With your passport and visa in hand, you are preparing to take off into your journey to settle in your new home in the United States. Naturally, you are flooded with emotions. On one hand, starting anew is exciting. On the other hand, the uncertainty can be a little overwhelming, especially when it comes to understanding the laws and expectations of the United States. So, how does a future immigrant to the United States ease those concerns? By planning and understanding what will be expected once an immigrant steps foot into America. In this article, we will guide you through the taxation laws of the United States in order to help you examine what taxation will look like for you and what tax consequences there may be for you as a new immigrant if you fail to follow certain steps.
The Concept of “Tax Residence”
The first step to understanding how taxation will work for you and any tax consequences that may befall you is to understand tax residence, which essentially is an identification of whether or not you are a resident alien of the United States for tax purposes. There are two methods of determining tax residence: the green card test or the substantial presence test for the calendar year (January 1- December 31). The green card test states that you are a resident for U.S. federal tax purposes if you are a Lawful Permanent Resident (LPR) of the United States at any time during the calendar year.
However, there exists a common misconception. The number of days you spend within the United States decides whether or not you are considered to be a tax resident is only true for people who are in the country under non-immigrant visas, not green cards. Legal Permanent Residents are still obligated and must report all of your income, generated from anywhere around the world, to the IRS, even if you do not step foot in the United States all year,
Consequences of Being Considered A “Tax Resident”
The United States operates through a worldwide tax system, which means that tax residents are taxed on their worldwide income (or income that is earned anywhere in the world). So, if you still are receiving income from your home country, perhaps from the rental of a former home, after relocation to the US, you might be taxed by the United States government on both this income and the income you are generating in the United States.
Let’s Clarify: With My Green Card in Hand, I Just Immigrated to The United States. Am I Required to Pay Taxes on My Overseas Assets?
Essentially, the answer to this question depends on when your income is earned. The U.S. doesn’t tax the money earned elsewhere prior to a Legal Resident’s arrival— just any income made since the person became a Legal Permanent Resident (LPR). The U.S. will tax you on the income you generate from your assets owned and or had before you immigrated to the U.S.
Some Important Information to Consider
If you are a new LPR and you willfully fail to file the Foreign Bank Account Report (FBAR), you can be fined up to $250,000 and/or sentenced up to five years in jail. Furthermore, the civil penalties can run up to $100,000 or 50% of the amount in your foreign account, whichever is higher, for each year you should have filed an FBAR and didn’t.
If an LPR comes in voluntarily under the Offshore Voluntary Disclosure Program, OVDP, to admit they failed to file FBARs after becoming an LPR, the penalty will be anywhere from 5% to 27.5% of the maximum they had in the undisclosed account for the years when they should have reported it. Calling this a penalty instead of a tax doesn’t make it any easier to take (the FBAR penalty is in addition to back taxes, penalties, and interest on any income from the account that they should have reported on the LPR’s 1040s). Additionally, if an LPR is already being audited, they are not eligible to participate in the OVDP.
A foreign student who has obtained the proper immigration status will be exempt from being treated as a U.S. resident for U.S. tax purposes even if he or she is here for a substantial time period that would originally result in the student being taxed as a U.S. resident. This student visa not only permits the student to study in the United States, but to pay taxes only on income from U.S. sources and not worldwide income. The visa also permits the student’s direct relatives to accompany the student to the United States and receive the same tax benefits.
What About Undocumented Immigrants?
Undocumented immigrants are not exempt from tax residence. If you are an undocumented immigrant and you meet the stay requirements outlined above, then you are considered a tax resident and have to file taxes on your worldwide income. In 1996, the IRS created the Individual Taxpayer Identification Number (ITIN) which is a tax processing number issued by the IRS for taxpayers who are not eligible to obtain Social Security Numbers. It is especially important that undocumented immigrants file taxes because it displays “good moral character”. Good moral character is essential for future endeavors of seeking United States immigration benefits. With that said, failing to file taxes will make it increasingly difficult to successfully achieve a desired immigrant status.
The United States government might have a tax treaty with your home country. Under these treaties, residents of foreign countries are taxed at a reduced rate, or are exempt from U.S. taxes on certain items of income they receive from sources within the United States. Under these same treaties, residents or citizens of the United States are taxed at a reduced rate, or are exempt from foreign taxes, on certain items of income they receive from sources within foreign countries. Please visit https://www.irs.gov/businesses/international-businesses/united-states-income-tax-treaties-a-to-z to see whether or not tax treaties apply to you.
All in all, what this article should indicate to you is that you must determine where you fall in the eyes of the government for taxation purposes prior to arriving to the United States and plan accordingly towards your foreign income and length of stay in the United States. This helps minimize any unpleasant surprises when it comes to taxation. Be sure to visit https://www.irs.gov/individuals/international-taxpayers/determining-alien-tax-status and other Internal Revenue Service resources for more information.
This blog post was co-authored by Sawsan Selim.
Disclaimer: Nothing in relation to the enclosed information should be construed and or considered as legal advice for any individual, entity, case, or situation. The following information is prepared for advertisement use only. The information is intended ONLY to be general and should not be relied upon for any specific situation. For legal advice on your specific situation, we encourage you to consult a CPA or an attorney experienced in the area of Tax and Immigration Law.