The United States Government defines an alien as any individual who is not a U.S. citizen or U.S. national. A nonresident alien is an alien who has not passed the green card test or the substantial presence test, which are explained below. This paper will discuss how the system works and what you will need to do to comply with the rules. How the U.S. Tax System Works Generally speaking, when most people talk about taxes in the United States, they are talking about the federal income tax system. Simply stated, it is the portion of an individual s income to which the government is entitled to use pay for public works, government salaries, parks, and other things that benefit the society as a whole. Income tax is determined by the amount of money one makes, or his or her income. The government gets a percentage of the earnings. There are several tax brackets or rates of tax. If you make more money, you will be in a higher tax bracket, and as a result pay a higher percentage of your income in income tax. The amount of money you pay in income tax can be reduced based on credits and deductions. A tax deduction lowers your taxable income, so depending on your tax bracket (or tax rate) you will pay less in taxes. A tax credit on the other hand, lowers your tax bill dollar for dollar it doesn t matter which tax bracket you re in. An alien is defined as any individual who is not a citizen of the United States or a U.S. national. Nonresident and Resident Alien Status An alien is defined as any individual who is not a citizen of the United States or a U.S. national. A nonresident alien is an alien who has not passed the green card test or the substantial presence test. A resident alien is an alien who has passed the green card test or the substantial presence test, which are described below. Substantial Presence Test You will be considered a resident of this country for tax purposes if you meet the test below for the calendar year. To satisfy the requirements of this test, you must be physically present in the United States on at least: 1. 31 days during the current year, and 2. 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting: all the days you were present in the current year, and 1/3 of the days you were present in the first year before the current year, and 1/6 of the days you were present in the second year before the current year.
Page 2/9 Income from sources outside the U.S. that s not effectively connected with a trade or business in the United States is not taxable if you receive it while you are a nonresident alien. The Green Card Test For U.S. federal tax purposes, you are a resident, if you are a Lawful Permanent Resident of the United States at any time during the calendar year. To be a Lawful Permanent Resident of the U.S. at any time, you have been granted the privilege, according to the immigration laws, of residing permanently in the U.S. as an immigrant. Typically, you attain this status if the U.S. Citizenship and Immigration Services (US- CIS) has issued you an alien registration card, Form I-551, commonly called a green card. You continue to have U.S. resident status, under this test, unless: You voluntarily renounce and abandon this status in writing to the USCIS; Your immigrant status is terminated by the USCIS; or Your immigrant status is terminated by a U.S. federal court. If you meet the green card test at anytime during a calendar year, but don t meet the substantial presence test for that year, your residency starting date is the first day on which you are present in this country as a Lawful Permanent Resident, but an alien in this situation may choose to be treated as a resident alien for the entire calendar year. Dual Status Alien The IRS says that a dual status alien has been both a resident alien and a nonresident alien in the same tax year. This has nothing to do with citizenship status just your resident status for tax purposes in the United States. In determining your U.S. income tax liability for a dual-status tax year, there are different rules that apply for the time you are a resident of the U.S. that year, and another set for the time when you are a nonresident. This usually takes place in the years of your arrival and departure. The Part of the Year you are a Resident Alien: in this time period, you are taxed on income from all sources; i.e. tax on your worldwide income. This means any income from sources outside the U.S. is taxable if you received it during the part of the year you were a resident alien. This applies even in cases where you earned the income while you were a nonresident alien or if you became a nonresident alien after receiving it and before the end of the year. For The Part of the Year you are a Nonresident Alien: for that portion of the year you are a nonresident alien, you are taxed only on your income from U.S. sources. Income from sources outside the U.S. that s not effectively connected with a trade or business in the United States is not taxable if you receive it while you are a nonresident alien. Dual Status Alien - First Year Choice If you are a nonresident alien who will become a resident alien under the Substantial Presence Test [see the next section] in the year following this taxable year, you
Page 3/9 If you have dual alien status and are married to a U.S. citizen or to a resident alien, you can chose to file a joint income tax return with your U.S. citizen or resident alien spouse. may elect to be treated as a Dual Status Alien for this taxable year and a Resident Alien for the next taxable year. However, you need to satisfy certain tests. The most common circumstances of dual status includes the following: When you enter the U.S. and receive permanent residency status (Green Card) during the year of arrival; When you enter the U.S. and pass the substantial presence test in the year of arrival; When you enter the U.S. and do not pass the substantial presence test, but qualify for and make the First Year Choice election; When you hold a J, F, M, or Q visa the first part of the year and receive permanent residency status during the year; When you hold a J, F, M or Q visa during part of the year, but later change to an H visa or other status eligible to use the substantial presence test, and pass the test; or When you leave the United States permanently during a year in which you qualify as a tax resident, but only if certain conditions apply. Dual Status Aliens Married to U.S. Citizens or Resident Aliens If you have dual alien status and are married to a U.S. citizen or to a resident alien, you can chose to file a joint income tax return with your U.S. citizen or resident alien spouse. If you chose to do this, you and your spouse will be treated as residents for your entire tax year for the purpose of your federal individual income tax return, as well as for withholding U.S. federal income tax from your wages. However, there are some situations where you may still be treated as a nonresident alien. In addition, you may still be treated as a nonresident alien for the purpose of withholding Social Security and Medicare tax. NOTE: If you file a joint return under this provision, the special instructions and restrictions for dual-status taxpayers do not apply. When does a nonresident alien need to file a U.S. income tax return? The United States Internal Revenue Service (IRS) states that you must file an income tax return if you are any of the following: 1. A nonresident alien who is in or considered to be in a trade or business in the U.S. during the year. You must file even if: Your income did not come from a trade or business conducted in the U.S.;
Page 4/9 If you are a resident alien, you You have no income from U.S. sources; or Your income is exempt from income tax. If your only U.S. source income is wages that are less than the personal exemption amount, however, you are not required to file. 2. A nonresident alien who is not in a trade or business in the U.S., but has U.S. income where there wasn t enough withholding of tax at the source (typically your employer). 3. A representative or agent responsible for filing the return of an individual described in 1 or 2 above; must report all interest, dividends, wages, or other compensation for services, income from rental property or royalties, and other types of income on your U.S. tax return. You are required to report these amounts whether from sources within or outside the U.S. 4. A fiduciary (keeper or administrator) for a nonresident alien estate or trust, or 5. A resident or domestic fiduciary or other person, responsible for the care of the person or property of a nonresident may be required to file an income tax return for that individual and pay the tax. NOTE: If you were a nonresident alien student, teacher, or trainee who was temporarily present in the U.S. on an F, J, M, or Q visa, the IRS says that you are in a trade or business in the United States. You are required to a Form 1040NR (or Form 1040NR-EZ) only if you have income that is subject to tax. This can be income such as wages, tips, scholarship and fellowship grants, or dividends. When does a resident alien need to file a U.S. income tax return? If you are a resident alien, you must report all interest, dividends, wages, or other compensation for services, income from rental property or royalties, and other types of income on your U.S. tax return. You are required to report these amounts whether from sources within or outside the U.S.
Page 5/9 Income Tax Forms Nonresident aliens who file an income tax return must use: (i) Form 1040NR or (ii) Form 1040NR-EZ. Many foreigners who come to the United States and become residents don t realize that they have to pay taxes on income from their home country, such as interest earned from bank accounts. Claiming a Refund or Benefit You must file an income tax return if you want to either: (i) claim a refund of overwithheld or overpaid tax; or (ii) claim the benefit of any deductions or credits. Many foreigners who come to the United States and become residents don t realize that they have to pay taxes on income from their home country, such as interest earned from bank accounts. Paying U.S. taxes on income in your home country. If you are a non-resident alien, you must pay U.S. income tax on just your U.S.- source income. If you are a resident alien, however, you are required pay U.S. income taxes on your worldwide income, just as if you were a U.S. citizen. This is true even if you don t get a Form W-2 Wage and Tax Statement, a Form 1099 (Information Return), or the foreign equivalents. If you have paid taxes in your home country, you can usually avoid double taxation by claiming foreign tax credits on your U.S. return. Nonetheless, you may have a double tax in paying state income taxes, as every state doesn t allow this same credit for foreign taxes. Foreign Bank and Financial Accounts Another important law is that you are required to report any foreign financial accounts; such as, bank or investment accounts on your U.S. tax return. Furthermore, the United States has a law called the Bank Secrecy Act, which says that you need to
Page 6/9 Another important law is that you are required to report any foreign financial accounts; such as, bank or investment accounts on your U.S. tax return. file a Form TD F 90-22.1, a Report of Foreign Bank and Financial Accounts (FBAR), if both of the following apply: You have financial interest in, signature authority, or other authority over any account located in a foreign country, and The aggregate value of all foreign financial accounts is greater than $10,000 at any time during the calendar year. A financial account can include annuities, private pensions, and life insurance policies with cash value. Also, a United States person has a financial interest in a foreign financial account for which: 1. that person is the owner of record or holder of legal title regardless of whether the account is maintained for the benefit of that person or another; or 2. the owner of record or holder of legal title is one of the following: (a) an agent, nominee, attorney, or a person acting in some other capacity on behalf of the United States person with respect to the account; or (b) a corporation in which the United States person owns directly or indirectly either (i) more than 50% of the total value of shares of stock, or (ii) more than 50% of the voting power of all shares of stock; (c) (3) A partnership in which the United States person owns directly or indirectly: (i) an interest in more than 50% of the partnership s profits, or (ii) an interest in more than 50% of the partnership capital; (d) A trust of which the United States person is the trust grantor and has an ownership interest in the trust for U.S. federal tax purposes; (e) A trust in which the United States person has a greater than 50% present beneficial interest in the assets or income of the trust for the calendar year; or (f) Any other entity in which the United States person owns directly or indirectly more than 50% of the voting. For example, if a married couple both deposit their money in the same account but only one spouse signs on the account, the non-signing spouse would still have an FBAR filing obligation because they had a financial interest in the account. A person having signature or other authority over but no financial interest in a foreign financial account may not be required to file an FBAR if they are an officer or employee of a federally-regulated bank or a federally-regulated publicly traded corporation You must file a FBAR. Failure to do so could mean a severe penalty. The IRS states that an individual who must file an FBAR but does not do so, may be subject to a civil
Page 7/9 penalty not to exceed $10,000 per violation. If the IRS finds that there is a reasonable cause for the failure to file a FBAR, and the account balance is properly reported, a penalty will not be imposed. However, if a person willfully fails to report an account or account identifying information may be subject to a civil monetary penalty equal to the greater of $100,000 or 50% of the account balance at the time of the violation. In addition, willful violations may also be subject to criminal penalties. The penalties for failure to file Form 8938 can be quite severe. Failure to file Form 8938 could lead to monetary penalties as high as $50,000 as well as criminal sanctions. Specified Foreign Financial Assets Additionally, you will be required to report interests in specified foreign financial assets on Form 8938 if the value of those assets exceeds certain thresholds. Specified foreign financial assets include: 1. Financial accounts maintained by a foreign financial institution. 2. The following foreign financial assets if they are held for investment and not held in an account maintained by a financial institution: (a) Stock or securities issued by someone that is not a U.S. person, (b) Any interest in a foreign entity, and (c) Any financial instrument or contract that has an issuer or counterparty that is not a U.S. person. The penalties for failure to file Form 8938 can be quite severe. Failure to file Form 8938 could lead to monetary penalties as high as $50,000 as well as criminal sanctions. Other Foreign Reporting Resident aliens are also required to report certain interests in and/or transactions with foreign entities; such as, foreign corporations, foreign partnerships, foreign disregarded entities and foreign trusts. If you have interests in or have conducted transactions with any of these types of entities they will likely need to be disclosed to the U.S. on your income tax return. Penalties for failure to file required disclosures can range from monetary penalties up to $50,000, reduction of available foreign tax credits, and criminal sanctions. Gift and Estate Taxes The IRS describes the estate tax as a tax on your right to transfer property at your death. This tax includes an accounting of all that you own or have certain interests in, as of the date of death. Value is determined by the fair market value of these items, rather than what was paid for them or what
Page 8/9 Gifts of real and tangible personal property located in the U.S. are subject to the U.S. gift tax. the values was when they were acquired. The total of all of these items is the gross estate. This may include cash and securities, real estate, insurance, trusts, annuities, business interests and other assets. Nonresident aliens are subject to estate taxes on the property they own in the United States at their death. Residents and citizens, on the other hand, are subject to estate taxes on all their property regardless of where it is located. Gifts of real and tangible personal property located in the U.S. are subject to the U.S. gift tax. Gifts of intangible U.S. situs property, such as stock, certain deposits and life insurance) and gifts of non-u.s. situs property is not subject to the gift tax. Departing Alien Prior to departing the United States, all aliens (with some exceptions) are required to get a certificate of compliance. You must obtain the certificate of compliance, more commonly called a sailing permit or a departure permit, from the IRS before leaving the country. The permit is issued after you file a Form 1040-C or Form 2063. Even if you have left the United States and filed a Form 1040-C, you still are required to file an annual U.S. income tax return for the year of departure. If you are married and both you and your spouse are required to file, you must each file a separate return, unless one of you is a U.S. citizen or a resident alien. In that situation, the departing alien could file a joint return with his or her spouse. Getting a Sailing or Departure Permit If you have been working in the U.S., you should get the sailing permit from an IRS office close to your employment or from an IRS office in the area of your departure. You should get your sailing or departure permit at least two weeks before your departure, but you aren t allowed to apply any earlier than 30 days before your planned departure date. When applying, be prepared with the papers and documents related to your income and your stay in the U.S. and bring the following records: 1. Your passport and alien registration card or visa. 2. Copies of your U.S. income tax returns for the past two years. If you were in the U.S. less than that, bring the income tax returns you filed for that period. 3. Receipts for income taxes paid on these returns. 4. All receipts, bank records, canceled checks, and other documents that prove your deductions, business expenses, and dependents that you claimed on your returns.
Page 9/9 5. A statement from your employer(s) that shows wages paid and the tax withheld from January 1st of the current year to the date of your departure if you were still an employee. If self-employed, bring a statement of income and expenses up to the date you plan to leave. 6. Proof of estimated tax payments for the past year and this year. 7. Documents showing any gain or loss from the sale of personal property and/ or real property, including capital assets and merchandise. 8. Documents relating to scholarship or fellowship grants including: a. Verification of the grantor, source, and purpose of the grant. b. Copies of the application for, and approval of, the grant. c. A statement of the amount paid, and your obligations under the grant. d. A list of any previous grants. 9. Documents showing that you qualify for any special tax treaty benefits claimed. 10. Document verifying your departure date from the U.S. [an airline ticket]. 11. Document verifying your U.S. taxpayer identification number [social security card or an IRS issued Notice CP 565 showing your individual taxpayer identification number (ITIN)]. If you are married and reside in a community property state, also bring all of these documents for your spouse, even if your spouse doesn t need a permit. This publication does not constitute tax, legal, or other advice from Esquire Group, LLC, which assumes no responsibility with respect to assessing or advising the reader as to tax, legal or other consequences arising from the reader s particular situation. This guide is not intended or written to be used, and it cannot be used by the taxpayer for the purpose of avoiding any penalties that may be imposed by any governmental taxing authority or agency. Persons wishing to invest in U.S. real estate should seek professional tax advice for their particular situation. Expatriation Tax The expatriation tax provisions under Internal Revenue Code (IRC) section 877A applies to United States citizens who have renounced their citizenship and long-term residents who have ended their U.S. resident status for federal tax purposes. The IRC 877A expatriation rules apply to you if any of the following statements are true: Your average annual net income tax for the five years ending before the date of expatriation or termination of residency is more than $157,000 for 2014, which is adjusted for inflation. Your net worth is $2 million or more on the date of your expatriation or termination of residency. You fail to certify on Form 8854 that you have complied with all U.S. federal tax obligations for the five years before your expatriation date of the termination of residency. If any of these rules apply, you are a covered expatriate. It is important to file this form: the IRS may impose a $10,000 penalty if you are required to file and you fail to do so.