What is FDAP income? It stands for fixed, determinable, annual and periodical, and refers to certain income nonresident aliens earn in the U.S. This income is subject to a withholding tax of 30%, although certain tax treaties offer a lower rate.
According to the IRS, tax at a 30% or lower treaty rate applies to FDAP income or gains from U.S. sources, but only if they are not effectively connected with your U.S. trade or business. The 30% or lower treaty rate applies to the gross amount of U.S.-source FDAP gains, profits, or income. Deductions and netting are not allowed against FDAP income.
The following items are examples of FDAP income:
- Compensation for personal services (such as commissions and gross proceeds from performances).
- Dividends.
- Interest.
- Original issue discounts.
- Pensions and annuities.
- Alimony.
- Real property income, such as rent, other than gains from the sale of real property.
- Royalties.
- Scholarships and fellowship grants.
- Other grants, prizes and awards.
- A sales commission paid or credited monthly.
- A commission paid for a single transaction.
- The distributable net income of an estate or trust that is FDAP income and must be distributed currently or has been paid or credited during the tax year to a nonresident alien beneficiary.
- A distribution from a partnership that is FDAP income, or such an amount that although not actually distributed is includible 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 prizefights in the United States.
- Prizes awarded to nonresident alien professional golfers in golfing tournaments in the United States.
- Payments to U.S. parties when a nonresident alien entertainer has rights to the performance.
- Gains derived from the sale of real or personal property, including market discount and option premiums but not including original issue discount.
- Items of income excluded from gross income, without regard to the U.S. or foreign status of the owner of the income, such as tax-exempt municipal bond interest and qualified scholarship income.
There can be confusion in defining a resident alien versus a nonresident alien. Also, as seen in the above list, many items are considered FDAP. If you are an alien in the U.S., keep close tabs on your status and maintain records of all your income to work effectively with your tax professional and pay the correct amount of taxes.