In this series, we will look at US taxes for non-US individuals. Definitions are critical in this area of US tax and we will start with them.
There are several different types of income subject to withholding.
Obviously, the focus here is on investment income. However, a few other types will be mentioned.
• The statutory rate – meaning defined by the tax code – is 30%.
• Many US tax treaties lower this rate to 15%.
• If you live in an EU country that is the standard treaty rate. Tax treaties lower the rate to a
different point – for example 10% for China.
• The US is not the only country withholding income sourced from within the country. For
example, Canada, France and the Netherlands also have withholding on payments sourced
within their countries.
IRS publication 901 contains an outline of many of the US tax treaties and is available for free at IRS.gov.
What types of income is subject to withholding?
• Interest Income (with exceptions)
• Dividend Income
• Payments in lieu of interest or dividends
• Gambling winnings – some things do stay in Las Vegas
• Trade or business income
This is not an all-inclusive list: But some of the more common types that investors – and perhaps
• Proceeds from securities transactions of US securities are not subject to withholding assuming
that the seller has proper, valid US tax documentation in place. A current W-8 BEN must be on
file with the custodian for no withholding to occur on proceeds.
• For US withholding, the withholding agent, usually a bank or a broker, pays the withheld tax to
the IRS on a weekly basis.
• Once the tax is paid and reporting forms filed the withholding agent has no claim against the IRS
to make corrections or get refunds.
• Tax is withheld when the payment is made. For example, a dividend is declared and then is
payable into your account 10 days later. The tax is withheld when the dividend is credited to
• Not all interest is subject to withholding. Investment interest is not subject to withholding. It is,
however, subject to reporting. You will receive a US tax form showing any interest credited to
your account annually. However, if the interest is investment interest then there will be no
What is investment interest?
• Interest earned on US bonds including US government bonds is investment interest. Interest on
free cash in a brokerage account is also investment interest. Interest paid by banks is usually
investment interest – but not always.
• Dividends and Payments in lieu are withheld on at 30%. If you live in a treaty country, then a
lower rate will apply.
• Payments in lieu are withheld on as if they were the actual payment. So, dividend payments are
withheld on interest. Payments in lieu are not – if they substitute for investment interest.
• Withholding on Rents is complex and can also be changed depending on the type of real estate
and how structurally it is owned. It may be a corporation, a partnership, or owned by an
• The withholding rate on Royalties is generally 30%. However, certain types of royalties differ and
tax treaties may lower the rate.
• Gambling winnings are withheld at 30%. This is one area where, for an alien, filing a US tax
return may net a refund. It all depends on how much you win.
• Trade or business income – that is income paid out from a US trade or business other than as a
dividend – is withheld at 33% regardless of your treaty status. The rate of withholding changes if
the US tax rates change. 33% is the current (2019) rate.
Any adjustments in withholding because of re-classification from one income type or another generally
can be done until reporting for the year is finalized. The final reporting by the withholding agent is due
to the IRS in March for the previous year. Once reporting is complete the withholding agent is unable to
receive a refund from the IRS.
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Disclosure: Tax-Related Circular 230 Notice
The information in this presentation is provided for informational purposes only, and does not constitute tax advice and cannot be used by the recipient or any other taxpayer to avoid penalties under any federal, state, local or other tax statutes or regulations, or to resolve any tax issue.