US Taxes for Foreign Nationals. Substantial Presence Test
A non U.S. citizen's tax obligation to the U.S. is determined by his or her residency status. Resident aliens (ie green card holders) must follow the same filing rules as U.S. citizens, for example. Non-resident aliens (ie foreign citizens with no green card) who earn U.S. income are also required to file a U.S. tax return. Those who possess dual residency will be required to file a special return. Also, dual residents are not eligible for the standard deduction or (usually) exemptions for dependents.
Filing a return is in the best interest of anyone who has earned U.S. dollars, regardless of their status. Many non-residents fail to file because they assume they do not owe. The problem usually lies, however, in overpayment. The amount withheld from the average non-resident's paycheck is normally over the amount that would be due at the end of the year. Failing to file means the loss of a refund.
Resident aliens have an added incentive to file. Visa terms require holders to fully comply with U.S. laws. This includes the obligation of filing a tax return. In order to make changes to your visa terms, visa holders will most likely be required to show proof that they have filed a return. This may prove essential for those who have left U.S. soil and are seeking reentry. Not filing a return could put their U.S. residency status at risk. There is no excuse for not filing, and the IRS website is equipped with all of the necessary forms for all residency situations.
For tax purposes, the difference between resident and nonresident status must be determined. To complicate matters, it is possible for an individual to qualify as both a resident and nonresident in the same year. In this case, the most likely status is dual status alien. Special rules apply for this status. It is important to note that one's immigrant status does not necessarily coincide with his tax relevant status. One might hold the immigration status of alien but still earn and live in the U.S. enough to hold resident status for tax purposes.
Resident aliens are non U.S. citizens who either meet the permanent resident test and obtain a Green Card or pass the Physical Presence test (183 days). For those who do not pass either of these qualifications, there is still a possibility of being treated as a resident for a portion of the year. Residents are treated exactly like citizens for tax purposes except that they will pay tax on worldwide income instead of U.S. income alone. Those who are exempt from the residency tests must file Form 8843. This form applies no matter how much or how little income has been earned.
Green Card Qualifications
If an individual is granted a Green Card by the Immigration and Naturalization Service (INS), he is then considered a permanent resident of the United States. He is not a U.S. citizen, but he is allowed to live in the U.S., permanently, as an immigrant (unless he applies for and is granted U.S. citizenship).
One becomes a resident in regards to tax laws and regulations as soon as he is a lawful permanent resident. Residents must report worldwide income on their U.S. tax returns but are eligible to every deduction and credit available to citizens. Additionally, the forms used by permanent residents are the same as those used by citizens. Being a resident and not a citizen, you may be eligible for benefits from your home country as well (if your country of birth has a tax treaty with the US).
If, at some point during the year, you are granted permanent resident status, you are treated as such, for tax purposes, from that point. The portion of the year in which you did not qualify usually results in a dual residency status.
Substantial Presence Test
In order to pass the requirements of the substantial presence test, an individual must be physically present on U.S. soil for at least:
- 31 days during the current year, and
- 183 days of the past 3-year period, including the current year and the previous two years.
However, all of the days spent on U.S. soil will not count, but will be calculated according to the following:
- All of the days one was present in the current year, plus
- 1/3 of the days one was present the first preceding year, plus
- 1/6 of the days one was present in the second preceding year.
Non resident aliens are those who fail to qualify under both residency standards. However, even non resident aliens may be required to file U.S. taxes and pay estate taxes if they hold assets or earn income in the U.S. A non resident will not file the same forms as residents and citizens, though, and he will only pay tax on his U.S. source earnings. Additionally, special tax rates apply to non residents, and they are often entitled to tax treaty exemptions. Students in the U.S. by Q, M, J or F visas are considered non residents and will be required to file a non resident tax return if they earn wages while in the U.S.
Dual Status Aliens
Dual residency is one of the complicated reasons one should contact an international taxes expert before moving to the U.S. from another country. One is considered a permanent resident for the purpose of taxation on the very first day of his lawful permanent residency status. Unless this happens on the first day of the year, the time period before his lawful permanent residency will earn him the status of dual status alien. Dual status aliens are required to file separate returns. They are not able to claim the standard deduction and are not normally allowed to claim dependents.
An Exempt Individual
An exempt individual is defined as one whose time spent on U.S. soil does not count toward the substantial presence test. An exempt individual isn't exempt from taxation. An exempt individual remains as a non resident alien until such a time as he is no longer exempt, or until he is granted permanent resident status.
Marriage poses an exception to the complication of dual residency. If one spouse has obtained residency status for tax purposes and the other has not, both may file as residents for the year. This generosity even applies to the spouse who would have been considered a dual status alien. In this way, the residency of one spouse covers the non residency of the other, allowing them to file as residents and claim the valuable deductions.
Estate and Gift Taxes
Foreign nationals need also be aware of the complications surrounding estate and gift taxes.
- If a gift exceeds the set yearly limits, it will be taxed regardless of its location.
- Estate taxes are taxes owed upon death. The rate imposed via death tax can be as high as 55%. If one owns property on U.S. soil as a resident alien, but then moves away and dies while away, the levying of estate tax begins at $60,000 (versus $1,500,000 for citizens and residents). To discuss and plan for every known scenario, contact an expert in international taxes and laws.
Under most circumstances, immigrants who work while in the U.S. are required to pay social security tax. Exemptions are available to those in the U.S. by way of faculty or student visas. This exemption is not without exemptions, however, and only applies if the work they are doing is directly related to their teaching/student visas. Also, spouses and children of the visa holder are not exempt from paying social security tax, regardless of their type of employment. All rules are up for alteration if a tax treaty exists between the U.S. and the visa holder's homeland.
Anyone who works and earns in the U.S. is required to file a federal and state return (if their wages are high enough to qualify for the mandate). Returns must be filed by April 15th. Specifically for students in the U.S. on student visas, if they received scholarship money but no other U.S. income, they are required to file by June 15th (the standard two month extension for overseas filing).
Avoiding Penalties and Interest
Extensions are available. If you file an extension, you can push your filing date to October 15th (whether you are overseas of stateside). This should only be done where absolutely necessary, though, as taxes are due on April 15th, regardless of the filing extension, and penalties and interest will accrue from that day. Additionally, because sufficient payments are due throughout the year, penalties may be charged even if taxes are paid by April 15th (if sufficient and regular payments were neglected). Estimated payments are made either through withholding or through estimated payments (or a combination of both).
For questions about your international taxes, and moving to the U.S. from a foreign home, please feel free to contact the professionals at Taxes for Expats for a free consultation.
I.J. Zemelman, EA is the founder of Taxes for Expats