NRA and withholding taxes

Self Self

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Jan 31, 2012, 4:52:48 PM1/31/12

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I thought the U.S.' 30% withholding tax is only on dividends. But I
noticed that my U.S. broker is withholding on ST capital gains as
well. And they tell me they will withhold 30% on LTCG and interest as
well.

I am aware that there is a new rule about withholding; but I thought
it doesn't go into effect until 1/1/2013. Any insight would be
appreciated.

Also, the "financial institution" can avoid the withholding if they
sign some kind of agreement with the IRS. But I am not clear about
the definition of "financial institution". Is it the broker in this
case?

And does anyone know whether the IRS has published a list of FFIs who
have "Chapter 4" agreement with them?

TIA

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Alan

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Feb 1, 2012, 1:54:57 PM2/1/12

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On 1/31/12 2:52 PM, Self Self wrote:
> I thought the U.S.' 30% withholding tax is only on dividends. But I
> noticed that my U.S. broker is withholding on ST capital gains as
> well. And they tell me they will withhold 30% on LTCG and interest as
> well.

STCG from mutual funds will have withholding. LTCG should not have
withholding. Bank interest has no withholding. Portfolio interest has no
withholding. The definition of portfolio interest confuses many brokers
as not all bond interest is portfolio interest. Interest from a money
market bank account has no withholding. Interest from a money market
mutual fund is categorized as a dividend and has withholding.

Rather than getting into the definition of portfolio interest, you can
find a pretty good definition in IRS Pub 519 on page 16.

>
> I am aware that there is a new rule about withholding; but I thought
> it doesn't go into effect until 1/1/2013. Any insight would be
> appreciated.

I'm not aware of changes to Sec. 1441 of the Code but see below.

>
> Also, the "financial institution" can avoid the withholding if they
> sign some kind of agreement with the IRS. But I am not clear about
> the definition of "financial institution". Is it the broker in this
> case?
>
> And does anyone know whether the IRS has published a list of FFIs who
> have "Chapter 4" agreement with them?

FFIs are Foreign Financial Institutions. There are new reporting
requirements and withholding requirements. The reference to Chapter 4
is to the new Code sections 1471 to 1474 that make up Chapter 4 of the
Internal Revenue Code. You're asking about a US broker, so I don't see
the relevance of FFIs.
>
> TIA
>

--
Alan
http://taxtopics.net

removep...@yahoo.com

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Feb 1, 2012, 4:48:20 PM2/1/12

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On Feb 1, 10:54 am, Alan <tempu...@vacationmail.com> wrote:

> > I thought the U.S.' 30% withholding tax is only on dividends. But I
> > noticed that my U.S. broker is withholding on ST capital gains as
> > well. And they tell me they will withhold 30% on LTCG and interest as
> > well.
>
> STCG from mutual funds will have withholding. LTCG should not have
> withholding. Bank interest has no withholding. Portfolio interest has no
> withholding. The definition of portfolio interest confuses many brokers
> as not all bond interest is portfolio interest. Interest from a money
> market bank account has no withholding. Interest from a money market
> mutual fund is categorized as a dividend and has withholding.
>
> Rather than getting into the definition of portfolio interest, you can
> find a pretty good definition in IRS Pub 519 on page 16.

This definition of portfolio interest makes no sense to me. Are US
Treasury bond interest considered portfolio interest according to pub
519 page 16? Is bank interest tax free according because it is
portfolio interest or because of another rule? Is interest from a
corporate bond portfolio interest -- looks like no because "Portfolio
interest. U.S. source interest income that is not connected with a
U.S. trade or business and ..."? What about interest from munis,
include private activity bond interest?

Alan

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Feb 1, 2012, 7:49:40 PM2/1/12

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On 2/1/12 2:48 PM, removep...@yahoo.com wrote:
> On Feb 1, 10:54 am, Alan<tempu...@vacationmail.com> wrote:
>
>>> I thought the U.S.' 30% withholding tax is only on dividends. But I
>>> noticed that my U.S. broker is withholding on ST capital gains as
>>> well. And they tell me they will withhold 30% on LTCG and interest as
>>> well.
>>
>> STCG from mutual funds will have withholding. LTCG should not have
>> withholding. Bank interest has no withholding. Portfolio interest has no
>> withholding. The definition of portfolio interest confuses many brokers
>> as not all bond interest is portfolio interest. Interest from a money
>> market bank account has no withholding. Interest from a money market
>> mutual fund is categorized as a dividend and has withholding.
>>
>> Rather than getting into the definition of portfolio interest, you can
>> find a pretty good definition in IRS Pub 519 on page 16.
>
> This definition of portfolio interest makes no sense to me. Are US
> Treasury bond interest considered portfolio interest according to pub
> 519 page 16? Is bank interest tax free according because it is
> portfolio interest or because of another rule? Is interest from a
> corporate bond portfolio interest -- looks like no because "Portfolio
> interest. U.S. source interest income that is not connected with a
> U.S. trade or business and ..."? What about interest from munis,
> include private activity bond interest?
>

Now you know why financial institutions screw up the withholding on NRAs.

You start with the underlying rule that interest is FDAP (Fixed or
Determinable Annual or Periodical) income and it is taxable and subject
to withholding unless there is an exception buried in the Code
somewhere. Bank and credit union accounts throwing off interest are a
specific exception in the code. Not portfolio interest.

The simplest way that I have found to explain portfolio interest is to
say if the bonds are bearer bonds (not registered) they are subject to
withholding unless the bonds were specifically targeted to the foreign
market and meet some other rules. If the bonds are registered and you as
the owner file your W-8BEN with the payor or agent, it is portfolio
interest and not subject to withholding. If the bonds are registered and
were targeted to the foreign market they will be considered portfolio
interest even if you don't file the W-8BEN. The above includes bonds
issued by state and local and federal government.

The bonds have to have been issued after 7/18/84.

There are a few exceptions. E.g. a 10% owner.

--
Alan
http://taxtopics.net

Self Self

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Feb 1, 2012, 11:23:10 PM2/1/12

to

On Feb 1, 1:54 pm, Alan <tempu...@vacationmail.com> wrote:
> On 1/31/12 2:52 PM, Self Self wrote:
>
> > I thought the U.S.' 30% withholding tax is only on dividends. But I
> > noticed that my U.S. broker is withholding on ST capital gains as
> > well. And they tell me they will withhold 30% on LTCG and interest as
> > well.
>
> STCG from mutual funds will have withholding. LTCG should not have
> withholding. Bank interest has no withholding. Portfolio interest has no
> withholding. The definition of portfolio interest confuses many brokers
> as not all bond interest is portfolio interest. Interest from a money
> market bank account has no withholding. Interest from a money market
> mutual fund is categorized as a dividend and has withholding.

I thought Capital gains is exempt from withholdings. So why the STCG
distributions is subject to withholdings?
[The previous brokerage, some years back, did not withhold on STCG
distributions.]

> Rather than getting into the definition of portfolio interest, you can
> find a pretty good definition in IRS Pub 519 on page 16.
>
>
> > I am aware that there is a new rule about withholding; but I thought
> > it doesn't go into effect until 1/1/2013. Any insight would be
> > appreciated.
>
> I'm not aware of changes to Sec. 1441 of the Code but see below.

I was confused. I was thinking of the Foreign Account Tax Compliance
Act of 2009 ("FATCA") [that you referenced below] that applies to
payments made to either foreign financial OR non-financial entity
where there might be U.S. owners -- in which case there will be
withholdings on interest, dividends and sales proceeds -- unless those
entities enter into an agreement with IRS. Those provisions do NOT
apply to NRAs.

So, I don't understand why this brokerage firm is telling me that they
will withhold on interest, etc.

> > Also, the "financial institution" can avoid the withholding if they
> > sign some kind of agreement with the IRS. But I am not clear about
> > the definition of "financial institution". Is it the broker in this
> > case?
>
> > And does anyone know whether the IRS has published a list of FFIs who
> > have "Chapter 4" agreement with them?
>
> FFIs are Foreign Financial Institutions. There are new reporting
> requirements and withholding requirements. The reference to Chapter 4
> is to the new Code sections 1471 to 1474 that make up Chapter 4 of the
> Internal Revenue Code. You're asking about a US broker, so I don't see
> the relevance of FFIs.
>
>
> > TIA
>
> --

> Alanhttp://taxtopics.net

Alan

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Feb 1, 2012, 11:38:08 PM2/1/12

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Did you give them a W-8BEN? If you did.... they should not be
withholding on the items I mentioned.

--
Alan

Self Self

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Feb 2, 2012, 8:24:08 AM2/2/12

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Yes. I guess I have to go back to them.

Thanks, Alan.

removep...@yahoo.com

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Feb 2, 2012, 5:22:28 PM2/2/12

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On Feb 1, 4:49 pm, Alan <tempu...@vacationmail.com> wrote:

> interest even if you don't file the W-8BEN. The above includes bonds
> issued by state and local and federal government.
>
> The bonds have to have been issued after 7/18/84.
>
> There are a few exceptions. E.g. a 10% owner.

How can you be a 10% owner of state or local or federal government?

Self Self

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Feb 2, 2012, 10:05:06 PM2/2/12

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How about distributions from MLPs? They are technically not
dividends.

TIA

Stuart A. Bronstein

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Feb 3, 2012, 2:40:10 PM2/3/12

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Self Self <m8r.j...@gmail.com> wrote:

> How about distributions from MLPs? They are technically not
> dividends.

The MLP should specify what kind of distribution you are getting. It
could be capital gain, return of capital, interest etc., depending on
what it is on the MLP books.

___
Stu
http://DownToEarthLawyer.com

Seth

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Feb 4, 2012, 10:10:23 PM2/4/12

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In article <428af43e-5bbf-45d2...@y10g2000vbn.googlegroups.com>,

removep...@yahoo.com <removep...@yahoo.com> wrote:
>On Feb 1, 4:49 pm, Alan <tempu...@vacationmail.com> wrote:

>> There are a few exceptions. E.g. a 10% owner.
>
>How can you be a 10% owner of state or local or federal government?

Legally or effectively?

Seth

Alan

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Feb 5, 2012, 4:39:41 PM2/5/12

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On 2/2/12 3:22 PM, removep...@yahoo.com wrote:
> On Feb 1, 4:49 pm, Alan<tempu...@vacationmail.com> wrote:
>
>> interest even if you don't file the W-8BEN. The above includes bonds
>> issued by state and local and federal government.
>>
>> The bonds have to have been issued after 7/18/84.
>>
>> There are a few exceptions. E.g. a 10% owner.
>
> How can you be a 10% owner of state or local or federal government?
>

Corporate bonds.

--
Alan
http://taxtopics.net

removep...@yahoo.com

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Feb 6, 2012, 11:43:48 AM2/6/12

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On Feb 5, 1:39 pm, Alan <tempu...@vacationmail.com> wrote:

> >> interest even if you don't file the W-8BEN. The above includes bonds
> >> issued by state and local and federal government.
>
> >> The bonds have to have been issued after 7/18/84.
>
> >> There are a few exceptions. E.g. a 10% owner.
>
> > How can you be a 10% owner of state or local or federal government?
>
> Corporate bonds.

Here's my confusion. The quote from publication 519 says

BEGIN QUOTE http://www.irs.gov/publications/p519/ch03.html

Portfolio interest. U.S. source interest income that is not

connected with a U.S. trade or business and that is portfolio interest
on obligations issued after July 18, 1984, is excluded from income.
Portfolio interest is interest (including original issue discount)
that is paid on obligations:

END QUOTE

>From this I gather that corporate bond interest is excluded from
income because it is connected with a US trade or business. That
leaves on US bonds, muni bonds. And no-one can be a 10% shareholder
of the government (in theory at least), so the paragraph later does
not make sense.

BEGIN QUOTE

Portfolio interest does not include the following types of interest.

* Interest you receive on an obligation issued by a corporation of
which you
* own, directly or indirectly, 10% or more of the total voting power
of all classes
* of voting stock.

END QUOTE

ira smilovitz

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Feb 6, 2012, 1:08:32 PM2/6/12

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On Monday, February 6, 2012 11:43:48 AM UTC-5, removep...@yahoo.com wrote:
> On Feb 5, 1:39 pm, Alan <tempu...@vacationmail.com> wrote:
>
> > >> interest even if you don't file the W-8BEN. The above includes bonds
> > >> issued by state and local and federal government.
> >
> > >> The bonds have to have been issued after 7/18/84.
> >
> > >> There are a few exceptions. E.g. a 10% owner.
> >
> > > How can you be a 10% owner of state or local or federal government?
> >
> > Corporate bonds.
>
> Here's my confusion. The quote from publication 519 says
>
> BEGIN QUOTE http://www.irs.gov/publications/p519/ch03.html
>
> Portfolio interest. U.S. source interest income that is not
> connected with a U.S. trade or business and that is portfolio interest
> on obligations issued after July 18, 1984, is excluded from income.
> Portfolio interest is interest (including original issue discount)
> that is paid on obligations:
>
> END QUOTE
>
> >From this I gather that corporate bond interest is excluded from
> income because it is connected with a US trade or business. That
> leaves on US bonds, muni bonds. And no-one can be a 10% shareholder
> of the government (in theory at least), so the paragraph later does
> not make sense.

"Connected with a US trade or business" refers to the taxpayer's trade or business, not that the bond is issued by a US corporation.

Ira Smilovitz
Leonia, NJ