Our world has become a global economy, not only are US citizens moving abroad for work and adventure, but many foreigners are traveling to the US to work. Many of these foreigners are not looking for the “American Dream” as so many in the past had, but instead are only in the country temporarily on assignment from their companies. For those who are not looking to head up the citizenship path and become US citizens or permanent residents (Green Card holders), there are some things that should be considered when dealing with US expat taxes.
Qualifying for Resident Status
Depending upon how much time you have spent in the US during the calendar year will determine which tax forms you will need to fill out and how your expat taxes will be calculated. It’s important to properly document your time in the US, either through flight records or through visa/passport records.
Ideally you would want to be considered a resident for tax purposes, as this gives you an easier filing and better tax benefits; but being a non-resident has it’s perks too.
Residents file a regular 1040 tax return and report all their worldwide income. They can take the standard deductions and exemptions to help lower their income.
A resident is determined by using the Substantial Presence Test. If you were present in the US for at least 31 days during the tax year you are filing for and 183 days during the current year and preceding 2 years. Counting up the days next gets a bit complicated because you can only count a percentage for previous years.
Here’s how to calculate the days for the Substantial Presence Test:
- Count all the days you were present in the current tax year
- Add to that 1/3rd of the days you were present in the prior year
- Add to that total 1/6th of the days you were present in the year prior to that
Confused? Here is an example:
- You were in the US in 2015 for 40 days- count all the days
- In 2014 you were in the US for 60 days- count 20 days (1/3 of 60 days)
- In 2013 you were in the US for 180 days- count 30 days for 2013 (1/6 of 180 days)
- This would equal 90 days
- In this situation, you would not be considered a resident of the US and would have to file a US non-resident return
Filing Requirements for Non-Residents
Most non-residents living and working in the US need to file a US tax return, even if your income is from outside the US. All the income earned while living in the US is taxable, although tax treaties with your home country and foreign tax credits may help to alleviate double taxation on your income. There are some exceptions to filing expat taxes, including having a low enough income to fall below the filing threshold for the year.
What Should Be Included on Your Tax Return
Residents need to include all their income on their tax return, both from US sources and worldwide source. This includes income that is not taxable to your home country, as many of the US tax laws do not comply with those of foreign countries. It’s possible that a tax treaty or the foreign tax credit will help to alleviate any double taxation that may occur on your income.
Non-residents would include any income that is either “effectively connected” with a trade or business in the US (such as a salary or income from a small business or partnership), or US based income that is Fixed, Determinable, Annual, or Periodic also known as “FDAP” income (such as an annuity, dividends, interest, etc.).
Here are a few tax guidelines to follow:
- Effectively connected income is taxed at a graduated rate, where the more you earn, the higher your tax rate
- Effectively connected income issometimes taxed at a lower rate when there are tax treaties involved
- FDAP income is taxed at a flat 30% tax rate for which no deductions can be used to reduce it
- FDAP income coming from brokerage or investment houses usually have the 30% tax withheld before the payment is made to the taxpayer, check with your investment advisor to be sure
The Foreigners Living in the US Tax Guide has additional information, for residents and non-residents, on top tax tips to save money with the credits, exclusions and deductions available.
Necessary Identification Numbers
As a foreigner living in the US, you most likely will not qualify for a Social Security Number. A Social Security Number is a number assigned to all US citizens and permanent residents which identifies that individual to the US government for the purposes of governmental benefits, tax filings, and other needs.
A non-US person instead can apply for an IRS Individual Taxpayer Identification Number (ITIN). This number is personal and cannot be exchanged with another person. An ITIN is necessary for all individuals identified on the tax return, including the main taxpayer, spouse, and all dependents. If any of the individuals have a Social Security Number, use that instead as they are not eligible for an ITIN.
To apply for an ITIN, you need to fill out a form W-7 and submit it to the IRS along with appropriate identification such as a passport or governmental ID. If you are living in the US when you apply for an ITIN, you can go to an IRS ITIN acceptance agent to process the form for you. If you are living outside the US when you apply for the ITIN, you may need to mail your forms and ID to the IRS. Note: Some US embassies and consulates have an IRS office that can process the ITIN paperwork.
The ITIN Form W-7 needs to be submitted with your first tax return with the IRS. Once you have been assigned an ITIN, you will not need to reapply – continue to use the same number on subsequent tax returns.
States and Cities Have Taxes Too
Not only will you have to consider your federal taxes paid to the IRS, but depending upon where you live, you may also need to pay the state and city taxes too. The only states without income tax are Alaska, Florida, Nevada, South Dakota, Texas, Washington (not Washington DC), and Wyoming. Tennessee does have income tax, but only on dividends and capital gains. Most states with income tax generally follow the IRS tax format, but all have some adjustments as to what income is taxable and what deductions are allowed. Some cities, such as New York City, also have separately calculated income tax filings.
It’s important to research your tax liabilities when planning your move (or stay) to the US and geographically where you will live makes a difference. Sometimes it’s only a matter of a few miles that separate you from paying hundreds of dollars more in tax to a city or school district.
Still Have Questions?
We are here to help! Our expert accountants help many foreigners living in the US file their expat taxes. Contact us today for more information.