TABLE OF CONTENTS:
- Introduction
- What type of US Tax return to file for the 1st time in the United States?
- Do you need to file your US Tax Return?
- What’s the due date for filing your US Tax Return?
- Do I need to file FBAR (Foreign Bank Account Reporting) or FATCA Form 8938?
- Do I need an SSN or an ITIN (Individual Tax Identification Number)?
- Conclusion
Introduction
Moving to the United States of America can be exciting professionally as well as challenging at the same time. The United States of America follows a very different personal tax structure compared to the one in your home country. It is one of the most expansive tax codes on the planet with tax literature running into hundreds and thousands of pages. As a newbie to US Taxes, it’s highly recommended that you consult your professional tax accountant to figure out the taxes for you. Below are the 5 most important things, Foreign National filing US Tax Return for the 1st time must remember.
What type of us tax return to file for the 1st time in the united states?
The type of Tax return to be filed would depend on the number of days in the US in the current Tax year. You will be considered a United States resident for tax purposes if you meet the substantial presence test (SPT) for the calendar year. To meet this test, you must be physically present in the United States (U.S.) 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.
Example: You were physically present in the U.S. on 120 days in each of the years 2019, 2020, and 2021. To determine if you meet the substantial presence test for 2021, count the full 120 days of presence in 2021, 40 days in 2020 (1/3 of 120), and 20 days in 2019(1/6 of 120). Since the total for the 3-year period is 180 days, you are not considered a resident under the substantial presence test for 2021.
So like most countries, it’s 183 days, however as you can see the calculation has a little twist, it does consider your presence days from the previous years as well. The form to be filed is Form 1040NR, NR stands for “Non-resident” (Form 1040 is pronounced as Ten-Forty).
You will be considered as present in the United States if you were physically present at any time during the day in the US for the day’s calculation. Exceptions do apply for transit workers, crew members, commuters from Canada, Mexico, Medical conditions preventing them from leaving the States, etc.
If you do have more than 183 days based on the SPT test, you will have to file a “Dual-Status” of a Part-year return (non-geeky term). You will be taxed on your World-Wide income from the date you became a US Resident for Tax purposes. For the part of the year, you were Non-resident and a statement would be attached to your Tax return.
Please do note that by taking elections, you can file a full-year return. The advantage of filing a full-year Tax return is the benefit of taking the standard deduction of around $25,100 on the tax return. However, a joint tax return has to be filed, i.e. along with your spouse. Yes, the United States is the only country that allows you to file a Joint tax return. (Income of taxpayer and spouse are clubbed and taxed together.
The Tax rates, credits, deductions all favor a Joint Tax return.
So what are the downsides of filing a joint tax return for a Foreign National filing US tax return in the year of arrival after claiming elections?
If prior to coming to the United States, you had a lot of employment income, passive income, so may want to file a Dual-Status arrival return. You do not want your home country’s income to be taxed in the United States. (A dual-status or a Non-resident tax return is always “Married filing Separately or Single”. A joint return cannot be filed.
Assuming you are landing in the US in February or March, it may make sense to take elections and prepare a full-year resident tax return compared to coming to the United States in the month of September or October, where filing a Dual-Status return may make more sense.
DO YOU NEED TO FILE? (Foreign National filing US Tax Return)
Assuming you are a US Tax Resident or a US Citizen for the current tax year, you must report all interest, dividends, wages, or other compensation for services, income from rental property or royalties, and other types of income on your U.S. tax return. You must report these amounts from sources within and outside the United States. If your total US taxable income is above a certain threshold, depending on your filing status, or self-employed with income over $400, you must file your Tax return. If you are a Foreign National filing US Tax Return and would like to claim a refund on the withholding, because your income was a little lower for the year or to claim a tax credit, you must file a tax return.
The minimum income to file taxes for 2021 are given below:
Filing Status | Age | Minimum Income requirement |
Single | Under 65/65 and older | $12,550 and $14,250 |
Married filing Joint | Under 65/65 and older 65 or older (one spouse) 65 or older (both spouses) | $25,100 and $27,800( both over 65) |
Married filing separately | Any age | $5 |
Head of Household | Under 65/65 and older | $18,800 and $20,500 |
Qualifying widow with dependent child | Under 65/65 and older | $25,100 and $26,450 |
Self-employed | Any age | $400 |
The above threshold applies to Federal Taxes. The United States follows a multi-level tax structure. Different thresholds apply to the state/localCity/county taxes. If you have filed previously, it’s always good practice to be tax complaint!
For a foreign National filing US Tax Return, What's the due date to file Form 1040-NR ?
The due date for the US tax return is April 15th of the following year, unless it’s a weekend. The due day for the 2020 Tax year is may 17, 2021. If you were a non-resident whose income is not subjected to US withholding(assuming to were on Foreign payroll), the due date for the Tax return would be June 15. The IRS also allows a six months extension to file your tax return by completing Form 4868. Do remember that the extension only applies to file the tax return. Any amount balance due needs to be paid by April 15th due date after which interest and penalties apply
STATE TAXES: Along with Federal taxes, there are state and local/city/county taxes to be paid. Every state/city/locality has a different set of rules regarding domicile and residency status once the taxpayer starts working in the state or the local city. A driver’s license, voter’s id, a home, workplace in the state may help establish residency in that state. States have the same filing due date as federal tax returns.
Does a Foreign National need to file fbar or fatca form 8938?
If the total balance of all your foreign bank accounts (not US banks located in the US), foreign financial interests exceed the amount of $10,000 at any time of the year, even for a minute! must be reported on the FBAR form (aka Fincen 114). These amounts are only included for reporting purposes and filed with the department of treasury, not the IRS. The due date to file is the same as the Tax return due date for the year. The taxpayer must be a resident for tax purposes to file these forms.
Form 8938 is part of the tax return, is also an informational report(for Foreign Financial Assets), but has different thresholds for reporting based on filing status and US/Foreign Presence as of 31st December of the Tax Year.
The below are the thresholds for filing Form 8938 with your tax return.
Filing Status | Taxpayers living in the US | Taxpayer living outside the US. |
Single/Unmarried | $50k on the last day of the tax year, or $75k any time during the year(whichever is higher) | $200k on the last day of the tax year, or $300k any time during the year(whichever is higher) |
Married Filing Jointly | $100k on the last day of the tax year, or $150k any time during the year(whichever is higher) | $400k on the last day of the tax year, or $600k any time during the year(whichever is higher) |
Married Filing Separate | $50k on the last day of the tax year, or $75k any time during the year(whichever is higher) | $200k on the last day of the tax year, or $300k any time during the year(whichever is higher) |
The Penalty for non-compliance of these 2 forms is very high, starting from $10k up to $50k for failure to file.
Most Foreign National filing US Tax Return for the 1st time, in the year of arrival aren’t aware of these forms, can land in trouble with the IRS for failure to comply. Anybody coming to the United States will have at least $10,000 in their home country to meet their basic needs.
The FATCA act was passed in 2010, to keep track of off-shore bank accounts of US Citizens, residents in “ Tax havens “ across the globe in a bid to avoid tax evasion. The Foreign Account Tax Compliance Act (FATCA), generally requires that foreign financial Institutions and certain other non-financial foreign entities report on the foreign assets held by their U.S. account holders or be subject to withholding on withholdable payments.
Every foreign bank has to comply with the FATCA regulations, regardless of its location/operations. If the US Taxpayer is found to be non-compliant, consequences could be dire. The fines can range from $10,000 to up to $50,000 or more.
Do I NEED A SOCIAL SECURITY NUMBER OR AN ITIN TO FILE US TAX RETURN?
Absolutely. Depending on the type of visa you are arriving in the United States, you may be eligible for an SSN or an ITIN. Visa which authorizes you to work like H1, L1 you must get an SSN from your social security office from your locality. Usually, it takes less than 2 weeks to get one. The dependents of the taxpayer, who may not be eligible for SSN, will have to apply for ITIN (Visa like H4, L2, F2) assuming you are including them on your Tax return (credit for another dependent, filing a joint return with a non-working spouse, etc). The ITIN can be obtained by filing form W-7, along with your tax return, proof of identity, and foreign documents to the address given below. (The tax return with ITIN application will be paper-filed)
Mail it to :
Internal Revenue Service
Austin Service Center
ITIN Operation
P.O. Box 149342
Austin, TX 78714-9342
Alternatively, you can also apply for an ITIN in-person using the services of an IRS-authorized Certified Acceptance Agent which will prevent you from having to mail your proof of identity and foreign status documents or you may make an appointment at a designated IRS Taxpayer Assistance Center (TAC) by calling 1-844-545-5640.
The following are the documents needed for the ITIN application.
- Passports ( an Absolute must!!)
- National Identity Card
- U.S. Driver’s License
- Civil Birth Certificate
- Foreign Driver’s License
- U.S. State Identification Card
- Foreign Voter’s Registration Card
- U.S. Military Identification Card
- Foreign Military Registration Card
- United States Visa
- USCIS photo identification
Assuming you are taking the 1st route of mailing documents, a certified copy of your passport will be required( for the sake of safety never mail your original documents even though they may be returned to you immediately). Passport can be certified at the local embassy or your original passport office of issuance. The passport is the only document you can submit without bothering with the other foreign documents. A US visa would also be readily available, hence must be attached to prove your “Foreign Status”.
It usually takes 6-8 weeks to process your ITIN Application. Once approved you will receive a letter after 6-8 weeks or a max of 10 weeks. If you do not receive notification within the timeframes above, you may call the IRS toll-free line at 1-800-829-1040 to check on the status of your application.
Conclusion
If you are a Foreign National filing US Tax Return for the 1st time, please do consider the above points before filing your Tax return. Your Visa to the United States also requires you to be tax compliant. Still in doubt! Please do contact us at SuperExpat@cloudexpattax.com.
DISCLAIMER: The above info should only be considered for the knowledge of US Tax. Every Taxpayer’s situation is unique, strongly advise you to consult a Tax Professional.