Immigrants and students, and foreign nationals who are in the USA are eventually faced with the situation that they are required to pay US income taxes. Making that determination about when you are responsible for paying taxes is the beginning, there are a host of questions that need to be answered as well.
This article’s focus is more narrow. The focus here is to illustrate the difference between a resident and a non-resident alien. In general, resident aliens are on their way to becoming US citizens, and an important step in that process is to become familiar with US taxes. When to start, and how to go about starting can be confusing, but as you will see below, is very important to obtaining your US citizenship.
Resident and nonresident aliens are taxed differently. Resident aliens are for the most part taxed the same way that US citizens are taxed. Nonresident aliens pay tax based on the source of their income if it is in conjunction with a US business.
Non-resident aliens income is generally calculated using one of 2 techniques; Time, and Geography.
Time basis is calculated by a formula of the amount of time you worked in the US versus outside of the US. You would use this method if you had one employer, but lived inside and outside the US.
Geographical basis is a formula that is based on where you earned your income. If you work part of the year for an employer in another country, then move to the US and worked for a US employer, the Geographical formula would be more appropriate.
Determining if you are a resident alien or a non-resident alien is the first step.
There are 2 general tests to determine of you are a resident or a non-resident alien for tax purposes.
Green Card Test:
If, according to the immigration laws, you have been given the privilege of residing permanently in the United States then you generally have this status
Substantial Presence Test:
To meet the Substantial Presence test, you need to be physically present in the United States on at least: 31 days during 2013, and also 183 days during the 3-year period that includes 2013, 2012, and 2011. To do this you would count the number of days that you were presents during those years.
Once you have met one of the above criteria, you then make your first year choice. Your first year choice is begins the first day of the month that you qualify for the choice. Then you are treated as a U.S. resident for the rest of the year.
Once you have made the determination that you are a Resident Alien, you need to determine if you will be filing single or married filing jointly or head of household. In general, If one spouse makes the determination that he or she is a resident alien, they can have their spouse be treated as a resident alien.
When you file, you can claim an exemption for your spouse, even if your spouse had no gross income for U.S. tax purposes. You can also claim your spouse as an exemption if he or she has not come to the United States.
You can claim an exemption for each person who qualifies as a dependent according to the rules for U.S. citizens. The dependent must be a citizen or national of the United States or be a resident of the United States, Canada, or Mexico for some part of the calendar year in which your tax year begins.
If you are a Resident Alien you may have to file Form 8938, Statement of Specified Foreign Financial Assets, to report the ownership of foreign assets
If you are a student nonresident alien, with a temporary status, you generally are not permitted to work while you are in the United States. But, in some cases, a student is granted permission to work. Social security and Medicare taxes are not withheld from pay for the work unless the student is considered a resident alien.
Any student who is enrolled and regularly attending classes at a school may be exempt from social security and Medicare taxes on pay for services performed for that school.
Agricultural workers that are temporarily admitted with H-2A visas generally are exempt from social security and Medicare taxes.
Getting an taxpayer identification number
Form W-7 is used to apply to the IRS for a taxpayer identification number.
Getting an identification number does not change your immigration status or your right to work in the United States and does not make you eligible for the earned income credit
The documents and information that are needed to complete the form are used for the purpose to document your identity.
When would you need to get a taxpayer identification number?
1. In the case where one spouse already has a taxpayer identification number, but his or her spouse does not, and together, they would like to file jointly, the form would be used to get an identification number for the spouse.
2. A dependent child who does not have an identification number would also need an identification number to be claimed on a tax return.
3. A person who is determined to be a resident alien but who is not eligible for a SSN.
Remember your foreign owned bank accounts
There has been a lot of activity in recent years to locate offshore bank accounts, so also be sure to report on your tax return the existence of any foreign bank accounts that you own.
Credit for Foreign Taxes
There is a tax credit on your US tax return for foreign income taxes that are paid.
If you are a in the process of immigrating to the US, you need to be aware of your tax responsibilities. The US tax courts do not allow ignorance as a valid reason for not complying with US taxes, and could lead to problems in obtaining valid US citizenship.