For a foreign national legally living in the United States, questions of taxation often meld with things like immigration status and length of stay on U.S. soil.
If you are not an American citizen but live in the U.S., you should adopt a few measures, talk to the right people and do your homework. These initiatives would help you understand your rights and responsibilities and sow the seeds of a good relationship with the Internal Revenue Service – and other government agencies, for that matter.
Know Your Status – Resident or Non-Resident Alien
The IRS uses the substantial presence test to verify whether you should be considered a resident alien for tax purposes. To qualify for the resident alien status, you must be physically present in the U.S. at least 31 days during the current year and 183 days during the last three years. (More on the 183-day limit later.)
Tax authorities also use the green card test to assess your alien status. So if you have a green card – that is, the United States Citizenship and Immigration Services has granted you the privilege to live and work on U.S. soil – you are considered a resident alien, both for tax and immigration purposes.
Note that, for the IRS, you are considered a resident alien if you meet the requirements of either test.
Count the Number of Days You're Present on U.S. Soil
The substantial presence test is a little complicated, so let's take a pause and go through it again. The first requirement, the simpler one, says you must be physically present on U.S. soil for a minimum of 31 days during the current year.
The second requirement is the convoluted one. It says you must be present in the United States for at least 183 days during the previous three years. To meet the 183-day mark:
- You must count all days you were present in the U.S. during the current year
- You must add one third of the days you were on U.S. soil during the year that immediately precedes the current one, and
- You must also add one sixth of the days you were on U.S. territory in the second year prior to the current one.
Let's further elaborate. Say you were physically present in America for 150 days in 2013, 90 days in 2012 and 60 days in 2011. To calculate the number of days you were present on U.S. soil during the last three years:
- Take all the 150 days you spent in 2013
- Add 1/3 of the 90 days you spent in 2012 – that is, 30 days (90 days divided by three)
- Add also 1/6 of the 60 days you spent in 2011 – that is, 10 days (60 days divided by 10)
The total number of days equals 150 plus 30 plus 10, or 190 days. This means you meet the substantial presence test and are considered a resident alien for tax purposes, even though you spent only two and three months in 2011 and 2012 within U.S. borders, respectively.
Know Your Exempt or Non-Exempt Status
You can be exempt from the substantial presence test if you fall under a specific exempt immigrant category or hold what the IRS calls a "closer connection to a foreign country." Note, however, that being exempt does not mean you are excused from paying U.S. taxes; it simply means that, when counting the number of days you spent in America in the previous three years, you should not count days during which you were in an exempt category.
Exempt categories include:
- A foreign government official (think a diplomat, for example) who is temporarily on U.S. soil, as well as members of his or her immediate family
- A teacher or trainee present in America under a "J" or "Q" visa
- A student temporarily present on U.S. territory under a "F," "J," "M" or "Q" visa
- A professional athlete present within U.S. borders to participate in a charitable sports initiative
Besides the exempt categories, there are other ways you can be excepted from adhering to U.S. tax laws. These include having closer connections to a foreign country – for example, you maintain a tax residence beginning on January 1 in a foreign country – and being a student with substantial ties to his or her home country.
Determine Resident Alien Taxes
If you are a green card holder, you are subject to the same tax rules that American citizens follow. When filing your taxes, you must report all of your previous-year earnings on Form 1040, irrespective of the country in which you made that money. U.S. employers generally would send income-verification paperwork, such as W-2s and 1099s, to the IRS, but foreign employers are not required to do so. Therefore, it is your responsibility to fully and accurately report to tax officials the cash you earned overseas. Talk to a tax accountant or fiscal attorney if you have questions about your rights and duties as a resident alien.
Figure Out Non-Resident Alien Taxes
If you are a non-resident alien, immigration-wise, figuring out your taxes is pretty easy. If you don't pass the 183-day mark, you don't have to file an income tax return, subject to certain conditions. If you pass the substantial presence test, you become subject to the same fiscal procedures that resident aliens and American citizens must abide by. But here the key point is that you only declare, and pay taxes on, income that is connected to the U.S. For example, if you have a savings account at a U.S.-based bank and earn, say, $5,000 interest income during the previous 12 months, you must report that revenue when filing your Form 1040NR – or 1040NR-EZ, if eligible.
Ask Questions – Lots of Questions
For American citizens, the Tax Code already constitutes a complicated text, intricate legalese that even the country's best fiscal minds often have difficulty decoding and explaining. So don't worry if you find certain items complex; help is always available. You can contact:
- The IRS
- Your state's department of taxation
- A free or affordable legal clinic in your residence area; call the offices of your state's Attorney General and Tax Commissioner to get more information about legal clinics.
- A community-based affordable or free fiscal preparation group; contact your local IRS office to get more information.
- Your local IRS' appointed Taxpayer Advocate, especially if your issue goes beyond the scope of a typical tax return.
As a resident or nonresident alien living in the United States, you can ease the way you – and the amount of time you spend to – report income, file your taxes and abide by IRS stipulations. To do so, you must know your residency status, apply the substantial presence test, talk to fiscal specialists, and do your homework beforehand.