Most of what you read about taxes assumes you're a U.S. citizen. But what if you're a non-U.S. resident? That tends to raise questions. For instance, can a non-resident alien open an IRA? Can a non-U.S. citizen open a brokerage account and trade U.S. stocks? How can you find the best account type for non-U.S. residents? And how does the withholding tax on U.S. stocks work if you aren't a U.S. citizen?
If you're a non-resident alien wanting to trade U.S. stocks in a brokerage account, this article is for you.
In a brokerage firm, most accounts fall into one of three overly broad categories: retirement, domestic, or foreign. Resident aliens and permanent residents (green card holders) follow the same tax laws as U.S. citizens, so they fall under domestic reporting. Retirement accounts include IRAs, 401(k)s, and many others. And foreign accounts are held by non-resident aliens.
U.S. Dividend Income
As a non-resident alien, you are subject to Chapter 3 withholding. When investing in a U.S. security, any dividend income received is subject to withholding by your broker at the time of payment. You may not have a year-end tax bill due, since the withholding is remitted to the IRS on your behalf when the income is deposited into your account. The statutory tax rate is 30%. Certain countries have entered into a treaty with the U.S. that may qualify you for a reduced rate if you are eligible and have claimed the exemption on an IRS Form W-8BEN. To learn more about tax treaties, explore the tax treaty tables section available on the IRS website.
Non-U.S. Dividend Income
Dividend income received from non-U.S. securities may already have the country of incorporation's tax deducted before the income is received. The net amount is distributed to your account; additional U.S. withholding is not applicable.
In response to concerns that non-U.S. investors could avoid dividend withholding by purchasing certain equity-linked instruments, the U.S. Congress enacted a new withholding regime titled Section 871m that impacts equity-linked derivatives which give rise to a “dividend equivalent payment.” This will primarily affect options for those with TD Ameritrade brokerage accounts. Although no income payment is actually received, the “dividend equivalent payment” is considered deemed income and is subject to withholding. The withholding is performed at your current dividend rate and is treaty eligible. Your broker will remit the withholding to the IRS on your behalf.
Tax Reporting and Form 1042-S
As a non-U.S. investor, you will be issued a Form 1042-S by mid-March for the preceding tax year on any reportable activity. Any U.S. withholding that occurred, along with the income it is attributed to, will be reported on Form 1042-S. This form is available online and is also mailed to your current mailing address on record. Additionally, the form is sent to the U.S. IRS, which then delivers the form to the tax authority of your country of residence. Typically, no U.S. tax filing is necessary; however, you may be required to report certain income earnings to your country.
Non-U.S. investors with brokerage accounts are required to provide their brokerage firm with a complete and valid IRS Form W-8BEN to certify their tax status. This form expires three calendar years after the signature date, unless material account information changes, causing the form to become invalid prematurely. Without a valid W-8BEN on file, Internal Revenue Code Section 3406(a)(1)(B) will require TD Ameritrade to begin federal backup withholding at a rate of 24% on all taxable dividends, interest, sales proceeds (including those from options transactions), and other reportable distributions credited to your account. Typically, notifications are sent before your W-8BEN expires to remind you that new paperwork is needed.
The U.S. stock market is one of the pillars of our country’s economic system, and U.S. citizenship is not a requirement to trade U.S. securities; however, it's important to identify the different forms and policies that apply to non-U.S. taxpayers.
TD Ameritrade does not provide tax advice. We suggest you consult with a tax-planning professional with regard to your personal circumstances.
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