Ask the Experts!
The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers. Here’s the question of the day.
Question: I have a client who is a nonresident alien of the U.S., and she owns a cash value life insurance policy. Is she subject to mandatory income tax withholding if she surrenders the life insurance policy?
Answer: A nonresident alien is generally subject to mandatory income tax withholding on taxable income from U.S. sources. The default withholding rate is 30%. Citizens of certain countries may have different withholding rates based on tax treaties between the United States and the particular country.
The purpose of mandatory withholding is to help ensure that nonresident aliens actually properly pay income taxes due on U.S. source income. If withholding was not required, it would be difficult for the IRS to collect income taxes from someone who is neither a resident nor citizen of the U.S.
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