Frequently Asked Questions from Non-US Citizens about US Taxes
Ines Zemelman, EANov-05-2016
Q: Is the status of my residency for tax reasons identical to my status for immigration?
A: These types of residency status are completely separate and may be different. It is possible to be a resident from a tax perspective, but remain an alien from an immigration standpoint. Persons in the United States on temporary visas could be, from a tax perspective, resident aliens, non-resident aliens, non-resident aliens who can choose to be treated as residents for tax reasons, or dual-status aliens.
Q: Will I always be a resident from a tax perspective if I’m a permanent resident from an immigration perspective?
A: Immigration laws consider an immigrant to be a permanent resident when they have been granted the privilege of living permanently within the U.S. Generally, this corresponds to having been issued a green card (which is actually pink) by the US Citizenship and Immigration Services (USCIS). From a tax perspective, permanent residents are considered U.S. residents as of the day they are present within the United States as a permanent resident. So, in the 1st year of residency - assuming they were first a nonresident - they will be considered dual-status aliens for purposes of taxes. Dual-status aliens are not allowed to file jointly, usually can’t claim exemptions for dependents, and are not allowed to claim a standard deduction.
Resident taxpayers are required to report all income worldwide. Once a taxpayer becomes a resident for the full year, they are allowed to claim credits and deductions available to all United States citizens. Full-year residents can file any applicable tax form - 1040EZ, 1040A, or 1040 - and can file joint returns with their spouses if married. The form instructions will explain this in more detail. Even resident taxpayers might be able to claim benefits under any tax treaties with their home country.
Q: Am I considered a nonresident alien or a resident today (2011) if I first came to the U.S. in late 2006 with a student visa (F-1)?
A: F-1 visa students (and family members) are not required to use the test for substantial presence to determine tax residency during the first 5 calendar years they are present within the U.S. If an F-1 student is present within the U.S. for any fraction of the calendar year, the entire year is counted. So, an F-1 student who entered the U.S. in December of 2006 is considered to be a nonresident alien for 2006 through 2010 since they were exempt from using the test for substantial presence. The exemption has ended in 2011 since it is the 6th calendar year they were in the U.S. So, it is necessary to begin using the test for substantial presence to determine residency status for tax purposes. If the conditions of the test for substantial presence are met, a person is considered a United States resident for the calendar year.
The conditions of the test require that a person is physically present within the U.S. for a minimum of:
- 31 days in this year, along with
- 183 days within the three years including this year along with the two previous years, using the counting method of:
- All days present this year, plus
- ⅓ of days present during the immediately preceding year, plus
- ⅙ of days present during the year prior to that.
This math is not hard if this is the 1st year one is not considered exempt. In that case, the substantial presence test is met if one is simply present within the United States for a minimum of 183 days within the calendar year; otherwise, the test is not met.
Q: If I am in the U.S. with a H-1b visa, while my spouse has a H-4 visa, how do I know what my residency is for tax reasons?
A: Only holders of Q, M, J, F, G, or A visas are exempt from having to meet the test for substantial presence. If one meets the test, they are a United States resident for the present year from a tax standpoint, starting with the 1st day they are in the U.S. While one is an “exempt individual” they are not taken to be present.
If the substantial presence test is met, and one has been within the United States with a H-1b visa during the whole calendar year, they are considered a resident for the full year from a tax standpoint. Resident taxpayers must report their worldwide income, but they are also allowed to claim any credits and deductions available to citizens. However, if the Earned Income Credit (EIC) is claimed, the taxpayer and all family members are required to possess Social Security Numbers which enable them to work. They can file any applicable tax form - 1040EZ, 1040A, or 1040 - and can file joint returns with their spouses if married. Even resident taxpayers might be able to claim benefits under any tax treaties with their home country. The form instructions will explain this in more detail.
If the test for substantial presence is failed, then one is considered a nonresident alien except if they qualify for, then choose to make, the special election described below. Nonresident aliens must file tax returns each year if they have income that is subject to United States income taxes. If married, each spouse has to file their return separately - they are not permitted to file joint returns. There are two forms that can be filed - Form 1040NR, U.S. Nonresident Alien Income Tax Return, and for taxpayers who qualify - Form 1040NR-EZ, U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents.
If wages were received that were subject to United States tax withholding, the annual tax return must be submitted by April 15th in the next year. If there were not taxable wages, the tax return must be submitted by June 15th. The form, either 1040NR or 1040NR-EZ, is submitted to the Department of the Treasury, Internal Revenue Service Center, Austin, TX 73301.
In some circumstances, one can elect to be considered a resident alien starting on their arrival date. This is possible if these tests are satisfied:
- They are not a resident alien otherwise in that year,
- They were not considered a resident alien during the immediately prior year (at any point),
- They are considered a resident alien based on the test for substantial presence for the year immediately following,
- They are present within the U.S. during the year of this election for 31 days (consecutive),
- Their presence in the U.S. is at least 75% of the days beginning with the start of the first 31 day period & the end of the year (December 31st).
If you choose to make this election, you are considered a dual-status alien. You are able to claim your spouse as an exemption, which means you can deduct USD 3,650 as of the 2009 tax year. There is also a provision in the regulations that allows any alien who chooses this election to choose the election for their dependent children as well (if they also meet the requirements of the test) [Reg. Sec. 301.7701(b)-4(c)(3)(v)]. To take advantage of these options, the children and the spouse must all have an Individual Taxpayer Identification Number (ITIN). Also, in order to take advantage of this election one must also pass the test for substantial presence for the next calendar year. This means it is necessary to file for an extension of time for filing the tax return. Tax regulations do require tax to be paid by the return due date, as if the filer was a non-resident alien. Dual-status aliens are not allowed to file their return jointly with their spouse, so tax rates will be the rates for married filing separately. Finally, non-US income earned before arrival within the United States is not taxed.
There is another election available. This election, chosen in conjunction with the above election, allows one to be considered a United States resident for tax purposes and file joint returns with their spouse [IRC Sec. 6013(g)]. With this election, one can claim tax benefits for residents and United States citizens, including the applicable standard deduction. The caveat is that worldwide income from the entire year is taxable. If foreign taxes were paid for foreign income, there is a tax credit available to counteract double taxation.
Q: If I won money during a gambling trip to a casino in the U.S., and I am Canadian, can I get a refund of the 30% tax the casino withheld?
A: Generally speaking, gambling winnings (non-business) obtained by nonresident aliens are considered income not connected to a United States business or trade and are subject to a flat tax of 30%. Nonresident returns do not have an allowance for losses from gambling. There are some types of income from gambling received by nonresidents that are tax exempt under the IRS code. These include gambling winnings from big-6 wheel, craps, baccarat, roulette, and blackjack. A new law also has provisions for exemption from taxes for nonresident aliens for dog racing and horse racing winnings.
Also, there are tax treaties which exempt income from gambling for these countries’ residents: Hungary, Lithuania, United Kingdom, Austria, Spain, Czech Republic, South Africa, Ukraine, Luxembourg, Slovak Republic, Italy, Russian Federation, Latvia, Turkey, Sweden, Ireland, Germany, France, Netherlands, Japan, Finland, Denmark, and Tunisia.
For Canadians, there is a provision in Treaty Article XXII (Protocol 3) that allows them to offset gambling winnings by gambling losses when submitting the 1040NR return. So, one must have losses offsetting their winnings in order to recover the withholding. One must also have either a Social Security Number or an ITIN in order to file tax returns. This can be obtained by submitting Form W-7 along with the required documents with the return.
Q: My spouse holds a J-2 visa, and I hold a J-1 visa. Last year we were both employed, and Medicare and Social Security tax were withheld by our employers. Are we eligible to get a refund, and what do we need to do to get it?
A: The Internal Revenue Code Sec. 3121(b)(19) says that work done by nonresident aliens under the visa’s purpose are exempt from Medicare and Social Security taxes if the visa is a Q, M, J, or F visa. This is applicable only to non-resident aliens. After a person passes the test for substantial presence, they are no longer eligible for this exemption. Additionally, family members with “-2” visas are not eligible.
This exemption includes on campus jobs. Jobs off campus can also be exempt, if the work is permitted and noted on Immigration Form I-94, “Arrival-Departure Record”. Off campus employment due to economic necessity and for practical training can also be exempt, if it is noted on Form I-766 or I-688B. If this exemption applies, one should contact their employer, explain that they are exempt under IRC sec. 3121(b)(19), then ask for refunds of Medicare and Social Security tax withheld. Form 843 can be used to apply for a refund from the Internal Revenue Service if one cannot be obtained from the employer.
Q: Can foreign nationals in the U.S. to get an MBA deduct their educational costs?
A: For nonresident aliens, the benefits of the USD 4,000 deduction and education credits are not applicable. But, the costs associated with getting an advanced degree such as an MBA can be deducted as miscellaneous deductions (keeping in mind the 2% threshold), if the degree either:
1. Is required by the employer, but it is not necessary to get employment; or,
2. Improves or maintains skills required in one’s current work, provided they have an established profession.
Supplies and books are also deductible, in addition to the tuition. The Internal Revenue Service is very aggressive when it comes to questioning eligibility for this deduction. The deduction will be denied by the courts if it cannot be proven that one has established a profession. As an example, there was a case where the taxpayer started working after his college graduation as a research analyst. He held this job only during the summer, and returned to college during the fall semester to work toward his MBA. His deduction for the MBA was denied because he did not work long enough to establish himself in the business or trade.
Q: Both myself and my wife are Canadian landed immigrants living in Canada. I commute to the U.S. to work on a daily basis using an H-1b visa. My wife is a homemaker, and dividends and interest are her only source of income. Does Article XXV of the Canadian treaty apply to our situation to help reduce U.S. taxes?
A: It does appear that Article XXV applies directly to your situation. The days in which you commute to the United States do not count toward the test for substantial presence, which means you are a nonresident as far as taxes are concerned. Form 1040NR is the proper form to report United States source income. In general, Article XXV allows one to get the benefits associated with filing joint resident returns, using a particular formula and Form 1040NR.
Q: I originally entered the United States with a F-2 visa as a Chinese resident. Then, I changed to an F-1 visa after admission to grad school and went to Mexico. I am now working at the university as a research assistant part time (20 hours/week). I thought I would be able to claim the USD 5,000 exemption from taxes because of Article 20 in the United States/China treaty; however, I have been told that I needed to have come to the United States using a F-1 visa originally. Which is correct?
A: This question is very common concerning various treaties. The United States/China treaty requires one to enter the U.S. as a Chinese resident, primarily for the purpose of studies, and not only to accompany a visa holder. The IRS does allow one, unofficially, to change status within approximately 60 days after arrival in order to qualify. If the change happened after 60 days, the payroll department at the university probably will not help with the exemption. The exemption can always be claimed when the tax return is submitted, even if the university payroll department doesn’t allow it, although there is a possibility the Internal Revenue Service will disallow the exemption. This could happen even up to 3 years following the filing of the return, even though one may have been given a refund at first.
Q: I am performing research as a postdoctoral student with a J-1 visa in the United States. I hold Russian citizenship. Does Article 18 of the United States/Russian treaty grant full exemption from tax?
A: Article 18 of the Russian treaty grants eligibility for an exemption if one is in the United States for training, study, or conducting research and is a recipient of non-service grants or a “similar payment”. The IRS considers a “similar payment” to be one that has the same features as an allowance or grant; that is, payment is not conditioned on the performance of services. So, Article 18 does not grant an exemption when the compensation was received for work performed. It has been common for Russians to claim this exemption although they are not eligible, and receive the refund, only because the Internal Revenue Service does not have sufficient manpower to audit the returns. Now, however, the IRS is more aware of this. The Internal Revenue Service is able to audit returns and impose penalties and interest on errors for as long as 3 years following the filing date or due date, whichever date is later.
Q: I am visiting the United States with a H-1b visa, and conducting research and teaching at a California university. A treaty between the United States and my country allows me to be exempt from U.S. income tax. But, Medicare and Social Security taxes are being withheld, along with state income taxes, by the university. When I complete my income tax return, will I be able to obtain a refund?
A: Generally speaking, treaty exemptions only apply to one type of tax - federal income. Holders of H-1b visas must pay medicare and social security tax on income - even that which is not considered taxable - for purposes of the federal tax on income. Holders of Q, M, J, and F visas are considered exempt from only the Social Security taxes.
Most states do honor exemptions in federal treaties, but federal law does not require them to. Among the states that don’t honor these exemptions are: Pennsylvania, North Dakota, New Jersey, Mississippi, Maryland, Louisiana, Kentucky, Kansas, Hawaii, Connecticut, California, Arkansas, and Alabama. One living or working in these states will still owe income tax to the state, even though the income is not taxable for federal purposes due to a treaty.
Q: I have heard that if I am in the United States on a H-1b visa, and perform services, I am eligible to deduct travel, lodging, and meals if I work for less than one year. If that is true, does it matter if the company is a U.S. based company? Additionally, if the services are performed for under one year, then the person changes their visa to one for students, can one claim the deductions associated with their time under the H-1b visa?
A: Deductions for travel, lodging, and meals can usually only be claimed if the person has a primary job based somewhere different, and is just on a temporary assignment due to training or remote work. The Internal Revenue Service code states that a person won’t be considered temporarily away if they are away for more than 1 year. There have been many court cases and IRS rulings that have found that non-resident aliens who are working within the United States are eligible to take these deductions if the assignment is not more than 1 year, and they have continuing, regular employment in their home country. Whether the company is foreign based or U.S. based is irrelevant, provided that the person retains permanent employment in their home country. Staying in the United States after employment ends and changing visa status will disqualify one from taking the deductions.