The United States is currently experiencing the largest influx of in-patriates (foreign nationals working in the U.S.) in history. As the laws regarding United States taxation of foreign nationals can be quite complex, this article will answer the most commonly asked questions that an in-patriate may have concerning his/her U.S. tax liability and filing requirements.
The general rule is that all wages earned while working in the United States, regardless of who pays for it or the locations of the employer, is taxable in the United States. This is true whether you are treated as a U.S. resident or not.
The difference in being taxed as a resident versus a nonresident is as follows:
The determination of residency for tax purposes does not bear any relationship to your legal or immigration status. It is quite common for a foreign national to be a nonresident for legal or immigration purposes and yet be a resident for tax purposes.
In addition, being a resident for income tax purposes can be different than being a resident for estate tax or even social security tax purposes.
In some cases, it is actually more beneficial to be treated as a resident than as a nonresident. As a result, it is important to have all of the information we request in order to make the best decision for you.
As a foreign national working in the U.S., you must first determine if you are a “resident” for U.S. income tax purposes. There are two tests to determine whether you are a U.S. tax resident. These two tests are:
If you meet the requirements of either of these two tests, you will be treated as a U.S. tax resident (unless a treaty overrides this).
In its simplest form, this is when you have been issued a green card or alien registration card allowing for permanent residency.
This is a more complicated test that looks at the number of days of physical presence in the U.S. over a three-year period of time. If the number of days of U.S. presence exceeds 183 days in the current year, or 183 equivalent days during a three-year period, you are a resident for U.S. tax purposes. An “equivalent day” is defined as:
In the current year, each partial day counts as one full equivalent day
There are exceptions to the counting of days, but in general, any part of a day counts as a full day.
If you are present in the States for less than 31 days in the current year, the substantial presence test is not applied.
If you are present in the U.S. for fewer than 183 days in the current year AND you maintain a “tax home” in another country during the entire year AND you maintain a closer connection to the foreign country in which you have a tax home, then this test will not apply.
Subject to some limitations, you do not count days in the U.S., for calculating the substantial presence test, while you are here on a J-1 visa (generally for up to two years). This does not exempt the earnings, but just allows you to be treated as a nonresident alien, not a resident alien.
Some countries have treaties with the U.S. which, in some cases, will override either the U.S. Internal Revenue Code or the income tax law of the foreign country.
In general, residency begins on the first physically present day in the U.S. during the year you meet the substantial presence test. There are exceptions for “nominal” days along with the closer connection exception, which can apply here. Remember that residency determines from what point you are taxable on your worldwide income, not when you are taxable.
Likewise, your residency is deemed to end on the last day that you are present in the U.S. within the year that you move from the United States. Problems can arise if you return back to the U.S. within a short period of time.
Sometimes it can be better to be treated as a resident than as a nonresident. There is an election available that allows a foreign national to be taxed as a resident in the initial year of a U.S. assignment even if one of the residency tests is not met for the year. To qualify, you would have to satisfy the following:
The general rules discussed above are based on the IRS Code. The United States has entered into numerous tax treaties with other countries. The purpose of these treaties is to prevent double taxation issues that may arise due to differences in the tax laws of the two countries. It is possible to be considered a resident, subject to tax in both countries. The treaties usually provide for ‘tiebreaker’ rules to override the IRS Code or the foreign home country tax laws. Most treaty provisions require the filing of certain documents, though, in order to take benefit of them.
The first thing you need to do is determine whether your assignment is considered “short-term” within the definition of U.S. law. An individual is treated as being on a short-term assignment in the U.S. if their tax home has not changed from their foreign location. If the intent of the assignment is to return to the original work location within one year, the assignment is considered a temporary assignment. This does not determine whether you are a resident or not. It just determines which types of payments are taxable.
The advantage of a temporary assignment is that the employer-provided benefits such as lodging, meals travel and certain other expenses are not considered taxable wages in the U.S. In this case, a resident or nonresident would not be taxed on these payments. On a long-term assignment (more than 12 months), these are typically taxed in addition to the wages.
It is possible to be taxed in one year as both a resident and a nonresident. If this is the case, a special filing is made on a single tax return, with certain forms required. During the residency period, you would be taxed on worldwide income. During the non-residency period, you would be taxed only on effectively connected income (usually wages earned in the U.S., as noted earlier).
Yes. Please note quite a few of the 50 states of the U.S. do not follow some, or all, of the U.S. federal tax codes or recognize the tax treaties between the U.S. and other countries. So, it is possible, and highly probable, you could be taxable for State purposes but may be exempt for federal.
In addition, other tax filing requirements, including estate and gift taxes, social security taxes, along with other filing forms, may be required regardless of your income tax residency determination.
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