The U.S. tax laws that relate to U.S. income tax nonresidents are complex and often difficult to apply in practice. In our experience, here are some of the most common errors made by G-4 visa holder nonresidents who work for the United Nations in the United States:
#1. Failure to Pay Tax on Capital Gains Derived from the Worldwide Sale of Securities
Although U.S. nonresidents working in the United States are exempt from income tax and self-employment tax related to wages earned from international organizations such as the United Nations, they are generally subject to tax on certain other types of U.S. source income, including capital gains from the sale of securities.
Generally, the law provides that capital gains from the sale of securities (i.e. stocks, bonds, mutual funds, etc.) are not taxable to a nonresident if the capital gain is “foreign source.” However, capital gains from the sale of personal property (i.e. securities) is deemed to be sourced to the United States if the nonresident has his/her “tax home” in the U.S. and is present in the U.S. 183 days or more during the calendar year. Generally, G-4 visa holders who work and live in the United States are considered to have a “tax home” in the United States. The 183 days of physical presence for this test includes all days of physical presence in the U.S. even if the person is a full-time employee of the United Nations. In other words, this 183 day rule is different from that of the substantial presence test, and does not have a similar exception for so-called “exempt individuals.”
Therefore, those nonresidents who work for the United Nations in the U.S. and spend more than 183 days in the U.S. during the calendar year are generally subject to U.S. taxation on their worldwide sale of securities at a flat 30% tax rate. Nonresidents who are subject to capital gains tax on the sale of securities should file a nonresident income tax return on Form 1040NR (“U.S. Nonresident Alien Tax Return”) in order to report this income.
The Internal Revenue Service appears to be emphasizing the need for nonresidents who are employed by international organizations to pay capital gains tax, as the IRS has issued a special notice related to this on their website (click here for the IRS notice)
#2. Filing a Joint Return with U.S. Citizen or Resident Spouse Without Making the “6013(g) Election”
Frequently, a G-4 visa holder who is considered a nonresident of the United States is married to a U.S. citizen or resident spouse.
A nonresident taxpayer cannot file a joint tax return with his/her spouse unless the nonresident becomes a U.S. tax resident. If a nonresident is married, he/she generally must file as “Other Married Nonresident Alien” on Form 1040NR. However, a nonresident who is married to a U.S. citizen or resident may make an election with his/her tax return called a “6013(g) election” to elect for the nonresident to be treated as a resident for tax purposes. Since both taxpayers would then be deemed tax residents, they may file a joint tax return on a Form 1040, U.S. Individual Income Tax Return. The G-4’s wages received from the United Nations or other international organizations would continue to be tax exempt. Making a 6013(g) election to file jointly with a spouse frequently lowers the overall tax liability of the couple. This is partly due to generally lower income tax rate brackets available to those taxpayers who file Married Filing Joint tax returns.
To reiterate, the 6013(g) election is only available to a nonresident married to a U.S. citizen or resident. Single nonresidents may not make this election, nor may a G-4 visa holder nonresident who is married to another G-4 visa holder nonresident.
In order for a tax resident to file a joint return with a nonresident spouse, a formal 6013(g) election must be submitted with the joint income tax return (Form 1040). In electing to be treated as a U.S. tax resident, the nonresident will become subject to U.S. tax on his/her worldwide income, and certain foreign informational tax filing may be required.
#3 Failure to Make the “Net Election”
If a nonresident receives rental income from a U.S. rental property, that income is considered U.S. source income and generally will be subject to a flat 30% tax rate on the gross rents received (with no deductions allowed) unless the taxpayer makes a “Net Election” to treat that rental property as a U.S. trade or business.
This “net election” allows the taxpayer to deduct expenses related to the rental property, including depreciation, mortgage interest, real estate taxes, repairs, maintenance, and other expenses related to the property, in order to determine the net income subject to tax. In almost all situations, the ability to deduct expenses related to the rental will result in a lower income tax than the flat 30% tax on gross rents. Furthermore, the resulting net income will be taxed at the normal U.S. progressive rates rather than a flat 30% tax rate.
A nonresident is eligible to make the “net election” provided that he/she derives gross income during the taxable year from the U.S. property and the property is held for the production of income. Again, without the “net election,” the gross rental income generally would be subject to a flat 30% tax. Once the “net election” has been made, it remains in effect unless revoked.
The Wolf Group has assisted G-4 visa holder nonresidents working for international organizations for over 30 years. If you are in need of a tax preparer for your 2015 income tax return, we would be pleased to assist you. Please contact our office at 703-502-9500.