Foreign National Tax | Living in the US
Whether you’ve recently arrived in the US or have been living in the US for many years, if you are originally from another country, then the US tax system can be especially challenging.
Often, we’re asked if foreign nationals living in the US need to file US tax returns and report assets held outside the US. The answer is almost always yes.
However, to figure out how you will be taxed, what forms to file, and what reporting you must do, you must first determine whether you are a US tax resident or nonresident.
Who is a US tax resident?
US tax residents include US citizens, US lawful permanent residents (green card holders), and people who meet the Substantial Presence Test.
Generally, if you move to the United States, you will become a US tax resident because you will pass the Substantial Presence Test. This test of residency is based on how many days you are physically present in the US over the most recent three years (see the graphic below).
Only a very small percentage of foreign nationals can live in the US without becoming a US tax resident. These individuals typically include G-4 visa holders and people on diplomatic visas.
Anyone who does not meet the tests for tax residency is considered a nonresident alien. However, nonresidents can sometimes make special elections, such as 6013(g) and 6013(h) elections, to be treated as full-year tax residents.
Are you considered a US tax resident?
Substantial Presence Test Formula
- Were you in the US for at least 31 days in the current tax year?
If yes, continue. If no, you don’t meet the Substantial Presence Test
- Determine your days of presence in the US over the past 3 years and apply the following formula:
100% of days in current year in the US
+ 1/3 of days in prior year
+ 1/6 of days in year before last
= Total days for Substantial Presence Test
- Are your total days according to the formula above greater than or equal to 183 days?
If yes, you meet the Substantial Presence Test, and you are a US tax resident.
Tax Forms and Deadlines
If you meet the Substantial Presence Test, then you are considered a US tax resident and are taxable in the US on your worldwide income.
As a US resident, you generally need to file a resident tax return (Form 1040). The US tax year is January 1-December 31. Your tax return is due by April 15 of the following year. If you need more time, you can file an extension by April 15, which changes the due date to October 15.
You may also be required to file annual reports with the IRS to report any ownership of foreign assets.
US tax residents can often file a joint tax return with their spouse. You may also need to file state tax returns or other filings, which can have March 15, April 15, or other due dates.
If you are a US nonresident, you generally need to file a nonresident tax return (Form 1040NR) to report any US income. US income can include US dividends, rental income, income from a US business, or wage/consulting income from days worked in the US. The Form 1040NR is due by June 15. Extensions are available through October 15. As a US nonresident, you may also need to file state tax returns or other filings, which can have March 15, April 15, or other due dates.
Frequently Asked Tax Filing Questions
It depends. For your first year in the US, you may be a resident, nonresident, or “dual status” resident (part-year resident and part-year nonresident), depending on your number of days in the US and other factors. Also, in the first year, you can claim special elections or tax treaty benefits to change your residency status or start date. Often, it’s important to work with a tax advisor who can guide you through your options and help you file the best status for your situation.
Fortunately, the US and most other countries have a system in place to reduce or eliminate double taxation. This usually happens by claiming “foreign tax credits” on your tax return for taxes paid to the other country. You may need to claim the foreign tax credits on your US return or on your home country tax return, depending on which country has the primary right to tax the income.
The IRS says that you should fix mistakes, but you are not legally required to do so. Instead, you should weigh the risks of not fixing the mistake against the benefits of amending the return. Amending a past tax return is very common.
Often, if you failed to report all your foreign income or assets, then the risks are high, and it makes sense to amend. Depending on your situation, you may get the best result from amending under an IRS amnesty program, such as a Streamlined Filing. If you used a mass-market software or a tax preparer who wasn’t familiar with international issues, then your situation is high risk!
We understand that foreign asset reporting can be confusing, especially for new arrivals in the US. Maybe you’re not sure if certain foreign assets are reportable or you didn’t fully report assets previously. We can help.
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How We Help Foreign Nationals Living in the US
As international tax practitioners, we work with foreign nationals living in the US as residents or nonresidents. We also work with green card holders and G-4 visa holders working for international organizations, as well as families with global assets who wish to transfer wealth across generations and borders.
We can help you:
- Prepare your US tax returns, including returns for
- Dual-status individuals
- Foreign asset reporting
- Determine your federal and state tax residency status
- Assess your foreign assets (life insurance, pensions, retirement accounts, investments) to determine proper US reporting requirements
- Understand options and elections available during your first year to provide the best tax result for your situation, including:
- Elections to be treated as a full-year resident, to file jointly with a spouse, to claim benefits under an income tax treaty with your home country, to disregard certain days of US presence, to choose better tax treatments for foreign mutual funds, and more
- Amend prior tax returns or use IRS Amnesty programs
- File prior-year returns if you’ve not filed before
- Determine the most tax-efficient ways to transfer assets and wealth across generations and borders
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Do You Have Foreign Assets?
Reporting your income to the IRS via a tax return is one matter. But if you own assets outside the US, you need to report those foreign assets via an informational reporting form. We can help you determine which form(s) apply to your situation and prepare these forms to accompany your US tax returns. The IRS has severe penalties for not reporting or under-reporting foreign assets. These penalties can be the greater of $100,000 or 50% of the account balance for EACH YEAR the account was not reported. Additional civil and criminal penalties may also apply.
If you answer “yes” to any of the following questions, then it’s very likely you will need to file an informational foreign asset report.
- Do you own, or jointly own, a business in another country?
- Have personal (or other) retirement accounts in another country?
- Have bank accounts in another country with a combined value of $10k or more on any given day?
- Have a life insurance policy in another country?
- Have mutual funds in a foreign investment account?
- Have pensions or trusts set up in another country?
- Receive gifts or inheritances from US nonresidents (including family members)?
|Assets to Report||Form Name||Annual Penalties for Not Filing or Incorrect Filing|
|Foreign Bank Accounts or Financial Accounts (including signature accounts); certain foreign pensions||FBAR/Form 114||$10,000 (or if intentional, greater of $100,000 or 50% of maximum balance)|
|Foreign financial accounts, bank accounts, pensions, securities, etc.||Form 8938||$10,000 – $60,000|
|Foreign mutual funds or pooled investments||Form 8621||Keeps statute of limitations open; interest charges may apply|
|Contents of certain foreign retirement accounts or life insurance policies||Form 8621||Keeps statute of limitations open; interest charges may apply|
|Certain foreign retirement accounts and foreign trusts (owner)||Form 3520-A||Late or incorrect filing penalty: greater of $10,000 or 5% of owned trust assets|
|Certain foreign retirement accounts and foreign trusts (owner or beneficiary); certain foreign life insurance policies||Form 3520||Late or incorrect filing penalty: greater of $10,000 or 35% of trust distributions or contributions or 5% of trust assets|
|Recipient of foreign gift or inheritance > $100,000||Form 3520||5% to 25% of value of gift or inheritance|
|Ownership in foreign corporation||Form 5471||$10,000 – $60,000; reduction of 10% of foreign taxes available for credit|
|Ownership in foreign partnership||Form 8865||$10,000 – $60,000; reduction of 10% of foreign taxes available for credit|
|Ownership in foreign sole proprietorship||Form 8858||$10,000- $60,000; reduction of 10% of foreign taxes available for credit|
|Transfer of cash or property to a foreign entity||Form 926||10% of transfer or $100,000|
|Calculation of the GILTI Tax||Form 8992||$10,000 – $60,000|
|FDII Deduction for GILTI Tax||Form 8993||Loss of Deduction|
Why The Wolf Group?
Since 1983, we’ve worked with clients in the United States and abroad on international tax matters. We have a long history of “cleaning up” complex tax returns, reporting foreign assets, and reconstructing financial records.
Check out our extensive team of CPAs, all with vast international tax experience.
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Principal, Director of International Tax
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What our clients say
“This was the first time I had to file taxes in the US. There was some complexity to it because my wife’s pension is paid and taxed in another country. I was grateful for the expert help that I received from The Wolf Group.”
“Very good client support. Easy to communicate and upload documents. Thorough and timely delivery of the returns. Used them for last year and this year. I am very happy to work with The Wolf Group.”
“The Wolf Group is very efficient in preparing returns, with amazing attention to detail and good suggestions. Everyone I worked with was pleasant and courteous.”