the U.S. at the time of the nonresident alien’s death.1

      For purposes of determining what property is situated in the U.S., any property which the decedent has transferred, by trust or otherwise, which would be taxable within the provisions of IRC Sections 2035 through 2038 (relating to termination of certain property interests within three years of death, transfers with a retained life estate or to take effect at death, and revocable transfers), is deemed situated in the United States if it was so situated either at the time of the transfer or at the time of death.2

      For a decedent who was a nonresident alien at the time of death, property is considered located in the U.S. if it falls into any of the following categories:

      (1)Real property located in the U.S.;

      (2)Tangible personal property located in the U.S., including clothing, jewelry, automobiles, furniture or currency. Works of art imported into the U.S. solely for public exhibition purposes are not included;

      (3)A debt obligation of a citizen or resident of the U.S., a domestic partnership or corporation or other entity, any domestic estate or trust, the U.S., a state or a political subdivision of a state or the District of Columbia; or

      (4)Shares of stock issued by domestic corporations, regardless of the physical location of stock certificates.3

      However, in the case of a nonresident alien who dies while in transit through the U.S., personal effects are not considered located in the U.S. Neither is merchandise that happens to be in transit through the U.S. when a nonresident alien owner dies.

      The IRS has also addressed certain assets and found that they are specifically excludible from a nonresident alien’s gross estate as being “without the U.S.” The following nonexhaustive list of the property owned by a nonresident alien is not considered to be situated within the U.S. for calculating the gross estate:

      (1)A bank account that is not used in connection with a U.S. trade or business;4

      (2)A deposit or withdrawable account with a savings and loan association chartered and supervised under federal or state law or an amount held by an insurance company under an agreement to pay interest on it. But the deposit or amount must not be connected with a U.S. trade or business and must be paid or credited to the decedent’s account;5

      (3)A deposit with a foreign branch of a U.S. bank if the branch is engaged in the commercial banking business;6

      (4)A debt obligation, the interest on which would be exempt from income tax under IRC Section 871(h)(1), relating to tax-exemption for interest earned by nonresident aliens with respect to portfolio debt investments;7

      (5)Stock issued by a corporation that is not a domestic corporation, even if the certificate is physically located in the United States;8

      (6)An amount receivable as insurance on the decedent’s life;9

      (7)Certain original issue discount obligations;10 and

      (8)Certain stock that a nonresident alien owns in a regulated investment company (RIC) at the time of his or her death.11

      If the decedent was a citizen or resident of one of the countries with which the U.S. had an estate tax treaty in place, the provisions of the treaty may override the normally applicable provisions of the Internal Revenue Code that are outlined above.


      1 .IRC Sec. 2103.

      2 .IRC Sec. 2104(b).

      3 .Treas. Reg. § 20.2104-1(a).

      4 .See IRS Guidance: “Some Nonresidents with U.S. Assets Must File Estate Tax Returns,” available at http://www.irs.gov/Individuals/International-Taxpayers/Some-Nonresidents-with-U.S.-Assets-Must-File-Estate-Tax-Returns (last accessed March 29, 2019).

      5 .IRC Secs. 2105(b)(1), 871(i)(3).

      6 .IRC Sec. 2105(b)(2).

      7 .IRC Sec. 2105(b)(3).

      8 .IRC Sec. 2104(a).

      9 .IRC Sec. 2105(a).

      10 .IRC Secs. 2105(b)(5), 871(g)(1).

      11 .IRC Sec. 2105(d).

  • 952. How does the estate of a foreign individual (nonresident alien) calculate the amount of U.S. estate tax owed?

    • The estate tax computation base of a nonresident alien’s estate consists of his or her taxable estate plus any taxable gifts made during his or her lifetime.1 The taxable gifts of a nonresident alien made after 1976 (other than gifts included in the gross estate) also form part of the tax base upon which the estate tax is computed. The adjusted taxable gifts of a nonresident alien are computed in the same manner as for a resident citizen.2

      Once the taxable estate of the nonresident alien decedent is determined, the mechanics of the actual tax calculation and the applicable rate schedule (before the unified credit) are the same for nonresident alien decedents as for citizen-residents. However, a very important difference comes into play in the use of the unified credit, which is greatly reduced for nonresident alien decedents. This, of course, indirectly results in a higher effective tax rate. See Q 954 for a discussion of the unified credit as applied to nonresident aliens


      1 .IRC Sec. 2101(c).

      2 .IRC Sec. 2101(b), (c).

  • 953. Is the estate of a foreign individual entitled to the same deductions as a U.S. individual?

    • A nonresident alien’s taxable estate is determined by deducting the following items from the alien’s gross estate:

      (1)Expenses, indebtedness, taxes and losses. These items may be deducted only in the proportion that the value of the decedent’s gross estate in the U.S. bears to the value of the entire estate, wherever situated.1 Thus, the deductible portion of each item is limited to the amount of each item multiplied by a fraction, the numerator of which is the value of the property located in the U.S., and the denominator of which is the value of the entire gross estate, wherever located.

      (2)Charitable bequests. Charitable bequests are fully deductible if made to organizations meeting the requirements for an estate tax charitable deduction under IRC Section 2055 and are computed in the same manner as similar deductions allowed the estates of U.S. citizens and residents.2

      (3)Marital Deduction. The marital deduction is not available for property passing to a surviving spouse who is an alien (either a resident alien or a nonresident alien) unless the property passes to the spouse in a qualified domestic trust (QDOT) or is placed in a QDOT before the date on which the decedent’s estate tax return is filed.3 The policy behind this limitation is that if the surviving spouse is an alien, there is a considerable likelihood that the marital deduction property will eventually be moved abroad, and not be taxable upon the death of the surviving spouse. This possibility can be eliminated, however, through the QDOT mechanism, which assures that the property in question will remain subject to U.S. estate tax upon the death of the surviving spouse.

      Allowance of Deductions.A deduction is allowed only if the executor discloses in the estate tax return the value of that part of the gross estate not situated in the U.S.4


      1 .IRC Sec. 2106(a)(1).

      2 .IRC Sec. 2106(a)(2).

      3 .IRC Sec. 2056(d).

      4 .IRC Sec. 2106(b).

  • 954. May a nonresident alien’s estate claim an estate tax exemption upon the death of the nonresident alien?

    • The unified transfer tax credit in the case of a nonresident alien decedent is only $13,000.1 This effectively exempts only the first $60,000 of his or her taxable estate from estate tax, a considerably lower threshold than applies to a domestic decedent (see Q 851).

      A special rule applies if the decedent was a nonresident of the United States, but resided in a U.S. possession (e.g., Puerto Rico, Guam) and was a U.S. citizen only because of birth or residence in, or citizenship of, the possession. Under these circumstances, the decedent is considered to be a “nonresident noncitizen,”2 and the estate of a decedent in this category qualifies for a credit that is the greater of:

      (1)$13,000, or

      (2)$46,800 multiplied by the ratio that the value (at death) of that part of the decedent’s gross estate that is located in the U.S. bears to the entire value of the decedent’s gross estate.3

      In either case, the credit may not be more than the amount of the estate tax.4 Further, the amount of the available credit is reduced by the value of any lifetime gifts made by the nonresident alien-decedent.5


      1 .IRC Sec. 2102(b)(1).

      2 .IRC Sec. 2209.

      3 .IRC Sec. 2102(b)(2).

      4 .IRC Sec. 2102(b)(4).

      5 .IRC Sec. 2102(b)(3)(B).

  • 955. Can a life insurance policy or annuity contract issued to a U.S. person by a foreign life insurance company qualify for the tax benefits traditionally afforded to U.S. life insurance policies?

    • Generally, foreign insurance companies cannot sell insurance products to U.S. persons without becoming subject to U.S. regulation. Despite this, if a U.S. person resides in a foreign country for an extended period of time, it is possible that he or she may choose to purchase a life insurance or annuity product from a foreign insurance company in that country. In order for a foreign-issued life insurance or annuity product to qualify for the same tax preferences given to domestic products, it will be required to comply with the U.S. requirements for these products (including, for example, the definition of “life insurance contract” under Section 7702 or the annuity provisions of Section 72).

      Further, under the IRC, most annuity contracts issued by domestic insurance companies are exempt from the original issue discount (OID) rules (discussed in Q 495 to Q 501).1 An annuity contract issued by a foreign insurance company will be subject to the OID rules, however, unless that insurance company is subject to tax under subchapter L with respect to income earned on the annuity contract. If the insurance company is not subject to tax under subchapter L, the annuity contract will be included in the definition of a debt instrument and the growth on the annuity cash value can be subject to tax as interest income even if payouts under the annuity contract have not yet begun.2

      In the context of variable life insurance contracts, a contract will not qualify as a variable life insurance contract unless it is a “variable contract” for purposes of IRC Section 817(d). Under this provision, the amounts received under the variable contract must be segregated into an account that is separate from the company’s general asset accounts under state law or regulation.3 The question that arises in this context is whether an insurance company that segregates its assets pursuant to foreign law will qualify. The IRS has found that a foreign insurance company that elects to be taxed as a domestic company under IRC Section 953(d) (meaning it will be subject to subchapter L taxation), and that segregates amounts received under life insurance contracts from general company assets under foreign law, can meet the requirements of Section 817(d).4

      This, however, leaves open the possibility that variable contracts issued by a foreign insurance company that has not elected to be taxed as a domestic company will not qualify for treatment as such under the IRC.


      1 .IRC Sec. 1275(a)(1)(B).

      2 .Treas. Reg. §1.1275-1(k).

      3 .IRC Sec. 817(d)(1).

      4 .Let. Rul. 200919025.

  • 956. What considerations should a U.S. citizen or resident alien be aware of when disposing of real property that is located in a foreign country?

    • The general rule that a U.S. citizen or resident alien is taxed on all worldwide income applies in the case of a sale of real property in the same manner as income from any other source.1 Therefore, a U.S. citizen or resident alien who sells real property that is located in a foreign country must report and abide by U.S. tax rules relating to the sale of real property (see Q 7843).

      Thus, for example, a U.S. citizen who sells a principal residence that he or she has used as a principal residence for two of the five preceding tax years is entitled to exclude a portion of the gain from taxation in the U.S. in the same manner as though the property was located within the U.S. (see Q 7843).

      Though the U.S. citizen or resident alien may also be required to pay taxes upon disposition of foreign-located real property both in the U.S. and in the country in which the property is situated, he or she will be entitled to claim a credit for certain foreign taxes paid on his or her U.S. tax return.2

      Further, a U.S. citizen or resident alien may be entitled to deduct any real property taxes that are imposed by a foreign country on his or her U.S. tax return.3


      1 .See IRS Publication 544.

      2 .See IRS Publication 54.

      3 .IRS Pub. 54.