So you’ve been offered a short-term assignment in the US-congratulations! Now you’re wondering what this means from a tax perspective. Some countries only tax income sourced within their country, others tax their residents. The United States taxes income sourced from within, as well as its citizens & residents on their world wide income. Logically, you can expect US income tax by the US on income earned while you are in the States. But what happens if your assignment puts you in the US long enough for you to be considered a resident?
When I Am I Considered a Resident by the IRS?
The IRS uses two tests to determine residency status of non-citizens: the green card test, and the substantial presence test. Green card holders are generally considered “resident aliens” for US tax purposes, meaning that they will be considered a resident of the US and subject to taxation on their worldwide taxes.
The second test, the substantial presence test, is most applicable to this discussion. This test states that you will be considered a US resident if you were physically present in the US for 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 first year before the current year, and
- 1/6 of the days you were present in the second year before the current year.
This test can get complicated so it’s important to seek tax advice if you have any question as to whether you are considered a resident alien for US tax purposes.
Uh Oh, I’m a Resident. Now What?
If you have been working in the US enough days to satisfy the substantial presence test and be considered a resident alien, you will be subject to the same tax reporting as US citizens. You will be required to report your worldwide income on your annual individual tax return. The good news is that you will be eligible for the Foreign Tax Credit on income that has also been taxed in other countries. Now that you’re considered a resident, you will report your earnings on a Form 1040, 1040A or 1040-EZ on a calendar year basis. As this can differ from the tax period of other countries, you may be required to dig deep to obtain the necessary information on a calendar year basis.
Phew, I’m Not a Resident of the US. Does This Mean I Don’t Have to Pay US Taxes?
Not so fast! Even if you are considered a nonresident alien for US tax purposes, you will still be required to pay taxes on any and all income associated with the US. You will be required to file a US tax return on Form 1040NR if you had US source income greater than your personal exemption ($3,950 in 2014 and $4,000 for 2015). The good news is that you will not need to report any income earned outside the boundaries of the US. Furthermore, you can be eligible for deductions and credits just like residents that will reduce your taxable income.
If you earn an annual salary and worked part year within the US and part of the year outside the US, you will need to prorate your earnings accordingly. Generally this is done by determining your daily salary rate and allocating based on working days. A detailed travel and work schedule will be essential to this process and is difficult to create retroactively so it is recommended to keep these records throughout the year.
My Employer Withholds Taxes. Do I Really Have to File?
Having to deal with taxation in two countries can be frustrating – especially if those countries are utilizing different tax years or methodologies! This can explain why studies show that the large majority of nonresident aliens do not file a return at all, or file it incorrectly. However, filing a tax return can be in your best interest, especially if your employer has been withholding taxes from your paychecks. The important thing to remember here is that:
Just because your employer is withholding tax from your paychecks does not mean that they are withholding the correct amount!
Actually, it’s more likely that the opposite is true. Studies have shown that there is a considerable amount of overpayment of US taxes by nonresident aliens who do not file their return. This means that there is a large amount of money waiting to be claiming by nonresident aliens! Another important factor to consider here is that this money expires three years from the due date of the original return. For example, if you worked in the US and had withholdings against your wages in 2012, you must file your Form 1040NR to claim this overpayment by June 15, 2015.
Still have questions?
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 J.W. Antenucci, “Widespread Noncompliance and Overpayment of Taxes by Foreign Scholars,” Tax Notes, May 13, 1996