5 Top Tax Tips for Foreigners Working in the U.S.
The United States tax system is quite complex and is constantly changing. Most US Citizens have difficulty understanding their tax obligations, and foreign residents living in the United States are left even more confused.
If you are a foreign resident living in the United States, you may be at a loss as to what the IRS expects of you when it comes time to file your US income tax return.
While the laws are constantly evolving, there are some aspects of your US income tax obligations that remain consistent. In this piece, we will take a look at the top 5 most important considerations about your tax liability while you are living in the United States.
1. If you are living and working in the United States as a Nonresident Alien and your income is greater than your personal exemption amount ($3,950 for 2014), you are required to file a US income tax return.
Nonresident Aliens living in the United States and working or conducting business are required to file an annual US income tax return. This applies to all Nonresident Aliens living in the United States as a student through an F Visa, a J Visa, an M Visa or a Q Visa. Not all Nonresident Aliens will meet the residency guidelines which require an individual to file a US income tax return. You are only considered a US Resident if you: A. Have been issued a Green Card, or B. You meet the Substantial Presence Test guidelines, which state you have been in the US for at least 31 days of the current year and you have spent 183 days in the United States out of the preceding 2 year period.
The United States’ tax year is consistent with the calendar year; the taxable year begins on January 1 and ends December 31. Your US income tax return is due on April 15 each year. You must file your return by this date and pay any outstanding tax liability that you have. If you are late paying your taxes, penalties and interest will be assessed. You have the option of either filing your US income tax return electronically or mailing your paper return (Form 1040NR) to the Internal Revenue Service.
2. Before you can file a US income tax return, you must have either a government-issued Social Security Number or an ITIN (Individual Taxpayer Identification Number).
You are required to have a US SSN (Social Security Number) or ITIN in order to file a US income tax return. You must fill out Form W-7, attach it to your Form 1040NR, and send your completed forms to the W-7 Center. You must also include all required documentation with your correspondence. Remember that your documentation must either be original copies or certified copies issued to you by the appropriate agency. If you are the spouse of an active member of the US Military, notarized copies will suffice.
3. You are advised to file a US income tax return even if you don’t have any tax liability. You may have a refund owed to you by the IRS and it’s important that you remain in compliance with all US laws, including US taxes, to remain compliant with your Visa agreement.
You may be under the impression that – because of your low earnings or due to the fact that you haven’t lived in the US long enough to have acquired residency status – you are not required to file a US income tax return. You may be correct, but it also may be in your best interest to file a tax return, anyway. This is because US Employers typically withhold taxes. Even though you aren’t required to file, you may be leaving money in the hands of the US government by not filing a US income tax return as a Nonresident.
Another good reason for Nonresidents to file is that you need to comply with the terms of your US Visa, which mandate that you remain compliant with all US laws. If you want to update the terms of your Visa or you wish to apply for permanent residency, you will be required to prove that you are current with all of your tax obligations.
4. If you are not considered a US Resident, you may be able to save money on your US income tax return by taking advantage of guidelines contained in the treaty between the United States and your home country.
The United States has active tax treaties with a long list of countries. Tax treaties were created to prevent double taxation on income which is generally taxable in two countries. If you are a researcher, student, teacher, or trainee in the United States on a temporary Visa, you are eligible to take advantage of provisions designed to prevent double taxation on your income. If you are considered a US Resident, you are not eligible for tax reduction based on a tax treaty.
If you feel you may be eligible to take advantage of a tax treaty between the United States and your home country, check IRS Publication 901 to see if there is an active tax treaty that could help you save money on your US income tax return. If you need help understanding the terms of a tax treaty, consult the advice of a seasoned US expat tax professional.
5. You may be required to pay Social Security and Medicare taxes. It depends on the type of your visa and your current resident status.
If you are a Non-US Resident on an F-1 Visa, a J-1 Visa, an M-1 Visa, or a Q-1 Visa, you will not be required to pay Medicare (FICA) or Social Security taxes. If you are considered a US Resident or you are on an F-2 Visa or an M-2 Visa, you may be required to pay into the US Medicare and Social Security systems. These are not steadfast rules; there are exceptions, such as a case in which you are a student working at the school at which you attend classes. In this case, you are exempt when it comes to FICA taxes.
You may be required to make contributions into the Social Security program of your home country. If this is the case, you may be able to find relief through a Totalization Agreement between your home country and the United States. Totalization Agreements are designed to stipulate the country to which you owe Social Security taxes when they are required in more than one country. Check the list of Totalization Agreements to see if there is an active agreement between the United States and your home country.