Nontaxable Types of Interest Income for Foreign Investors (NRA – Nonresident Alien Individuals) in United States Banks and Financial Institutions
Nonresident aliens (NRAs) are not taxed on certain kinds of interest income as follows, per Internal Revenue Code subsections 871(i) and (h), provided that such interest income arises from one of the following sources:
- A U.S. bank
- A U.S. savings and loan association
- A U.S. credit union
- A U.S. insurance company
- Portfolio Interest
As described in “3. Exclusions From Gross Income” – “Nonresident Aliens” – “Interest Income” and its subsection “Portfolio interest”.
Nonresident Aliens can exclude the following items from their gross income.
Interest Income Interest income that is not connected with a U.S. trade or business is excluded from income if it is from:
- Deposits (including certificates of deposit) with persons in the banking business;
- Deposits or withdrawable accounts with mutual savings banks, cooperative banks, credit unions, domestic building and loan associations, and other savings institutions chartered and supervised as savings and loan or similar associations under federal or state law (if the interest paid or credited can be deducted by the association); and
- Amounts held by an insurance company under an agreement to pay interest on them.
U.S Tax Return Filing for Foreign Investors?
If the nonresident alien individual uses Form 1040-NR to report his income, then such nontaxable interest income shall not be reported anywhere on Form 1040-NR except in response to question L on page 5 of Form 1040-NR.
What happens if erroneous reporting is done by the US-based Financial institution on Form 1099 or Form 1042S?
The erroneous reporting of such interest income on Form 1099 by one of the institutions listed above shall not cause such interest income to be included in the gross income of the nonresident alien recipient if such recipient has filed the proper income tax return.
A nonresident alien individual should not deliver Form W-9, Request for Taxpayer Identification Number and Certification, to a U.S. bank, U.S. savings and loan association, U.S. credit union, or U.S. insurance company. Instead, the NRA should deliver Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding, to such institutions in order to put them on notice that he is a nonresident alien and that the interest income accruing to his account at such institutions is not taxable.
Do you need an ITIN/US Tax ID to complete Form W8 BEN?
For more information on Form W8BEN please refer to this blog post More on Form W8BEN
If you have received a Form 1099 or Form 1042S with 30% tax withholding for not providing ITIN or completing Form W8BEN, Here are your options to reclaim your tax withheld by the financial institutions.
Option 1 – (If your bank requested you to complete W8BEN)
To get a letter from the US bank team, apply for ITIN and complete Form W8BEN this way you can avoid the tax withholding for the future tax years
Option 2 – (If 30% Federal tax withholding is done, you can reclaim back)
You can reclaim back the taxes withheld by applying for ITIN via certified acceptance agents and filing a 1040NR tax return with the Form 1099/1042S income reporting. In this approach, First ITIN will be processed in 6 to 10 weeks’ time and a refund will be released by IRS between 3 to 6 months after approval of the ITIN.
Our team specializes in international expatriate U.S. personal tax return service. If you need assistance with US 1040 filing for refund claim/FATCA Compliance work/FBAR FINCEN114 Filing, ITIN/ Form W7 Application/EIN/Form W8BENE or CAA services/1040NR U.S. tax filing for refund claim of excess 1042S / 8288A/ 8805/ W2/ 1099. We are happy to assist our clients in a timely, efficient, and cost-effective way