Filing tax returns in the US can be time-consuming, burdensome, and complex for anyone, but even more so for foreign nationals with US filing requirements, and particularly in the first year.
In this article (the first of a two-part series), we provide a high-level overview of the filing requirements for those who are not US citizens. In the second article, we’ll dive a little deeper into some of the planning opportunities and additional reporting required for foreign investments and income.
Because the tax laws are so complex, we highly recommend working with a professional, particularly in the first year, although it’s still important for you to understand the basic concepts as well.
When Are You Required to File US Tax Returns?
On a very basic level, if you have US source income as a non-citizen, and don’t live in the US full time, you should file a US non-resident tax return reporting the US source income and pay taxes on it. There are various exclusions and treaty options to avoid taxation, but that’s the basic formula.
Additional complications arise when you are considered a resident for US tax purposes (regardless of your citizenship or immigration status), after which you’ll be required to file US tax returns reporting your worldwide income and paying full taxes thereon (with various exclusions, credits and treaty options to avoid double taxation if you pay taxes to another country concurrently – but that’s a topic for another day).
Whether you are considered a US resident for tax purposes is a relatively straightforward question, as there are two objective tests – the Permanent Resident Test and the Substantial Presence Test.
The Permanent Resident Test is simple: if you hold a Green Card, you have to file US tax returns as a resident, starting with the date you receive it, or the date you enter the US if later.
The Substantial Presence Test is more detailed, and requires some basic math. In essence, it counts your days of physical presence in the US according to a specific formula, and once they exceed 183 days, you’re considered a resident and must file tax returns as a resident based on your worldwide income.
Days Of Presence in The United States
In order to be treated as a resident for tax purposes, a foreign national must be physically present in the US on at least:
31 days during the current year, and
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 prior year, and
○ 1/6 of the days you were present in the second prior year.
If you meet both prongs of the test, you’ll need to file tax returns as a resident.
Here’s an example:
Lina comes to the US on September 1, 2020, then spends 80 days in the US in both 2021 and 2022. Is she considered a resident in 2022?
First prong – yes, she was present in the US for more than 31 days in 2022.
Second prong: her day count is:
80 for 2022 +
(80 / 3 =) 26.67 for 2021 +
(30 + 31 + 30 + 31 – counting all the days from September through December = 122 / 6 =) 20.33 for 2020 =
127 total days
So despite all her travel to the US, Lina will not be considered resident during 2022 under the Substantial Presence Test.
In addition, the IRS goes into further detail as to what (or what does not) constitute being present in the US. Some of these exceptions include days commuting to work in the US from a residence in Canada or Mexico, days you are in the US for less than 24 hours (when in transit between two places outside of the US), and various others.
Exempt Individuals
Finally, as it relates to the Substantial Presence Test, the tax law excludes days of presence for any period in which the foreign national is considered an "exempt individual." Exempt individuals fall into the following categories:
● An individual temporarily present in the US as a foreign government-related individual under an “A” or “G” visa, other than individuals holding “A-3” or “G-5” class visas.
● A teacher or trainee temporarily present in the US under a "J" or "Q" visa, who substantially complies with the requirements of the visa.
● A student temporarily present in the US under an "F," "J," "M," or "Q" visa, who substantially complies with the requirements of the visa.
● A professional athlete temporarily in the US to compete in a charitable sports event.
Returning to the previous example, if Lina had been in the US under a student visa since 2020, the she would be considered to have zero days of presence in the US for purposes of the Substantial Presence Test, even though she’d actually been here 282 total days.
Difference Between Resident, Non-Resident, And Dual-Status
Foreign nationals should be aware of the different filing statuses, as they may pass through each of them at various times. For example, in the example above, Lina would be considered a non-resident, but if in 2020 she’d instead arrived on June 1, she would be considered a part-year resident, and then a full year resident starting in 2021.
Resident
As described above, once a foreign national either obtains a Green Card or passes the Substantial Presence Test, they will be treated as a resident for US tax purposes, regardless of nationality or immigration status (except when they are considered exempt individuals – see above). Once becoming a resident, a foreign national is subject to the same tax rules as US citizens. Thus, they must report their worldwide income on their tax returns, regardless of which country it was earned in.
Non-Resident
If a foreign national fails both the Permanent Residence Test and the Substantial Presence Test, they’ll be considered non-resident for tax purposes. A non-resident must still pay US income taxes, but only on the income that is associated with the US.
It is important to note that the US has about 70 bilateral income tax treaties which allow foreign nationals to either exclude income from US taxation or lower their tax rates. You can find more details here, but the important point is that you should consider working with a professional if you are in this situation to make sure that you are not missing out on opportunities to lower your taxes.
Dual Status
When a foreign national is in transition between being a non-resident and a resident (or vice versa), and is treated as resident for part of the year and non-resident for the other part of the year, their residency is effectively "Dual Status." In this case, the taxpayer must file two different tax returns for these transition years.
Essentially, they would file a non-resident tax return for the part of the year when they were considered a non-resident – reporting only their US source income – and a separate, resident tax return for the part of the year they were considered a resident – reporting their worldwide income for the corresponding period.
Some disadvantages of being a dual-status filer include:
● If married, they must file separately and cannot file jointly
● May not use Head of Household filing status
● Cannot use the standard deduction
● Not normally allowed to claim dependents
Getting An Individual Taxpayer Identification Number
If you need to file any US tax return, you’ll need to obtain an Individual Taxpayer Identification Number (ITIN), unless you have a work permit or are otherwise eligible for a Social Security Number (SSN). Even if you are eligible to obtain a SSN, your spouse and children may not be, in which case you’ll need to file ITIN applications for them.
Below are the steps to obtain an ITIN:
● Prepare your US tax return.
● Complete the ITIN application form, and mail it along with your tax return and passport to a special IRS processing facility. Alternately, you can include copies of the passport certified by your home country embassy or consulate, or you can take your passport, applications and tax return to an IRS service center and have the application processed in person.
● To visit an IRS service center, you should plan to make an appointment in advance. You can find the local service centers here.
● Note that it can take 7+ weeks for the ITIN to be issued, so make sure you don’t have any travel plans scheduled during that period if you’ve mailed in your passport.
How We Can Help
We hope that after reading this article, you have a better understanding of filing US tax returns as a foreign national. However, we understand how complicated this all can be!
Our next article will explore the different tax filing options and opportunities, thus diving deeper into this topic.
If you are a foreign national with a US tax filing obligation and would like to discuss your financial and tax situation, please schedule a call with our team today.
