So here's a fun tax question, given the amount of travel this time of year, (particularly those traveling to the U.S. from other countries) how do you account for income tax withholdings for taxes on various kinds of income, including gambling winnings, received by a nonresident alien?
Let's start with this scenario: I'm a Canadian citizen and live in our capital, Ottawa. Last month, I went on my first visit to the United States, a 10-day stay, part of which was in Las Vegas, where I won $20,000 at a casino. To my dismay, I left the casino without all of my winnings, the $20,000 having shrunk to $14,000 after the casino withheld $6,000 for US income taxes.
I contacted the U.S. Embassy in Ottawa. The person with whom I wound up speaking said the way to recover the $6,000 is to contact some agency known as the Internal Revenue Service, which, the staffer assured me, is renowned for its prompt, understandable and helpful responses to inquiries.
According to some of my U.S. friends, that might not always be so, which is why I thought it prudent to get advice from someone like you, who has no connection with the IRS. Should I hire a tax professional to prepare a refund claim? If yes, how do you rate my recovery prospects?
Answer: Unfortunately, less than zero. With your scenario, you get nothing back. As someone from outside of the U.S. who briefly vacations here, you come under a special set of tax rules for a nonresident alien â an individual who is neither a US citizen nor an alien who resides in the United States.
IRS regulations specify how much to withhold for income taxes on various kinds of income, including gambling winnings, received by a nonresident alien. Generally, those regulations require a casino, such as the one you visited, to withhold at a rate of 30 percent of your winnings.
There's a limited exception to this requirement, but it provides no relief for you. For the regulations to be superseded and the exception to apply, the US-Canada income tax treaty has to permit withholding of income taxes at a less-than-30-percent rate or, as might be the case, no withholding at all, that is, a complete exemption from taxes. Nowhere does that treaty authorize an exception to the usual rule that compels 30 percent withholding by a US casino on the full amount of gambling winnings received by a Canadian.
My advice would also not differ had you suffered any gambling losses during your visit to the U.S. According to IRS guidelines: âYou must report the full amount of your winnings. You cannot offset losses against winnings and report the difference.â Result: No recovery of the $6,000, even if your losses are sufficient to offset your winnings of $20,000.
As it happens, there's a different, more favorable, set of rules for someone who is a US citizen or an alien who resides in the United States. Those rules similarly tax gambling winnings. However, gambling losses are deductible up to the amount of winnings, a relief provision that, as I explained, is unavailable to someone like you.
Understandably, odds are that you are unlikely to appreciate the appropriateness of that distinction. Moreover, you might even be inclined to view the rules for foreign tourists as an example of governmental rapacity on the part of the United States.
About the author:
Julian Block writes and practices law in Larchmont, New York, and was formerly with the IRS as a special agent (criminal investigator) and an attorney. More on this topic is available from âJulian Block's Year Round Tax Strategies,â available at julianblocktaxexpert.com.