Synopsis: Are you a foreign national with a recently approved visa? If so, you may soon find yourself in a tax nightmare – being both overwhelmed and alarmed at the complexity and compliance requirements you are now subject to under the U.S. income tax system. However, being aware of the information below will arm you with the knowledge necessary to work with your tax accountant in order to ensure you are in compliance with the U.S. tax code and in optimizing your U.S. tax position.
What are the consequences of being unaware of the numerous complex tax rules associated with working as a foreign national in the U.S.? While there are many ramifications, the IRS penalties to foreign nationals are so severe that they could range in the hundreds of thousands of U.S. dollars. Therefore, it is important to work with a knowledgeable international tax accounting firm to report your worldwide income to the U.S. government along with disclosing particular information about all your foreign financial accounts.
Tax Residency Status
The Wolf Group: “If you have obtained a green card, you will be a U.S. tax resident from the first day you enter the country. If you enter the U.S. with a nonimmigrant visa, generally, you may become a U.S. income tax resident under a certain test under the U.S. tax code that is based on the number of days that you are physically present in the United States.
Foreign National: “What is significant about being considered a U.S. tax resident?”
The Wolf Group: “Meeting the criteria of being a U.S. tax resident means that you must report certain information to the U.S. taxing authorities and you must file certain tax forms by specified deadlines so that you are not monetarily penalized for not doing so.
Foreign National: “Are there exceptions to meeting the U.S. resident criteria?”
The Wolf Group: “Yes, if you meet certain criteria, you may be able to qualify for an exception to meeting the U.S. resident tests. Two of these exceptions are the “Closer Connection Exception” and the Income Tax Treaty Tie-Breaker”.
Closer Connection Exception
To meet the “closer connection exception,” you are required to meet certain conditions including the following:
- You have a “tax home” in a foreign country for the current year;
- You have a “closer connection” with the same foreign country than with the United States for the current year;
- You do not have an application for a green card pending at any time in the year, and you have not taken any steps to apply for green card status; and
- You have notified the IRS of qualification for this exception on Form 8840, “Closer Connection Exception Statement for Aliens.”
Income Tax Treaty “Tie-Breaker”
The Wolf Group: “If you become a tax resident of the United States, using the rules mentioned above, and you are also a tax resident of another country that has a tax treaty with the U.S., you may be eligible to be treated as a tax resident of the other country and not the U.S. using the so-called Treaty-Tie Breaker rules.”
The Wolf Group recommends that your tax accountant review your home country’s specific tax treaty with the U.S. as each individual’s tax circumstances are unique. However, generally, one would be treated as a tax resident of only one of the countries in the following circumstances:
(1) Where the taxpayer has a “permanent home” available to him or her;
(2) If permanent homes are available in both countries, where the taxpayer has his or her “center of vital interests” (i.e., where his or her personal and economic relations are closer);
(3) If the taxpayer’s center of vital interests cannot be determined, or if no permanent home is available to the taxpayer in either country, where the taxpayer has “an habitual abode”;
(4) If the taxpayer has an habitual abode in both countries or neither, where the taxpayer is a national (i.e., citizen); and
(5) If the taxpayer is a citizen of both countries or neither, as determined under the treaty’s mutual agreement/competent authority procedure.”
Foreign National: “Which forms must be filed if I want to utilize the Treaty Tie-Breaker rules and/or be in compliance with the U.S. tax code?”
The Wolf Group: “Required tax forms vary for each resident, non-resident and U.S. taxpayer based on their individual circumstances. Please consult with your tax accountant to ensure the proper and complete tax forms that may be required are being filed .
The Wolf Group has assisted hundreds of U.S. nonresidents and residents with their U.S. income tax requirements since 1983. If you are in need of tax return preparation or tax planning services, we would be pleased to assist you. Please contact our office at 703-502-9500 to get started.
This articles in this newsletter is not intended as legal or tax advice, and cannot be relied upon for any purpose without the services of a qualified tax professional.