In a Nutshell - Introduction to U.S. Tax Residency for Non-U.S. Nationals
For foreign journalists holding citizenship or nationals of a country other than the United States, navigating U.S. immigration laws and regulations are only a warm-up compared to the challenge of complying with U.S. tax rules and regulations.
Those who seek to work, do business, or study in the U.S. are inevitably faced with the task of navigating federal, state, and local U.S. taxes and will eventually be acquainted with the common American saying coined by Benjamin Franklin, “in this world nothing can said to be certain, except death and taxes.”
On this topic, the first and foremost question that must be answered by foreign citizens and nationals is the determination of residency for tax purposes. With the exception of legal permanent residents, immigration status does not clearly correspond between immigration status (e.g. visa type) and tax residency.
The reason this question is so important is that whether an individual is a tax resident determines their mandatory filing requirements, which type and source of income are subject to U.S. income tax, and the deductions available to them.
Most countries have “territorial” income tax systems and the first shock that comes to many non-U.S. nationals is the concept of “worldwide taxation,” meaning if an individual or entity qualifies as a U.S. tax resident, their income from all sources, whichever (or from wherever) source derived, will be subject to U.S. income tax. This concept has broad implications on international tax issues.
Foreign citizens and nationals are broadly subjected to two tests in determining whether they are residents for U.S. income tax purposes: (1) the “lawful permanent resident test” and (2) the “substantial presence test.”
The lawful permanent resident test applies to an individual with legal permanent resident status, colloquially known as a “green card holder”. In essence, as long as the individual’s permanent residency status is active, they fall under the same tax treatment as U.S. citizens. Therefore, they are taxed on their worldwide income regardless of their physical presence or immigration status in foreign jurisdictions.
The substantial presence test applies to those foreign nationals who – regardless of their visa status, intent, or purpose of their presence – are physically present in the U.S. for a specific length of time, typically over 183 days in any given calendar year.
Substantial presence is also triggered under the following conditions: (1) the non-U.S. national is present in any U.S. state or territory for at least 31 days during the calendar year, and (2) the sum of days in the U.S. in the current year, plus 1/3rd of the days present in the prior year, plus 1-6th of the days present in the previous year exceeds 183 days. With rules such as that, it is no surprise that the term “accidental American” is used to describe those individuals who inadvertently trigger U.S. tax residency during the course of their travels in and out of the U.S.
There are even more specific rules and exemptions pertaining to the taxation of non-U.S. nationals employed by foreign governments, not-for-profit organizations, and educational institutions. These rules should always be interpreted on a case-by-case basis and their application should often be guided by tax professionals (in some cases legal experts) of both the individual’s home country and the U.S.
Certain individuals may be exempted from the substantial presence test, provided they are able to prove a “closer connection to a foreign country,” and establish that their permanent tax home is outside of the U.S. However, this facts-and-circumstances determination is typically a weak position if all other conditions for U.S. tax residency are met.
Your tax situation may be especially challenging in the year that you move to or from the U.S., and it is highly advisable to seek advice in both the U.S. and your home country before you move or change the status to help prevent any tax surprises in either country.
It is also important to remember that tax reporting requirements do not always equate to tax liability, as the U.S. has income tax treaties with almost every country in the world in order to circumvent “double taxation”. However, any failure to report U.S. sourced income could be detrimental to efforts to obtain favorable immigration status and it is likely that a clean tax record will be a pivotal requirement under future immigration reform.
* Barnabas Benyovszky is a Certified Public Accountant with extensive experience providing individual and business tax consulting both in the United States and abroad. He operates his tax practice in Grand Rapids, Michigan. Visit www.digitalcpas.net to learn more! Members of the Association of Foreign Press Correspondents (AFC-USA) can request a free consultation with Barnabas Benyovszky. To place your request, email us.