Inpatriate (Foreign Nationals) – Assignments To The U.S.
Each year, thousands of nonresident aliens are gainfully employed in the United States. Thousands more own rental property or earn interest or dividends from U.S. investments.
The tax analysis for Foreign Nationals who arrive to reside and work in the U.S. can be extremely simple or incredibly complex, all depending upon the particular facts involved. The years of arrival and departure are potentially the most difficult, as the required tax treatment in those years may depend on many variables.
- Assignments To The U.S./ Filing Requirements for resident Aliens
- Green Card Test
- Substantial Presence Test
- Filing Requirements for Nonresident Aliens
- Tax Treaties
The U.S. taxes residents on worldwide income, and nonresidents only on U.S. source income. Therefore, determination of residency is crucial. After 1984, the U.S. ceased to use intent as the basis for residency determination, relying instead upon specific criteria, as set forth in IRC Sec. 7701(b).
An alien individual will be treated as a U.S. (tax) resident if (and only if) the individual meets one of 3 tests:
- The individual is a lawful permanent resident of the U.S. (i.e., has a green card)
- The individual meets the Substantial Presence Test; or
- The individual qualifies for and makes a “First Year Election” (to be treated as a part year U.S. resident)
Any non-citizen who does not meet one of the aforementioned tests is a non-resident alien.
NOTE: There are also two elections for resident treatment available for cases where a nonresident alien is married to a U.S.Citizen or Resident Alien. However, either election might have long-term consequences and should be very carefully considered. Professional advice should likely be sought.
Green Card Test
You are a Lawful Permanent Resident of the United States, at any time, if you have been given the privilege, according to the immigration laws, of residing permanently in the United States as an immigrant. You generally have this status if the U.S. Citizenship and Immigration Service (USCIS) issued you an alien registration card, Form I-551, also known as a “green card.” You continue to have resident status, under this test, unless you voluntarily renounce and abandon this status in writing to the USCIS, or your immigrant status is administratively terminated by the USCIS, or your immigrant status is judicially terminated by a U.S. federal court.
Substantial Presence Test
You will also be considered a U.S. resident for tax purposes if you meet the Substantial Presence Test for the calendar year. To meet this test, you must be physically present in the United States on 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.
You were physically present in the United States on 120 days in each of the years 2006, 2007, and 2008. To determine if you meet the substantial presence test for 2008, count the full 120 days of presence in 2008, 40 days in 2007 (1/3 of 120), and 20 days in 2006 (1/6 of 120). Since the total for the 3-year period is only 180 days, you are not considered a resident under the substantial presence test for 2008.
Resident aliens are generally taxed in the same way as U.S. citizens. This means that their worldwide income is subject to U.S. tax and must be reported on their U.S. tax return (Form 1040, U.S. Individual Income Tax Return; Form 1040A, U.S. Individual Income Tax Return or Form 1040EZ, Income Tax Return for Single and Joint Filers with No Dependents).
Filing Requirements for Nonresident Aliens
Nonresident aliens are generally subject to U.S. income tax only on their U.S. source income. They are subject to two different tax rate methods, one for effectively connected income, and one for fixed or determinable, annual, or periodic (FDAP) income. Effectively connected income (ECI) is earned in the U.S. from the operation of a business in the U.S. or is personal service income earned in the U.S. (such as wages or self-employment income). Effectively connected income of a nonresident is taxed at the same graduated rates as for a U.S. person. FDAP income is passive income such as interest, dividends, rents or royalties. This income is taxed at a flat 30% rate, unless a tax treaty specifies a lower rate.
Nonresident aliens must file and pay any tax due using Form 1040NR, U.S. Nonresident Alien Income Tax Return or Form 1040NR-EZ, U.S. Income Tax Return for Certain Nonresident Aliens with No Dependents.
There may be a range of tax treatment options available in a part-year residency situation. Residency could be triggered early in the tax year due to a U.S. vacation or U.S. business trip in excess of 10 days, in a case where a subsequent actual assignment did not begin until mid-year. (Many times a tax treaty could limit U.S. taxability prior to the date of assignment, however.)(Taxpayers should seek professional advice for any such analysis.)
Where residency applies to only a portion of the year, the taxpayer is a “Dual Status” taxpayer. As such, the taxpayer only reports income (or loss) for the residency period (and any U. S.source income for the nonresident period). However, the taxpayer must itemize (i.e., no standard deduction) even if there are no itemized deductions of any consequence.
Married Dual Status taxpayers are not only required to itemize, but must use the higher “married filing separate” tax rates. Married taxpayers can, however, elect to file on a full year basis, as full year residents reporting all income and loss for the entire year, where such an election would be advantageous. IRC Sec. 6013. For example, if the spouse did not work or there had been a rental loss during the non-residency period, the loss could (potentially) be claimed, and the lower married joint rates and standard deduction could be used. Even where the spouse had worked in the foreign country, the election still might be advantageous, due to foreign tax credit or, in some cases, the foreign earned income exclusion.
The United States has tax treaties or conventions with many countries. Under these treaties and conventions, Citizens and Residents of the United States who are subject to taxes imposed by the foreign countries are entitled to certain credits, deductions, exemptions, and reductions in the rate of taxes of those foreign countries. If a foreign country with which the United States has a tax treaty imposes a tax on you, you may be entitled to benefits under the treaty. Treaty benefits generally are designed for U.S. Citizens and U.S. Residents who (currently) reside in the United States. They generally are not available to U.S. Citizens and Residents who do not currently reside in the United States. However, certain treaty benefits and safeguards, such as the nondiscrimination provisions, are available to U.S. citizens residing in the treaty countries. U.S. Citizens and Residents residing in a foreign country may also be entitled to benefits under that country’s tax treaties with third countries. An examination of the specific treaty and specific treaty article(s) is necessary to determine if one is entitled to a tax credit, tax exemption, reduced rate of tax, or other treaty benefit or safeguard.