Frequently Asked Tax Questions for U.S. Nationals Living Abroad

The IRS uses the “substantial presence” test to determine foreign nationals’ United States tax obligations for the calendar year. This means you are obligated to file a tax return as a resident alien if you have been physically present in the United States for at least:

• 31 days during the current year, and
• 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:
• All the days you were present in the current year, and
• 1/3 of the days you were present in the first year before the current year, and
• 1/6 of the days you were present in the second year before the current year.

The IRS deems J-1 visa holders as “nonresident aliens” who are required to file 1040 tax forms and pay federal, state and local taxes. There are important exceptions to these rules, however for students, teachers, and trainees. These IRS defines these as:

• Student refers to any alien individual (and that individual’s immediate family) who is admitted temporarily to the United States on an “F” or “M” visa or as a student on a “J” or “Q” visa, and who substantially complies with the requirements of that visa.
• Teacher or trainee refers to any individual and that individual’s immediate family other than a student, who is admitted temporarily to the United States on a “J” or “Q” visa, and who substantially complies with the requirements of that visa. In general, the term includes any alien individual present in the United States on a “J” or “Q” visa for a purpose other than studying. For example, alien physicians, au pairs, short-term scholars, and summer camp workers in “J” visa status; and cultural exchange visitors in “Q” status are all within the definition of “teacher or trainee”.

There is also a limit on the number of years a J-1 alien can be considered an “exempt individual” student, teacher, or trainee and exclude U.S. days of presence for purposes of the Substantial Presence Test. The time limit depends on whether the J-1 alien entered the United States as a “student” for the purpose of studying at an academic or vocational institution or as a “teacher or trainee” for the purpose of teaching, conducting research, or receiving on the job training.

For Students there is the five calendar year rule:

A J-1 alien can exclude U.S. days of presence as a “student” for purposes of the Substantial Presence Test for up to five calendar years. The five-year limit is a lifetime limit that can’t be renewed but may be extended if certain conditions are met.

Teacher or trainee – two calendar year rule:

Generally, a J-1 alien cannot exclude U.S. day of presence as a “teacher or trainee” for more than two calendar years. There is a four year exception subject to certain conditions, the two-year teacher or trainee limit can be extended up to four calendar years.

However, unlike the student limit which is a lifetime limit, the teacher or trainee limit can be renewed.

• For examples of the application of the tax residency rules in various situations involving students, teachers, and another category of individual that is subject to U.S. tax obligations includes L-1 Visa holders. However, unlike a J-1 visa holder, Legal Permanent Resident or U.S. Citizen, an L1 visa holder must meet the substantial presence test (as defined above) before they are considered a U.S. person for tax and offshore reporting purposes. If they are considered a U.S. person, they may need to file a:
  • U.S. Tax Return (1040) – See FAQ #4 below for additional details.
  • FBAR (FinCEN 114) – See FAQ #6 below for additional details.
  • FATCA Form 8938 – See FAQ #6 below for additional details.
  • Form 8621 PFIC – See FAQ #7 below for additional details.
  • Form 5471 – See FAQ #7 below for additional details.
  • Form 8865 – See FAQ #8 below for additional details.

The IRS defines foreign-earned income as wages, salaries, professional fees, or other amounts paid to you for personal services rendered by you.

If you meet the requirements of the IRS substantial presence test outlined above, you must declare your worldwide income, which includes all income earned in countries in addition to the United States as well as all U.S. income. In addition to federal taxes, you may also be subject to state, local and county taxes depending on your tax nexus.

You are classified as a non-resident if:

• You do not currently have a green card.
• You have not met the substantial residence requirements noted above.
• If you meet the residency requirements above or you have a green card, then you meet the qualifications as a
• U.S. resident for taxation purposes and would file form 1040.

You cannot file as married filing jointly if either spouse was a nonresident alien at any time during the tax year. Non-resident aliens married to U.S. citizens or residents can choose to be treated as U.S. residents and file joint returns.

A non-resident spouse needs valid SSN/TIN to e-file a tax return. Otherwise they can only paper file and if they live abroad it can be hard to mail the check.

The IRS requires U.S. resident aliens to file a Report of Foreign Bank and Financial Accounts.

(known as the FBAR or Form 114). Depending on your circumstances, you may also be required to file the Foreign Account Tax Compliance Act (FATCA) or Form 8938, which is known as Statement of Specified Foreign Financial Assets.

The primary difference between FBAR and FATCA is that FBAR is an information return that is reported to the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”), while the FATCA Form(s) 8938 are additional scheduled items individually reported within the Form 1040.

The FBAR is filed separately from Form 1040 to the Treasury’s FinCEN. The purpose of each form is different: FinCEN wants to ensure that foreign assets are not being hidden; while the IRS wants the FACTA form filed to make sure you are paying all the tax you owe on any gains in your foreign assets. As the IRS states:

“FACTA requires certain U.S. taxpayers who hold foreign financial assets with an aggregate value of more than the reporting threshold (at least $50,000) to report information about those assets on Form 8938, which must be attached to the taxpayer’s annual income tax return. The reporting threshold is higher for certain individuals, including married taxpayers filing a joint annual income tax return and certain taxpayers living in a foreign country .”

First, a definition of a PFIC:

A foreign corporation is considered a PFIC if 75% or more of its gross income is from non-business operational activities or at least 50% of its average percentage of assets is held for the production of passive income.

If you are a foreign national with an interest in a PFIC, you need to file Form 5472 which is the Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business” if:

• You own, either individually or collectively with other foreigners, 25% of a U.S. corporation or disregarded entity; or you own a foreign a corporation that is engaged in a trade or business within the U.S.

A partnership formed in a foreign country that is controlled by U.S. partners is required to file tax Form 8865. The IRS defines control for foreign partnership purposes as an entity with five or fewer U.S. persons who each own a 10% or greater interest in the partnership also own (in the aggregate) more than 50% of the partnership interests.

A US person who is a partner in a foreign partnership (or an entity taxed as a partnership) is required to file Form 8865. This form reports the income and financial position of the partnership and is required with each partner’s tax return and a K-1 form.

The IRS has residency rules which affect resident alien taxation including the substantial presence test, the green card test and the first year choice test (See irs.gov for details).

These rules determine your starting and ending dates for residency, influencing your tax obligations, based on your arrival, departure and residency status.

If you leave the United States part way through the calendar year, you will need to determine your tax obligations. A tax professional can help you do this.

In addition, you must file a signed and dated statement with the IRS to establish your residency termination date. This statement must be included with your income tax return. If you are not required to file an income tax return, you must still send the statement to the IRS’ Department of the Treasury on or before the due date for filing an income tax return.

You are considered by the IRS to be a resident, for U.S. federal tax purposes, if you are a lawful permanent resident of the United States at any time during the calendar year. This is known as the “green card” test.

According to the IRS, your U.S. resident status continues under this test, unless:

• You voluntarily renounce and abandon this status in writing to the USCIS,
• Your immigrant status is administratively terminated by the USCIS, or
• Your immigrant status is judicially terminated by a U.S. federal court.
• If you meet the green card test at any time during the calendar year, but do not meet the substantial presence test for that year, your residency starting date is the first day on which you are present in the United States as a lawful permanent resident.

Income for independent personal service earned in the United States by nonresident aliens is tax exempt provided that you spent less than 183 days in the U.S. during the year.

You may still need to file a non-resident tax return to report income reported to you on form 1099-MISC and claim income exemption.

When entering into a totalization agreement, the United States and a partner country agree to coordinate social security coverage and benefit payment provisions for individuals who have worked in both of the countries over the course of their working lives. Totalization agreements have three main purposes:

1. Eliminate double social security taxation, which occurs if a worker and his or her employer are required to pay social security taxes to two countries on the same earnings.
2. Fill gaps in the coverage records of people who have divided their careers between two countries by combining, or totalizing, the periods of coverage earned in each country.
3. Totalization agreements permit unrestricted payment of benefits to residents of the two countries. Although these three purposes do not constitute the entire scope of totalization agreements, they are by far the most visible and have the greatest effect on businesses and workers.

All totalization agreements share certain features, but the complexity of and variation in different countries’ social security laws make each agreement unique. Our firm can help you better understand how these totalization agreements may impact you as a foreign national.

The IRS makes streamlined filing compliance procedures available to certain taxpayers who certify their failure to report foreign financial assets and pay all tax due in respect of those assets was not the result of willful conduct on their behalf. These streamlined procedures are designed to provide to taxpayers in such situations an avenue for fling amended or delinquent returns, and terms for resolving their tax and penalty procedures related to them.

These are the specific eligibility requirements for the streamlined procedures for non-U.S. residents from the IRS:

• You will be required to certify that the failure to report all income, pay all tax and submit all required information returns, including FBARs (FinCEN Form 114) was due to non-willful conduct (i.e. Conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.)
• If you are eligible to use streamlined procedures and you have previously filed delinquent or amended returns must pay previous penalty assessments

You will need a valid Taxpayer Identification Number to qualify—this is a valid Social Security Number (SSN). For individuals who are not eligible for an SSN or ITIN, your tax return will not be processed under the streamlined procedures. However, for taxpayers who are ineligible for an SSN but do not have an ITIN, a submission may be made under the streamlined procedures if accompanied by a complete ITIN application.