Opportunities in the United States have drawn investors from across the world in search of lucrative stocks and securities.
As an investor and resident of another country, you may find it helpful to learn how you can grow your portfolio while minimizing tax costs.
Ann Irons, a CPA who handles international tax returns in Bellingham, MA, explains how tax treaties benefit foreign investors by reducing the amount of tax paid on their US investments. If no treaty exists between your country and the US, your income will be subject to the full rate of 30 percent.
What Is a Tax Treaty?
The United States has entered into tax treaties with several countries in an effort to stimulate international commerce. Under such a treaty, a foreign investor’s income may not be taxed at all, or it may be taxed only at a reduced rate. Not all treaties with the US use the same rate of reduction, nor do they apply to the same sources of income. In other words, an investor based in China may not necessarily have the same investment experience as one in, say, India or Russia. However, the majority of these treaties do share a common saving clause; this forbids US residents and citizens from citing tax treaties as a means of avoiding taxation altogether.
When Do Tax Treaties Not Apply?
Even if a tax treaty exists between the United States and your country, it is risky to assume that your income will not be taxed. Some, but not all, states will levy taxes on income earned within their borders, separate from federal income taxes. Irons adds that as a foreign investor, you must also be aware that some states refuse reductions or eliminations imposed by tax treaties altogether. Other states view only certain types of income as taxable. Your best bet is to hire someone with intimate knowledge of the state’s tax codes; this helps avoid hefty penalties and fees handed down by state and federal governments.
How Do I Claim Tax Treaty Benefits?
In the past, a foreign investor needed only to provide an address to a withholding agent to claim a reduced tax rate. This is no longer adequate, says Irons. Before you can claim your reduction, you must complete Part II of Form W-8BEN. Irons also notes that tax treaty benefits only apply to investment income; it does not extend to income that is effectively connected to a trade or business in the United States.
Questions about tax returns for foreign investors? To learn more about our tax preparation and accounting services, or to schedule a meeting with Ann Irons, CPA, LLC, contact us at (508) 966-0700. We serve businesses, individuals, and foreign investors based in and around Bellingham, Woonsocket, Medway, Milford, and the surrounding areas.