Questions Frequently Asked
Most nonresident aliens are subject to Social Security and Medicare tax on their wages, just like residents are, even though they might not spend enough time working in the U.S. to be able to claim the benefits. The employee portion (one half) of Social Security and Medicare tax is 7.65% of the employee's wage, which is withheld by the employer (the employer also pays 7.65%).
However, there is a special exemption in the Internal Revenue Code for F, J, M and Q visa holders who file nonresident returns. Many small business employers (and even large business employers) are not aware of this exemption, so be sure you don't pay this tax if you qualify for the exemption. Tell your employer you are exempt from Social Security and Medicare tax under Section 3121(b)(19) of the Code. Your employer can also get a refund of it's share of the tax. If your employer will not grant a refund, we can help.
The IRS offers an alternative option to get a refund, but only after you attempt to get a refund through your employer. Read about it at this page on IRS.gov. It's best if you can convince your employer to send you the refund, because the refund process through the IRS often takes months, or even years (no kidding). If you would like us to prepare the paperwork, which includes following up on the filing with the IRS, our fee is $150 up front for this. Please use our questionnaire to submit a quote request at our Free Quote Request page.
An ITIN is a number issued by the IRS to an individual who does not qualify for a Social Security number, but who is required to file a US tax return, or be claimed as a dependent on a US tax return. You and any dependents claimed on your tax return must have either a Social Security number or an ITIN, or your tax return will not be accepted by the IRS. (Of course, some forms are accepted even if you don't have an ITIN, like the ITIN application form (Form W-7) and the tax return you must file with the ITIN application form attached.)
You might need an ITIN if you do not qualify for a Social Security number and are one of the following:
- A nonresident alien who is required to file US tax return,
- A U.S. resident alien who is required to file a US tax return,
- A dependent or spouse of a U.S. citizen or resident alien,
- A dependent or spouse of a nonresident alien visa holder, or
- A nonresident alien claiming a tax treaty benefit.
ITINs are issued regardless of immigration status. In fact, even an undocumented alien who earns income is required to file a tax return and can obtain an ITIN, as long as proper identification documents are submitted. To read more about ITINs, go to Individual Taxpayer Identification Numbers (ITINs) on our Foreign National Tax Guide page.
This must be determined on a case-by-case basis. It will be necessary to take into account all factors affecting the choice, so the lowest combined federal and state tax burden can be achieved. In some cases, there might be legal issues that make the foreign earned income exclusion a risky choice. Even when there is no question of availability, the foreign earned income exclusion might limit the availability of a child tax credit, making the foreign tax credit a better choice. On the other hand, the foreign earned income exclusion will usually reduce any state tax liability, while the foreign tax credit generally does not. We measure all combinations of the foreign earned income exclusion and the foreign tax credit, and present to you the optimized result.
Unfortunately, the United States requires its citizens to report worldwide income. Therefore, the filing requirements are the same regardless of where you live in the world. For 2018, the standard deduction for a single person is $12,000, and $24,000 for married couples filing jointly. If your income is greater than these amounts, you are required to file a US tax return. Although the foreign earned income exclusion and the foreign tax credit are available to expats to reduce or eliminate double taxation, you must file a tax return to claim these benefits. Under certain circumstances, you are required to report your foreign bank and investment accounts. If you have investments or business activities outside the U.S., you may be required to file any or all of the following: FBAR Form 114, Form 3520/Form 3520-A, Form 8938, Form 8621 and Form 5471. Substantial penalties could apply for failure to file these forms. For a review of all of these forms, see our Expat Tax Guide.
This is a great place to start. We would be happy to work with you. Your days will be sunnier and sleep will be sounder when you're not dreading an IRS notice. Some good reasons to become fully compliant might be to:
- avoid additional interest and penalties,
- claim a refund (maybe you don't realize you are due one),
- protect social security benefits if you are self-employed,
- avoid delays or denials in obtaining loans, or
- avoid issues in obtaining a green card or future entry visa.
We would begin with a conversation with you (over the phone, Skype or Hangouts), and would ask about a few things, like:
- When did you last file?
- Where have you lived since last filing?
- Are you a foreign national, and what is your residency status?
- Do you think you owe past taxes?
- Have you received notices from the IRS?
- Do you have the ability to pay back taxes?
Perhaps you are not sure about the answers to some of these questions, so we could help you order a transcript from the IRS showing tax years filed, payments due and notices sent (like these). This information will help us determine whether you might be eligible for a delinquent filing program that the IRS currently has in place. For example, if you are an expat who has not filed, you might be a good fit for the Foreign Offshore Streamlined Procedures. Whatever your situation, we will work with you to gather past year information, prepare your returns and determine tax or refunds due. We will work with the IRS to mitigate penalties, if possible, and help you with payment plans.
Great question, and it sometimes depends on the state. Some states you depart are cool with letting go. Other states are, shall we say, clingy. If you remain a resident of a state, you have the obligation to file a state tax return. Most states in the United States define residency based on a person's "domicile." Domicile, in general, is the place you intend to be your permanent home and to which you intend to eventually return.
Andrew Mitchel wrote a good article on this topic a few years ago. He says that you can only have one domicile at a time. Once you acquire a domicile, you retain that domicile until another is acquired. A change of domicile requires: 1) abandonment of a prior domicile, 2) physically moving to and residing in the new locality, and 3) intent to remain in the new locality permanently or indefinitely. If you move to a new location but intend to stay there for only a limited period of time, your domicile does not change.
Some states say that you remain their resident until you establish residency in another state. However, if you never intend to live in that state or any other state, but will permanently reside outside the United States, that test is not valid. Other states provide exceptions for treating you as a resident, even if you retain your domicile in that state. For example, California allows (with certain exceptions) you to be treated as a nonresident of California if you are located outside California under an employment related contract that lasts at least 546 days.
Connecticut, on the other hand, has two alternative tests that allow you to be treated as a nonresident even though you are domiciled in Connecticut. To meet the requirements of the first test, you must:
- not maintain a permanent place of abode in Connecticut for the entire year,
- maintain a permanent place of abode outside of Connecticut for the entire year, and
- not spend more than 30 days in Connecticut during the year.
To meet the requirements of the second test, you must:
- be in a foreign country for at least 450 days during any period of 548 consecutive days, and
- during this period, not spend more than 90 days in Connecticut (or have a spouse or minor children that spend more than 90 days in Connecticut).
As you can see, state rules are not consistent, so it's important to review the rules for the state in which you are, or were, domiciled.
If you are a nonresident of the U.S. filing a nonresident return, this is not a problem. However, if you are a resident of the U.S. this is a big problem. Actually, foreign mutual funds are probably the worst thing you can possibly own from a tax perspective.
Foreign mutual funds are considered "passive foreign investment companies" (PFICs), and are subject to a very punitive tax regime in the U.S. Our Expat Tax Guide gives you a rundown of the basic rules under Form 8621:Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund.
First, read Your Undisclosed Foreign Financial Accounts: Coming Clean Could Be Much Easier Than You Think. As the article says, doing this might not mean financial disaster. The article is based on this IRS page: Options Available For U.S. Taxpayers with Undisclosed Foreign Financial Assets. Then, just contact us. After learning your situation, we will lay out your options and potential risks of penalties.
You are a lawful permanent resident if you have been given the privilege, according to the immigration laws, of residing permanently in the United States as an immigrant. You generally have this status if the US Citizenship and Immigration Services (USCIS) has issued an alien registration card to you, also known as a green card (although it is pink). You are a U.S. resident for tax purposes beginning on the first day you are present in the U.S. as a lawful permanent resident. Therefore, for the first year of your residency, if you were a nonresident prior to obtaining permanent residency status, you will be classified as a dual-status alien for tax purposes. As a dual-status alien you must file a return separate from your spouse and cannot claim the standard deduction.
As a resident taxpayer you must report, for U.S. tax purposes, your worldwide income. You are also eligible to claim the deductions and credits available to U.S. citizens once you are a full-year resident. If you are married you can file a joint return with your spouse. As a resident taxpayer, you still might be eligible to claim treaty benefits under the U.S. tax treaty with your home country.
Generally, if you did not pass either the substantial presence test or the green card test (see U.S. Tax Guide under Determining Your Residency Status) you are a nonresident and can only file a nonresident return, unless you qualify for one or both of the following special elections.
First Election: There is a special election [IRC Sec. 7701(b)(4)] to be treated as a resident alien from your arrival date if you satisfy the following tests -
- You are not otherwise a resident alien for the year,
- You were not a resident alien at any time in the immediately preceding year,
- You are a resident alien under the substantial presence test for the immediately following year (the year after your arrival),
- You are present in the United States during the election year for a period of 31 consecutive days,
- Your days of U.S. presence are 75% or more of the total days between the beginning of the earliest 31-day consecutive U.S. day period and December 31.
If you make the election, you will be a dual-status alien and can file a dual status return. Furthermore, the regulations include an extremely liberal rule that permits an alien who makes the election to make an election as well on behalf of dependent children who themselves satisfy the tests [Reg. Sec. 301.7701(b)-4(c)(3)(v)]. You must, however, have ITINs for your children to claim them. Also, to make the election, you must pass the substantial presence test during the following calendar year, which means we will have to file an automatic extension for the time to file your return. The regulations require you to pay tax by the original due date of the return as if you were a non-resident alien. As a dual-status alien, you cannot file a joint return with your spouse, so the tax rates are those for a married taxpayer filing a separate return. Additionally, you are not subject to U.S. tax on any non-U.S. source income earned prior to your arrival in the U.S.
Second Election: A further election is available, when combined with the first election, to file a joint resident return with your spouse and be treated as a U.S. resident for the entire year [IRC Sec. 6013(g)]. Under this election, you can claim the standard deduction and other tax benefits available to U.S. citizens and residents, but you and your spouse are subject to tax on your worldwide income for the entire calendar year. In order to eliminate double taxation, the foreign tax credit is generally available to claim against foreign taxes paid on foreign source income.
Generally, non-business gambling winnings received by a nonresident alien are treated as income not effectively connected with a U.S. trade or business and are taxed at a flat rate of 30%. There is generally no allowance for gambling losses on the nonresident return. Certain types of gambling income received by a nonresident are exempt from taxation under the Internal Revenue Code. They include winnings from blackjack, baccarat, craps, roulette, and big-6 wheel. A recent law also exempts certain horse-racing and dog-racing gambling winnings from the income of nonresident aliens.
Additionally, some tax treaties exempt gambling income for residents of the following countries: Austria, Czech Republic, Denmark, Finland, France, Germany, Hungary, Ireland, Italy, Japan, Latvia, Lithuania, Luxembourg, Netherlands, Russian Federation, Slovak Republic, South Africa, Spain, Sweden, Tunisia, Turkey, Ukraine, and the United Kingdom.
For Canadians, a special provision under Treaty Article XXII (Protocol 3) allows you to offset your gambling winnings with gambling losses on Form 1040NR. Therefore, you can only claim a refund if you have losses to offset your winnings. If you do not have a U.S. social security number, you must obtain an Individual Taxpayer Identification Number (ITIN) to file a tax return. This is applied for by filing Form W-7 and the required supporting documents with your non-resident return.
Under IRC Sec. 3121(b)(19), services performed by a nonresident alien visiting the U.S. as an F, J, M or Q visa holder, which are carried out for the purpose of the visa, are not subject to social security or Medicare tax. Note that you must be a non-resident alien. Once you have passed the substantial presence test you no longer qualify for the exemption. Also, family members on "-2" visas do not qualify for the exemption. Therefore, you are eligible for a refund but your spouse is not.
On-campus employment qualifies for this exemption. Off-campus employment that is permitted for a student, and is so noted on the student's copy of Immigration Form I-94, "Arrival-Departure Record," is also exempt. Off-campus work performed by students due to severe economic necessity or for optional practical training, as noted on INS Form I-688B or Form I-766 is also exempt. If you qualify for this exemption, you should contact your employer and tell them that you are exempt from social security and Medicare tax under IRC sec. 3121(b)(19), and ask for a refund. If the employer will not grant a refund we can apply for one from the IRS. Form 843 is used for this purpose and must be filled out correctly to successfully claim a refund. See U.S. Tax Guide under Social Security Tax and Employer Withholding.
First, if you are a nonresident alien, the education credits and the special $4,000 education deduction available to residents are not available to you. However, prior to 2018, the costs of obtaining an MBA (or other advanced degree) were deductible as miscellaneous itemized deductions (subject to the 2%-of-AGI floor) if the MBA either 1) maintains or improves skills needed in your present work, as long as you have established a profession, or 2) meets the express requirements of your employer, but is not required to obtain employment. Not only was the tuition deductible, but also books and supplies. The IRS is aggressive in questioning this deduction, and the courts will deny the deduction if you cannot demonstrate an established profession. In one case, the taxpayer began employment as a market research analyst after graduation from college. He worked at this for the summer, but in the fall returned to school for his MBA. He was not allowed to deduct the cost of his MBA, since he had not established himself in a trade or business. Ross Lawrence Link (1988) 90 TC 460, aff'd by unpublished order (CA6, 2-1-89). For years after 2017 (until 2026) this deduction is repealed.
It appears that you are a prime candidate for Canadian treaty Article XXV. Your days commuting to the U.S. are not counted toward the substantial presence test, so you remain a nonresident for tax purposes and must use Form 1040NR to report your U.S. source income. Article XXV essentially allows you to claim the benefits of filing a joint resident return, through a special formula, on Form 1040NR.
This is a question that often comes up with respect to various treaties. According to the U.S./China treaty, you must come to the United States as a resident of China, for the primary purpose of being a student, not to simply accompany a primary visa holder. Unofficially, the IRS allows you to change your status within about 60 days of arrival to qualify for the exemption. If your change took place later than that your payroll department will probably not cooperate in granting the exemption. You can always claim the exemption on your tax return, even if payroll does not allow it, but there is the danger that the IRS will also disallow it. This might occur up to three years after you file your return, even if you have been granted a refund initially.
Treaty exemptions generally apply only to federal income tax. As an H1-b visa holder, you are required to pay social security and Medicare tax on the income that is not taxable for federal income tax purposes. Only F, J, M and Q visa holders are exempt from social security tax. Regarding state income tax, most states honor federal treaty exemptions, but they are not required to by federal law, and some do not. Those that do not (that we are aware of) are: 1) Alabama, 2) Arkansas, 3) California, 4) Connecticut, 5) Hawaii, 6) Kansas, 7) Kentucky, 8) Louisiana, 9) Maryland, 10) Mississippi, 11) New Jersey, 12) North Dakota, and 13) Pennsylvania. If you live or work in one of these states, you will owe state income tax even though your income is exempt from federal income tax by a treaty.
For an in-depth article on your US tax filing requirements, see Form 1040NR, Form 1120 and Form 5472: A U.S. Tax Guide for Non-U.S. Residents with a Single Member LLC.
Here's a short explanation.
Generally: If you are performing any personal service in the United States or any other activity within the United States that is regular, substantial, and continuous enough to constitute the conduct of a trade or business under the general standards of the Internal Revenue Code, you are considered to be conducting business in the United States. If this is the case, income from sources within the United States is considered effectively connected with your trade or business and is taxed at graduated rates (IRC Section 864(c)(3)). Income from sources without the United States is treated as effectively connected to your US business only if you have an office or other fixed place of business within the United States (IRC Section 864(c)(4)).
If you do not visit the United States and do not have assets or employees in the United States, you are not engaged in business in the United States. Forming an LLC for the purpose of engaging in business with U.S. customers from your home country does not change this result, if there is still no physical activity in the United States. Even if you accept payments into a U.S. bank account, this is still only an incidental U.S. activity, and does not indicate you are engaging in a U.S. trade or business. (Comm. v. Piedras Negras Broadcasting Co., 127 F.2d 260 (5th Cir. 1942)). This means that you do not have a U.S. tax return filing obligation.
However, the formation of an LLC and the receipt of payments will likely alert the IRS of your activities, and it might ask for a tax return to show you have no tax obligation. So filing a tax return might be necessary only to demonstrate that you are not required to file. (Yes, I know.) Also, you will probably need to file an annual registration form with the state of formation, and a fee to the state might apply.
Treaty Exemption: Tax treaties between the United States and other countries generally take precedence over the statutory rules. Under Article 7 of the U.S. Model Income Tax Convention, "the profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein." In other words, if Article 7 is part of the treaty between your home country and the United States, your business is exempt from U.S. taxation unless you have a "permanent establishment" in the United States. Here's a link to check the business provision in the treaty between the U.S. and your home country: Tax Treaties. Therefore, If a treaty exclusion applies, even if you are not actually engaged in business in the U.S., it might be expeditious to simply claim the treaty exemption on your U.S. nonresident tax return rather than trying to make the argument that you are not required to file.
Form 5472 Requirement: For most tax purposes a single member LLC is a disregarded entity, so a nonresident alien who owns an LLC is not required to file separate tax returns. The LLC activity is reported on Schedule C or E, attached to your individual nonresident return. However, beginning in 2017, Form 5472 must also be filed.
Generally, when a U.S. formed corporation has reportable transactions, and at least one direct or indirect foreign (U.S. nonresident) shareholder at any time during the year owning 25% or more of the stock, Form 5472 is required to be filed. Under regulations effective beginning in 2017, a U.S. disregarded entity (LLC) wholly owned by a foreign person is treated as a U.S. corporation separate from its owners for the limited purpose of this reporting requirement.
Reportable transactions include wages, commissions, loans, and other transactions between the corporation to the 25% owner. A separate form must be filed for each 25% foreign shareholder. The fact that all income and expenses flow to you and are reported on your individual return means you are deemed to have reportable transactions. A $10,000 penalty applies for failure to file this form if required, or for filing an incomplete form.
This form is required to be filed separately from you Form 1040NR, attached to Form 1120.
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