Foreign individuals and companies that operate in the United States are subject to U.S. tax laws, which can be complex and difficult to navigate. Understanding these tax policies is essential for avoiding penalties and ensuring compliance with the law. This guide will cover the basics of U.S. tax policies on foreigners, including who is subject to U.S. taxes, how to determine tax residency, and what types of income are taxable.
Foreign individuals and companies are subject to U.S. taxes if they have income that is sourced in the United States. This includes income earned from employment, investments, or business operations. In general, foreigners are subject to the same tax rates and rules as U.S. citizens and residents. However, there are some differences in how taxes are calculated and reported for foreign taxpayers.
Tax Liabilities of Foreigners in the U.S.
Foreigners residing in the United States for a certain period are subject to U.S. income tax on their worldwide income. The IRS considers a person a “resident alien” for tax purposes if they meet either the “green card test” or the “substantial presence test”. Under the green card test, a person is considered a resident if they have been granted lawful permanent residence in the U.S. at any time during the calendar year. Under the substantial presence test, a person is considered a resident if they are physically present in the U.S. for at least 31 days during the current year and for a total of 183 days during the current year and the two preceding years, using a weighted average.
On the other hand, nonresident aliens are only taxed on income earned in the U.S. and on certain U.S.-sourced income, such as rental income from a property in the U.S. or royalties from U.S. sources. Additionally, nonresident aliens are subject to a withholding tax of 30% on certain types of income, such as interest and dividends, unless a tax treaty between their home country and the U.S. reduces or eliminates the withholding tax.
Types of Income that are Taxable
For resident aliens, all income earned worldwide is subject to U.S. income tax, including wages, salaries, tips, interest, dividends, rental income, and capital gains. For nonresident aliens, only income that is considered “effectively connected” with a U.S. trade or business is subject to U.S. income tax. Such income includes wages or salaries earned while working in the U.S. and income from a U.S. business or trade.
Forms that Need to be Filed
Foreigners living in the U.S. must file various tax forms depending on their circumstances. Resident aliens use the same tax forms as U.S. citizens and permanent residents, including Form 1040, the U.S. Individual Income Tax Return. Nonresident aliens use Form 1040-NR, the U.S. Nonresident Alien Income Tax Return, or Form 1040-NR-EZ, the U.S. Income Tax Return for Certain Nonresident Aliens with No Dependents. Additionally, if they meet certain criteria, nonresident aliens must file Form 8840, the Closer Connection Exception Statement for Aliens.
How to Comply with U.S. Tax Laws
Foreigners living in the U.S. can comply with U.S. tax laws by keeping accurate records of their income and expenses, paying estimated taxes throughout the year, and filing their tax forms on time. Additionally, they can seek the assistance of a tax professional who specializes in foreign taxation.
FAQs
Do foreigners living in the U.S. need to pay Social Security and Medicare taxes?
Generally, yes. Foreigners considered resident aliens for tax purposes are subject to Social Security and Medicare taxes, just like U.S. citizens and permanent residents.
Can I claim a foreign tax credit for taxes paid in my home country?
Yes, if you paid foreign taxes on income subject to U.S. taxation, you may be able to claim a foreign tax credit on your U.S. tax return. This can help reduce your overall tax liability.
What is the difference between a resident alien and a nonresident alien for tax purposes?
A resident alien is generally taxed like a U.S. citizen based on their worldwide income. On the other hand, nonresident aliens are only taxed on their U.S.-source income. Whether you are a resident or nonresident alien depends on several factors, including the length of time you have been in the U.S. and your visa status.
What happens if I fail to file a tax return or pay taxes as a foreigner in the U.S.?
If you fail to file a required tax return or pay taxes owed, you may be subject to penalties and interest on the amount due. Additionally, if the IRS determines you have willfully evaded taxes, you could face criminal charges and significant fines. It is important to stay up-to-date on your tax obligations as a foreigner living in the U.S.