Welcome to America! You are now taxed on your world-wide income! Or are you not? Did you know that your immigration status and your tax status are two different not related to each other concepts? Many of your clients come to U.S. on a tourist visa, yet they are required to file U.S. resident tax return. The IRS uses two tests — the green card test and the substantial presence test — for assessing your alien status. If you satisfy the requirements of either one, you’re considered a resident alien for income tax purposes; otherwise, you’re treated as a non-resident alien. If you are an alien with a green card, meaning the U.S. Citizenship and Immigration Service allows you to reside in the country legally, you are a resident alien. However, if you don’t have a green card and spend at least 31 days in the U.S. during the current tax year and a total of 183 days during the last three tax years (inclusive of the current tax year), you’ll usually satisfy the physical presence test and are also treated as a resident alien. However, 183 days calculation is not a simple one, it takes into consideration total number of days in a current year and only a fraction of days in the previous two years.
Avoiding being treated as a U.S. tax resident can save you thousands of dollars in tax liability. Non-residents earning income in U.S. pay income taxes but only on the income that’s effectively connected to the U.S., which generally includes the money earned while in the U.S. The IRS, however, has no authority to impose tax on the income that non-residents earn in their home countries or in any foreign country for that matter. Nonresident taxpayers who have US-sourced income often benefit from relief provided under U.S. law and income tax treaties between their home countries and the United States. Tax treaties often have provisions that permit certain types of income to be excluded from U.S. taxation, to avoid double taxation, or that subject the income to lower tax rates. Most international taxpayers required to obtain Individual Taxpayer Identification Number (ITIN) in order to file non-resident tax return. As Certified Acceptance Agents, we are licensed by IRS to help taxpayers not eligible for social security numbers obtain ITIN.
A year of transition between being a nonresident and a resident for tax purposes, you are generally considered a Dual-Status Taxpayer and it get even more confusing at this point. A Dual-Status Taxpayer files two tax returns for the year—one return for the portion of the year when considered a nonresident, and another return for the portion of the year considered a resident. In some situations, a taxpayer can elect to be treated as a full-year resident in the transition year to avoid having to file two separate returns.
Navigating US tax maze is confusing and intimidating, let La Rusa’s international tax experts guide you through the process.