Foreign National Tax Basics

New! For answers to common tax questions check out the real-life Q&A posts on our new Global Tax Matters Blog.*

Your U.S. Income Tax Obligation While Living in the U.S. as a Foreign National
Your tax obligation to the U.S. depends on which type of foreign national you are considered to be for tax purposes. For example, resident aliens are required to follow the same rules and fill out the same forms as U.S. citizens. Generally, nonresident aliens who receive wages or business income while in the U.S. are required to file a tax return. Dual-status aliens must file a separate return, cannot claim the standard deduction, and generally cannot claim dependency exemptions.

Sound complicated? It’s not simple, but filing a return is in your own best interests! Studies have shown that most nonresidents either do not file a return, or else they often file incorrectly. It has also been shown that there is massive overpayment of U.S. taxes by nonresidents who do not file, rather than underpayment (J.W. Antenucci, “Widespread Noncompliance and Overpayment of Taxes by Foreign Scholars,” Tax Notes, May 13, 1996). Just because your employer has withheld tax from your wages does not mean that you have paid the proper amount. You may be owed a refund!

For resident aliens, another good reason to file a return is to preserve your visa status. If you do not have a tax liability and choose not to file a return, the IRS will not impose penalties if no tax is due. However, the terms of your visa require you to comply with all laws of the U.S., including the requirement to file an income tax return. You may be required to show proof that you filed if you wish to change your visa status, obtain permanent residency, or regain entry into the U.S. once you have left. Failing to file your taxes (and thereby failing to comply with this requirement) could jeopardize your visa status.

You can find the basic forms for filing your taxes, such as Form 1040NR, on the IRS Web site.

Residency Status
The first thing you must determine in order to file your tax return is whether you are a resident or nonresident for U.S. tax purposes. If you find that you are both a resident and nonresident in the same year, you may be a dual status alien for which special rules apply.

The designation of resident for tax purposes is completely separate from your immigration status. You might qualify as a resident for tax purposes while remaining a nonimmigrant alien for immigration purposes.

Resident Alien
Non-U.S. citizens meeting either the lawful permanent residence (“Green Card”) test or the Substantial Presence test (based on time in-country – known as the 183-day calculation). Special rules apply to foreign government personnel, students, teachers and a few other special occupations. Even if you do not meet either of these tests, you may be able to choose to be treated as a U.S. resident for part of the year. Resident aliens follow the same rules and file the same forms as a U.S. citizen. As a resident alien, you will pay tax on your worldwide income rather than just U.S. source income. If you are an exempt individual (exempt from the Substantial Presence test for determining residency status) you are required to file Form 8843 regardless of the amount of income received. More information on the Green Card test, the Substantial Presence test, and a definition of “exempt individual” are available below.

The Green Card Test
You are a lawful permanent resident of the U.S. if you have been given the privilege, according to the immigration laws, of residing permanently in the U.S. as an immigrant. You generally have this status if the Immigration and Naturalization Service (INS) has issued you an alien registration card, also known as a “green card”.

You are a U.S. resident for tax purposes beginning on the first day you are present in the U.S. as a lawful permanent resident. As a resident taxpayer you must report, for U.S. tax purposes, your worldwide income. You are also eligible to claim all deductions and credits available to U.S. citizens. You can file Form 1040, 1040A or 1040EZ, whichever is applicable to your situation, and if you are married you can file a joint return with your spouse. As a resident taxpayer, you may still be eligible to claim treaty benefits under the U.S. tax treaty with your home country. For more information, visit the IRS Web site page on the Green Card Test.

If you receive permanent residency status during the year, you are automatically a resident for U.S. tax purposes from that point forward. However, you may or may not be considered a resident for U.S. tax purposes for the portion of the year you did not have permanent residency status. That means you might be a dual status alien. See the section above on dual status aliens for more information.

The Substantial Presence Test
To meet the substantial presence test, you must be physically present in the U.S. (during a period you do not hold an F, J, M or Q visa) for at least:

  • 31 days during the current year, and
  • 183 days during the 3-year period that includes the current year and the previous two years, counting:
    …all of the days you were present in the current year, and
    …1/3 of the days you were present in the first preceding year, and
    …1/6 of the days you were present in the second preceding year.

See the IRS Web site page on the Substantial Presence Test for more information.

Nonresident Alien
Non-U.S. citizens not qualifying under the two Resident Alien tests, but with assets in or income earned in the U.S., may have a U.S. income or estate tax filing obligation. A nonresident files a special tax form, pays tax only on U.S. source income, is subject to special rates, and may qualify for treaty exemptions. Students or scholars visiting the U.S. on an F, J, M or Q visa are classified as nonresident for U.S. taxation purposes and are required to file a tax return if they have any income subject to U.S. income tax.

Dual Status Alien
You are a U.S. resident for tax purposes beginning on the first day you are present in the U.S. as a lawful permanent resident. Therefore, if during the first year of your residency you were a nonresident prior to obtaining permanent residency status, you may be classified as a dual-status alien for tax purposes. As a dual-status alien you must file a separate return, cannot claim the standard deduction, and generally cannot claim dependency exemptions. See the IRS Web site page on Dual Status Aliens for more information.

Definition of Exempt Individual
An exempt individual is someone whose days in the U.S. are not counted toward the substantial presence test, not someone who is exempt from tax. If you are an exempt individual, you are a nonresident alien until you are no longer an exempt individual, or until you receive permanent residency status.

Nonresident Spouse Treated as a Resident
If one spouse is a resident for tax purposes at the end of the year, and the other spouse is a nonresident, you can elect to treat both spouses as residents for the entire year. This rule applies even if the spouse who is a resident at the end of the year is a dual-status alien (a nonresident at the beginning of the year). See the IRS Web site page on this topic for more information.

U.S. Estate & Gift Tax
In addition to income tax there are two other taxes that foreign nationals should be aware of: gift taxes and estate taxes.

  • Gift taxes are imposed on all gifts in excess of certain annual limits, regardless of the location of the property given.
  • Estate taxes can be an extremely complex area; a small overview is provided here. The estate tax is a tax imposed at death, at rates up to 55%, on the value of all assets owned by the individual worldwide. An additional and little-known problem can arise if a non-citizen, non-green card holding spouse owns or co-owns real estate located in the United States — for example, a summer home. If such a person moves overseas and dies while out of the United States, the floor for levying U.S. estate tax on a nonresident alien starts at $60,000, rather than at $1,500,000 as for U.S. citizens and resident aliens. If you have a sizable estate or foreign business holdings, a Certified Public Accountant can help you to minimize the effect of these taxes.

U.S. Social Security Taxes
Generally, immigrants will be subject to U.S. Social Security taxes if they work while in the U.S. Blanket exemptions from social security tax are generally available only to those on F, J, M or Q student or faculty visas, and only if the work relates to their teaching or learning program. The exemption extends only to the primary visa holder; children and spouses of the primary visa holder are NOT exempt from social security taxes. Also, persons with E, H and L visas are generally subject to U.S. Social Security taxes. All of these rules are subject to modification under the treaty (if one exists) between the U.S. and the immigrant’s country of citizenship.

Deadlines for Filing Returns
If you worked and earned wages in the U.S., you must file your federal and state tax returns (if required) by April 15 of the following year. If you received only scholarship income, or received no U.S. source income during the year, you must file your federal tax return by June 15 of the following year.

Avoiding Penalty and Interest on Tax Due

Even if you file an extension to October 15th, instead of April 15th,  to file your US Income Tax Return, be aware that interst and underpayment penalty are charged as of April 15th.

Further, the IRS can assess underpayment penalty (and interest) if the tax due is paid by April 15th, but no (or insufficient) estimated tax payments or withholding were made prior to paying the balance due on April 15th.  This is because tax law requires sufficient regular payment or withholding (or combination) to be done through out the tax year in order to avoid ALL underpayment penalties.

Do you have additional questions?

GlobalTaxHelp.com can help you with any additional questions you have about your particular situation. Contact us today for a no-obligation consultation!

*Privacy note: All identifying details in our Q&A entries, including country names, have been changed to protect the privacy of those who have made inquiries to us.  The changes do not affect the validity and relevance of the answers.