Advanced Underwriting Consultants

Question of the Day – May 7

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question: My client died, leaving her son as the beneficiary of her IRA.  The son is a Canadian citizen living in Toronto.  What are the tax results?

Answer: The son, as a nonspouse beneficiary of an IRA, has the normal ability to stretch the taxable distributions of the IRA based on his life expectancy.

Any U.S. source income is taxed when paid to foreign persons.  Here’s an excerpt from IRS Publication 515:

In most cases, a foreign person is subject to U.S. tax on its U.S. source income. Most types of U.S. source income received by a foreign person are subject to U.S. tax of 30%. A reduced rate, including exemption, may apply if there is a tax treaty between the foreign person’s country of residence and the United States. The tax is generally withheld (NRA withholding) from the payment made to the foreign person.

It’s up to the IRA custodian to withhold 30% of the taxable IRA distribution.

The Canadian national MAY be able to get back some of the withheld amount by filing a U.S. tax return for the year in which a distribution is received.  The Canadian national may also be liable for Canadian income tax on the distribution.  He should contact a tax professional familiar with multi-jurisdictional tax issues to find out.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.