About FIRPTA

 

Fixed, Determinable, Annual, or Periodical Income (FDAP)

It is important to test every FIRPTA disposition for FDAP income which is a form of Effectively Connected Income (ECI) and know how to report it to the IRS or suffer an audit well after the transaction has closed and you think you are home free.

 

FDAP is taxable income other than gains from sale of real or personal property and items excludable from gross income (tax exempts, scholarships, etc.) or stock and securities trades through a US broker.

 

Certain kinds of FDAP may be ECI for income purposes but not treated as ECI for withholding purposes!

 

FDAP is taxable income other than gains from sale of real or personal property and items excluded from gross income (tax exempts, scholarships, etc.) or stock and securities trades through a US broker.

The IRS lists the following included in FDAP income items:

  • Compensation for personal services

  • Dividends

  • Interest

  • Original issue discount

  • Pensions and annuities

  • Alimony

  • Real property income, such as rents, other than gains from the sale of real property

  • Royalties

  • Scholarships and fellowship grants

  • Other grants, prizes and awards

  • Sales commission paid or credited monthly

  • Commission paid for a single transaction

  • The distributed net income of an estate or trust that is FDAP income, and that must be distributed currently, or has been paid or credited during the tax year, to a nonresident alien beneficiary

  • Distribution from a partnership that is FDAP income, or such an amount that, although not actually distributed, is included in the gross income of a foreign partner

  • Taxes, mortgage interest, or insurance premiums paid to, or for the account of, a nonresident alien landlord by a tenant under the terms of a lease

  • Prizes awarded to nonresident alien artists for pictures exhibited in the United States

  • Purses paid to nonresident alien boxers for prize fights in the United States

  • Prizes awarded to nonresident alien professional golfers in golfing tournaments in the United States

 

Requirements to File Tax Returns

A.  Who Must File

If you are any of the following, you must file a return:

  1. A nonresident alien individual engaged or considered to be engaged in a trade or business in the United States during the year.

    • This includes selling US real estate property interest(s). However, if your only U.S. source income is wages in an amount less than the personal exemption amount you are not required to file.

  2. A nonresident alien individual who is not engaged in a trade or business in the United States and has U.S. income on which the tax liability was not satisfied by the withholding of tax at the source.

  3. A representative or agent responsible for filing the return of an individual described in (1) or (2),

  4. A fiduciary for a nonresident alien estate or trust, or

  5. A resident or domestic fiduciary, or other person, charged with the care of the person or property of a nonresident individual may be required to file an income tax return for that individual and pay the tax (Refer to Treas. Reg. 1.6012-3(b)).

 

NOTE: If you were a nonresident alien student, teacher, or trainee who was temporarily present in the United States on an "F,""J,""M," or "Q" visa, you are considered engaged in a trade or business in the United States. You must file only if you have income that is subject to tax, such as wages, tips, scholarship and fellowship grants, dividends, etc. 

 

Claiming a Refund or Benefit

You must also file an income tax return if you want to:

  1. Claim a refund of overwithheld or overpaid tax, or

  2. Claim the benefit of any deductions or credits. For example, if you have no U.S. business activities but have income from real property that you choose to treat as effectively connected income, you must timely file a true and accurate return to take any allowable deductions against that income.

B.  Which Income to Report

A nonresident alien's income that is subject to U.S. income tax must generally be divided into two categories:

 

Effectively Connected Income is taxed after allowable deductions. FDAP income generally consists of passive investment income; however, in theory, it could consist of almost any sort of income. FDAP income does not allow deductions to off set it..

C.  Filing Requirements

Nonresident aliens who are required to file an income tax return.

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D.  When and Where To File

If you are an employee or self-employed person and you receive wages or non-employee compensation subject to U.S. income tax withholding, or you have an office or place of business in the United States, you must generally file by the 15th day of the 4th month after your tax year ends. For a person filing using a calendar year this is generally April 15.

f you are not an employee or self-employed person who receives wages or non-employee compensation subject to U.S. income tax withholding, or if you do not have an office or place of business in the United States, you must file by the 15th day of the 6th month after your tax year ends. For a person filing using a calendar year this is generally June 15.

Extension of time to file

If you cannot file your return by the due date, you should request an automatic extension of time to file, which must be filed by the regular due date of the return.

You Could Lose Your Deductions and Credits

To get the benefit of any allowable deductions or credits, you must timely file a true and accurate income tax return. For this purpose, a return is timely if it is filed within 16 months of the due date just discussed. The Internal Revenue Service has the right to deny deductions and credits on tax returns filed more than 16 months after the due dates of the returns.

Ph:  417-862-4710

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