Disclaimer: The following is for informational purposes only. It is not intended to constitute legal advice, or to recommend a course of action, and does not create an attorney-client relationship between the reader and Renuka Somers, or Somers Tax Law, PLLC.

Here’s a checklist of what to consider:
1. What is the Tax Status of the Beneficiary?

      a. Is the Beneficiary a Nonresident Alien (NRA)?

• • Confirm that they are not a U.S. citizen, Lawful Permanent Resident (Green Card holder), or U.S. tax resident.

      b. Is the Beneficiary a Resident Alien ?

• • Do they satisfy the “Substantial Presence Test” (SPT) for the relevant tax year?
  • IRC 7701(b)(1)(A)(ii).

Have they been physically present in the US for at least:

• 31 days in the current year; and
• 183 days in the 3-year period that includes the current year and the preceding 2 years, counting:
• All the days they were present in the current year; and
• 1/3 of the days they were present in the first preceding year, and
• 1/6 of the days that they were present in the second preceding year?

If the total number of days calculated in this manner is 183 days or more, the Beneficiary would be a U.S. resident for tax purposes in the current tax year.

Even if the SPT is satisfied, the Beneficiary could be treated as an NRA if they were present in in the U.S. for less than 183 days during the current year, and maintained a “tax home” (regular or principal place of business, or regular place of abode) in another country and could demonstrate a “closer connection” to that country during the year, if for example, they:

1. Have been in the U.S. for less than 183 days in the year,
2. Have a closer connection to the other country during that year,
3. Have maintained a “tax home” in the other country throughout the whole year, and
4. Have not taken any steps towards, and do not have an application pending for a change of immigration status (green card).

The IRS considers several factors when reviewing the closer connection test, including the locale of an individual’s:

• Permanent home
• Family
• Personal belongings
• Social, political, cultural, or religious affiliations
• Personal banking activities
• Business activities
• Jurisdiction of their driver’s license
• Jurisdiction in which they vote
• Country of residence designated on forms and documents; and
• IRS forms and documents filed by the individual: Form 1078 (Certificate of Alien Claiming Residence in the United States), Form W-8 (Certificate of Foreign Status) or Form W-9 (Payer’s Request for Taxpayer identification Number).

1. If it is confirmed that the Beneficiary is an NRA, the beneficiary must complete a Form W-8BEN. The Fiduciary may rely on the information disclosed on that Form for 3 years.

2. Is the Beneficiary Receiving an “Income” Distribution?

The distribution to the beneficiary must be of U.S. sourced income (interest, dividends, returns on corpus/principal, or amounts originally received into the estate).

3. Who is Receiving the Payment?

Withholding applies if payment is to be made directly to an NRA Beneficiary.

Withholding does not apply if payment is made to a foreign qualified intermediary (such as a foreign financial institution / organization with a qualified intermediary withholding agreement with the IRS) or authorized federal agent.

4. Withholding Rate:

Confirm if there is a Tax Treaty in effect between the U.S. and the NRA Beneficiary’s country of residence. If so, the Fiduciary can withhold at the applicable rate outlined in the Treaty. Refer to the IRS Tax Treaty Tables for more information.

If not, the default withholding rate is 30%.

5. IRS Filing Obligations:

The Estate must file the following IRS Forms:

1. Form 1042 (Annual Withholding Tax Return for U.S. Source Income of Foreign Persons)
2. Form 1042-T (Annual Summary and Transmittal of Forms 1042-S), and
3. Form 1042-S (Foreign Person’s U.S. Source Income Subject to Withholding) for each applicable tax year to disclose the amount of tax withheld on payments of U.S. source income to foreign persons.

The NRA Beneficiary must file the following IRS Forms to disclose their U.S. sourced income:

1. Form 1040NR(or Form 1040NR-EZ).

They may have additional tax filing obligations in their country of residence.