Wiggin and Dana’s Immigration and Citizenship Law and Compliance Practice Group addresses the spectrum of immigration needs of employers and relatives, including immigration law-related areas for compliance. Tax law is one such area. At the start of a new year, we offer a quick refresher on some basic tax considerations related to U.S. immigration status. Of course, it is imperative to contact immigration and tax advisors to ensure compliance in both areas.
For us. Federal For income tax purposes, the Internal Revenue Service (“IRS”) divides individuals into three groups: 1) US citizens, 2) resident aliens, and 3) non-resident aliens. Each group has different rules for US tax payments and filing requirements, and there are different withholding tax requirements for payments to individuals in different groups. The following discussion focuses on US tax considerations for resident aliens or non-resident aliens. Anyone who works in the United States should know who is a tax resident and who is not. In addition, it is possible to be both a resident alien and non-resident alien in the same year, usually the year a person arrives in the United States. These persons have a “dual status” for this year and should contact a tax advisor with this status regarding the requirements involved.
An individual does not have to be a US citizen to be considered a "resident" for US tax purposes. A person who is not a US citizen is a resident alien if that person passes one of two tests: the “Green Card” test or the “Substantial Presence” test. The green card test is met if at any point during the calendar year the individual is granted lawful permanent residency (alien registration, or “green card”) issued by the US citizenship and immigration authorities. Alternatively, a person will pass the Essential Attendance Test for 2021 if that person is physically present in the United States for at least (1) 31 days in 2021 and (2) 183 days during the three-year period that includes 2021, 2020, and 2019. Counting:
All days present in 2021;
1/3 of the days in 2020; and
1/6 of the days in 2019.
Once a person becomes a resident foreigner, all worldwide revenue subject to US taxation. This means that all interest, dividends, wages or other allowances for services, rental income or royalties and other types of income must be reported on US tax returns.
A non-resident alien is a non-US resident who is not a resident alien. There are many different visas available for non-resident aliens residing in the United States. While the specific tax treatment of non-resident aliens generally depends on the individual's visa status, a non-resident alien is usually only subject to US federal income tax on US source income.
A non-resident alien spending time in the United States and receiving US-source income should file tax on Form 1040NR (or 1040NR-EZ, if qualified). A non-resident foreigner must enter an "identification number" in the tax return. If they are not entitled to a social security number, they should apply for an ITIN (Individual Tax Identification Number).
It's also important to consider non-income taxes such as federal unemployment taxes (commonly known as "FUTA") and federal taxes that fund Social Security and Medicare programs in the United States (commonly known as "FICA"). These are taxes that are paid on wages. Only employers are responsible for paying unemployment tax, while taxes for FICA are paid partly by employers and partly by employees. The employee's share of FICA tax is usually withheld from the employee's paycheck.
However, certain non-resident aliens are not subject to FICA tax, and employers of these non-resident aliens are not required to pay either FICA tax or unemployment tax for these individuals. Examples of non-resident aliens who are not subject to these taxes include students, academics, teachers, professors, researchers, and other foreigners temporarily residing in the U.S. at F-1, J-1, M-1, or Q-1 / Q- 2 are present without a migrant background.
In cases where non-resident aliens are required to pay FICA tax, such non-resident aliens should be aware of arrangements known as "totalization agreements" that the US has with a number of other countries to allow for double taxation avoid social security contributions. Such agreements currently exist between the USA and the following countries: Australia, Austria, Belgium, Brazil, Canada, Chile, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Luxembourg, the Netherlands , Norway, Poland, Portugal, Slovak Republic, Slovenia, South Korea, Spain, Sweden, Switzerland, United Kingdom and Uruguay.
Under US law, all US individuals (citizens, green card holders, and residents) must file an annual tax return if their income exceeds a certain amount set by the IRS per year, regardless of where they live or where their income is from. This is due to the United States' relatively unique worldwide tax system which bases taxation on US status and physical presence rather than source of income or general residence. (1)
US taxation on worldwide income can come as a surprise, especially to those colloquially known as "casual Americans". These overseas residents are US nationals and are often unaware of their US citizenship. “Random” citizenship can arise from birth in the United States or from birth abroad to at least one parent who is a US citizen. In many cases, the casual American has only lived briefly or never in the United States. and is also a citizen of a foreign country. Often times, these people only realize they are US citizens if they have a problem, such as: For example, the death of a U.S. citizen's parent triggering an inheritance and estate review, denial of a loan, or receipt of a late tax report from the IRS. Additionally, green card holders who have moved overseas and whose physical green cards may have expired but have not given up or lost their status in the United States may fall into this category.
While the U.S. worldwide tax structure is not new, prior to 2010 the IRS did not generally enforce tax requirements for casual Americans. In 2010, Congress passed the Foreign Account Tax Compliance Act 2010 (FATCA) to enforce existing tax laws. FATCA introduced additional reporting requirements for both individuals and institutions such as banks and called for increased enforcement.
The implementation of FATCA has brought a renewed focus on tax compliance for all US citizens living abroad and holders of a green card, whether they are "random Americans" or their worldwide tax requirements as a citizen / holder of a green Card just aren't aware of it. All persons with permanent US status abroad should be aware of their worldwide tax and reporting obligations. Because tax obligations vary from country to country and can be influenced by tax treaties, residence / citizenship, or other circumstances, tax and immigration advisors should have a thorough understanding of an individual's citizenship (s) and residence in order to fully assess an individual's tax to be able to have responsibilities / requirements.
Employees with L-1 or H-1B visa status
Due to the length of time that some L-1 and H-1B visa holders remain in the U.S., it is possible that they will switch from non-resident aliens to resident aliens (and therefore may need to begin filing Form 1040 tax returns with the IRS ). With the above formulation in mind, it is even possible that an employee with an L-1 or H-1B visa may become taxable in the United States during the first year they spend in the United States. In this case, he will have to file a tax return as a "dual status alien" or, more simply, as a person who is both resident and non-resident for a given year.
Once a person becomes a resident with an L-1 or H-1B visa for US tax purposes, they should check to see if their home country has a tax treaty with the US to avoid double taxation. Some countries require a “Certificate of Residence (Form 6166)” in order to benefit from such contracts. To obtain Form 6166 certification or a US Residency Certification Letter, an individual must complete Form 8802, Application for United States Residency Certification.
Other concepts to consider
In addition to the points discussed above, there are other areas where tax law and immigration law overlap. Tax and immigration advisors can assist in handling these complex areas of law within an individual's specific situation and circumstances. These areas include, but are not limited to, the following: 1) Tax treaties between the United States and other countries that may serve to lower both the withholding tax rate and the actual tax on certain US source income; 2) the "Exit Tax," which applies to US citizens and certain permanent residents wishing to emigrate from the US; and 3) US estate and inheritance taxes, which apply in many countries outside the US.
Tax and immigration laws are complex. Anyone affected by these laws can read IRS Publication 519 US Tax Guide for Aliens and should consult with tax and immigration advisors regarding individual circumstances, including whether or not due to family relationships with the alien, whether due to family ties USA special rules apply to citizens as to whether and how tax treaty benefits apply and what income should be taxed in the USA
(1) As noted above, a “Resident” is anyone who passes the IRS “Essential Presence” test for the calendar year. In addition, the US tax US citizens and green card holders on their worldwide income, even if they have not lived in the US for many years.