Non-resident aliens can hold investments in the United States
quite easily. A "non-resident alien" is the U.S. government's
name for a citizen of a country other than the U.S. who also lives
outside the U.S. The only thing non-resident aliens have to be
concerned about if they have U.S. investments is taxation.
For example, if a non-U.S. national works in the U.S. for some
period of time and amasses a nice portfolio of stocks while here,
that person can hang on to the portfolio forever, no matter whether
they continue to live in the U.S. or not. But they will have to
continue to deal with the U.S. tax authority, the IRS.
Thanks to the U.S. Congress, the tax laws are complicated, and
a resident or nonresident alien might have to look carefully before
finding a tax advisor who understands all the issues. Here's an
overview.
In the years when you are considered a non-resident for tax purposes
(basically, the years when you spend in the US less than 183 days;
the actual rule is a little more complex, and takes prior years
into account; see IRS publication 519 for details), you file your
US tax return on form 1040 NR, instead of regular 1040 (EZ, A),
and pay tax on your investment income according to special rules:
• No tax on capital gains. This means that a brokerage
or a mutual fund should withhold nothing when you sell shares.
With respect to mutual funds, long-term capital gain distributions
are exempt as well.
• No tax on bank interest.
• No tax on portfolio interest. It's not always easy to
figure out interest on what bonds qualify as "portfolio interest",
though. Some brokerage firms are confused on this issue, unfortunately.
• 30% flat rate tax on dividends. Generally this includes
dividend and short-term cap gain distributions by mutual funds.
A tax treaty with your country of residence may reduce this rate.
• 30% flat rate tax on interest that neither is paid by
a bank nor qualifies as "portfolio interest." A tax
treaty with your country of residence may reduce this rate.
• No personal exemption or deductions can be applied against
investment income (which is, technically, "income not effectively
connected with your US trade or business").
If you are a non-resident for the tax purposes in a given year,
but spend 183 days or more in the country, your capital gains
are also subject to the 30% flat tax. This is a fairly rare but
possible situation.
Note also that money-market mutual funds pay dividends, while
a money-market bank account pays interest, for the purposes of
1040 NR.
Tax treaties are very important. If the individual's country of
residence has an agreement (tax treaty) with the US government,
those rules pretty much supersede the standard rules set by the
Internal Revenue Code. In particular, they often reduce the tax
rate on interest and dividend income.
While you are a non-resident alien, you are supposed to file
Form W-8BEN (it replaces older Forms W-8 and 1001) with each of
your mutual funds or broker every 3 or 4 years, so that they will
automatically withhold tax from your investment income. Since
you have to indicate your country of residence for tax purposes
on this form, the investment income payor will know what tax treaty,
if any, applies. In the spring, the payor will send you a form
1042-S reporting your income, its type, and the tax withheld.
If Forms W-8BEN have been filed and the appropriate tax has been
withheld, you won't need to send any money to the IRS with your
1040 NR in April; in fact, you won't even need to file 1040 NR
at all if you don't have other US-source income. Note also that
as a non-resident you will not be eligible to claim standard deduction,
or to claim married status, or file form 1116 (foreign tax credit).
None of this discussion applies to resident aliens or to US citizens
resident abroad. Once you are considered a bona fide resident
of the U.S., the tax rules that apply to U.S. citizens also apply
to you.
