US Tax Guide for Foreign Individuals

Foreign individuals who have any income from a US source may be required to pay US taxes. In addition to any federal income tax due to the Internal Revenue Service (IRS) an individual may be liable for state and local (city or municipality) income tax, and social security taxes, too. An individual’s tax obligation is determined principally by reference to their status.

Status

A non US citizen may be classed as a resident or non-resident alien. If a person is not classified as a resident alien then they may be classified as non-resident alien, although there are some special categories of individuals whom the IRS deems as non-resident aliens even though they would otherwise be classified as resident aliens (see below).  In the United States a tax year for individuals is the same as a calendar year, being January 1 to December 31.

A non US citizen is classified as a resident alien if they meet the tests set out here.

Non-resident Aliens

Even if a foreign individual is not considered a resident alien for tax purposes they may still be liable for income from US sources including compensation for services performed in the US (although in certain circumstances total compensation not exceeding $3,000 in any tax year may be excluded), income effectively connected to a US trade or business, and the taxable portion of a scholarship or fellowship.  Tax due is determined at the graduated rates that apply to US citizens and residents.

US source income that is fixed or determinable annual or periodic (FDAP) is taxed at a flat rate of 30%, unless a lower rate if a tax treaty applies. A non-resident alien is normally exempt from US capital gains tax but may have to pay capital gains tax if (i) the gain is derived from the sale of a US real property interest or is effectively connected with the conduct of a US trade, or (ii) they are present in the US for at least 183 days during the tax year that the gain is realized in.

A non-resident alien may be eligible for relief.  Such as a credit against their home country tax bill for tax withheld by the United States under a tax treaty. Non-resident aliens are required to file forms 1040NR or 1040NR-EZ. A foreign national who does not have a Social Security number (SSN) may apply for an individual taxpayer identification number (ITIN) by submitting a completed form W-7 with documentation required to the IRS. The IRS will reject a tax return that does not contain a valid SSN or ITIN.

Resident Aliens

A resident alien is taxed on their worldwide income, the same as a US citizen. In the case of an alien who is resident due to the green card test, but not the substantial presence test, then their residency commences on your first day of lawful physical presence in the US An individual may elect to be treated as residence for the entire tax year if they had a green card at any point during the year.  If an individual is tax resident during any part of the following year and is also resident during the current tax year, then they will be taxed as a resident through the end of the current tax year.

A resident alien is subject to the same rules, tax, allowances, benefits and rates as a US citizen.

US resident aliens normally living abroad maybe able to exclude $101,300 of their annual income from US taxation if they meet certain requirements and can claim an addition 16% for certain housing expenses.

A resident alien under the green card test remains resident until they leave the US and either return their green card to USCIS and renounce their US immigrant status or have their immigration status revoked by USCIS or a US federal court. A green card holder who has been resident for at least 8 of the last 15 years who ceases to be a green card holder may be subject to special reporting requirements (Expatriation Tax).

If a resident alien meeting the substantial presence test ceases to be resident in a tax year then generally their residency ends on 31 December of the year they left the US However, by exception, if an individual leaves in a tax year then their residency may end on the last day that they were physically present in the US in the tax year if the individual has a tax home in a foreign county and they maintain a closer connection to that foreign county than to the US

Tax Treaty

The US has entered into international tax treaties with various other countries.  These treaties are often aimed to prevent double taxation and provide rules to allocate certain income to the signatory countries, determine the residence of individuals and income, credit certain taxes withheld, set withholding taxes applied to certain payments, and provide for mutual assistance in tax matters.

Specifically a tax treaty will normally set out which residency pertains in cases where an individual is resident in two or more jurisdictions during a tax year, and the rate of tax to withhold from FDAP income.  Tax treaty benefits are claimed on form 1040.

A listing of current tax treaties in force may be found here.

It must be noted that tax treaties are sometimes amended and maybe replaced by new treaties. Care should be taken to accurately identify the treaty in force for the tax year in question.

Social Security

Foreign nationals employed in the US are liable to pay social security unless certain exceptions apply.  Those exceptions apply to certain non-residents under F, J, M, and Q visas, and students enrolled in and employed at academic institutions (the same as for US citizens). A foreign national temporarily employed in the US by their (foreign) employer may be exempt from social security under a treaty between the US and their country – these treaties are termed Totalization Agreements – if the individual is paying foreign social security taxes.

A listing of such agreements in force may be found at:

https://www.irs.gov/individuals/international-taxpayers/totalization-agreements

It must be noted that such agreements are sometimes amended and maybe replaced by new treaties. Care should be taken to accurately identify the agreement in force for the year in question.

State and Local Taxes

A foreign national is subject to state and local taxes under the same rules on residency that apply to US citizens. These are residency rules that govern each state, not the residency tests set out above. The rules on determining income vary from state to state.

Foreign Account Tax Compliance Act (“FATCA”) and Foreign Bank and Financial Accounts   (“FBAR”)

A foreign national that hold interests in foreign bank accounts and financial assets and becomes a resident alien may be required to file one or two reports to the IRS pursuant to FATCA and FBAR.

Bank accounts with an aggregate value in excess of $10,000 at any point in a year must be reported under FBAR. The FACTA requirements are more complex and detailed, but it should be noted that certain foreign financial institutions are required to report such assets to the IRS and are doing such, generally through Inter Governmental Agreements executed between their governments and the US

Certificate of Compliance (“the Sailing Permit”)

The sailing permit is required (with certain exceptions) for nonresidents who have taxable income during the taxable year, and resident aliens who will be leaving the US without any expected date to return. You will need to complete either form 1040C or 2063. If you owe any taxes, you will need to pay them when you file your form. The purpose of the sailing permit is to make sure that you accept full responsibility for the taxes that you owe so they won’t go unpaid. Form 1040C is not the only return you make for the year you depart as you are also obliged to file a 1040 (or 1040NR) for the year too.

Forms and Filing Dates

The following are some of the most frequent filings and dates required by the IRS:

Form Who Must File Description Due Date
1040 / 1040A
(or 1040EZ)
Resident aliens and US citizensFull return of worldwide income and gains for a calendar year.April 15 of the following year; 6-month extension available on request.
1040NR
(or 1040NR-EZ)
non-resident alien engaged in a trade or business in the US or who had compensation from U.S. sourcesReturn of US source income in the yearApril 15 of the following year; 6-month extension available on request.
1040C
(or2063)
An alien departing the USA return of estimated tax for the year of departure (but a 1040/1040NR is also required) and application for compliance certificateAt least 2 weeks before departure
8938Resident aliens and US citizensA return of financial assets specified under FATCAWith form 1040
FinCen form 114Resident aliens and US citizens specified under FBARA return of financial assetsApril 15 of the following year; 6-month extension automatically given.