Do I have to pay 30% tax on distributions from my retirement account even if I'm not a US Citizen?
Let's say you are not an American citizen or Green Card holder, and you are not living in America, but you have a US-based retirement account thanks to past employment with an American company. You've probably been told that you're subject to a mandatory 30% withholding tax when taking a distribution from your account.
Actually, there is a way you claim some, or all, of this withholding back.
The IRS would classify you as a nonresident alien. And it is true that in most cases, you will be subject to a mandatory 30% withholding when taking withdrawals of any amount from these accounts. But the story doesn't end there. Just because the brokerage will impose a mandatory withholding of 30% does not mean your actual tax liability is 30% of the withdrawal amount.
If you make a withdrawal from your US-based retirement account and the brokerage withholds 30%, you will likely need to file IRS Form 1040-NR (Nonresident Alien Income Tax Return) in order to claim any relevant deductions or exclusions that may reduce your actual tax liability. Filed properly, that can generate a refund from the US tax authorities.
Depending on the nation of your primary residence or habitual abode for the tax year, you may also be able to claim a treaty position on IRS Form 1040-NR in order to further reduce—or, in some cases, completely eliminate—your tax liability.
Please keep in mind that if you need to file Form 1040-NR, you will need a Untied States tax identification number. If you previously held a Green Card, then you would have been issued a US Social Security number, which you can use for this purpose.
If you never had a Green Card, you will need to complete Form W-7 (Application for IRS Individual Taxpayer Identification Number) in order to obtain the Individual Taxpayer Identification Number (ITIN) required to file a US federal income tax return. This application can be completed and submitted together with a signed copy of the final Form 1040-NR return.
If this strategy is new to you, don't worry, we can help you reclaim past taxes as well. If you have taken distributions from US retirement accounts at any point within the last three years and any amount was withheld, you can still complete and submit a nonresident return in order to potentially claim a portion or all of the withholding back.
However, time is of the essence, as it becomes considerably more difficult, or even impossible, to claim a refund from the IRS after three years have gone by. If you want to get past taxes back, and to avoid some or all of your liability this year, please contact us.