Worldwide Income Tax & Offshore Reporting for U.S. Visa Holders
Worldwide Income Tax & Offshore Reporting for U.S. Visa Holders: The IRS worldwide income tax & offshore reporting rules for U.S. visa holders is unnecessarily complicated. Generally, the U.S. worldwide income and reporting rules only apply to U.S. Citizens and Legal Permanent Residents (Green-Card Holders). But, there is a 3rd category of individual who can also get swept up into the IRS Offshore Reporting quandary – U.S. Visa Holders and other foreign nationals who meet the Substantial Presence Test.
Who is a U.S. Person for Tax & Reporting?
A U.S. Person is a person who is subject to U.S. Tax on their worldwide income, and reporting for their offshore and foreign accounts and assets. U.S. Citizens and Legal Permanent Residents will generally always be considered a U.S. person.
Under certain circumstances a 3rd category of individual emerges, who may also be considered a U.S. person – foreign nationals who meet the Substantial Presence Test.
There are many different types of Visa Holders who may be subject to U.S. Tax & Reporting. It is not limited to work-visas. Some of the common visa holders include:
What is the Substantial Presence Test?
The Substantial Presence Test requires the taxpayer to analyze the current year and two-prior year time spent in the U.S.
Non Citizens & Green Card Holders
What Foreign Nationals must understand is that the responsibility to file a 1040 (and report foreign bank accounts) is not just for US Citizens or Legal Permanent Resident. If a Foreign National meets the Substantial Presence Test, they are also required to file a 1040 and FBAR (if they meet certain threshold requirements) even though they are not a US Citizen or Legal Permanent Resident.
U.S. Tax Rules
When a person first comes to the United States to live, if they earned income they are required to file a tax return. Until they become a Legal Permanent Resident or US citizen, they finally 1040-NR.
The problem for many people is that once they have lived in the United States for a certain amount of time, they become subject to regular taxation just as if they were a US citizen or Legal Permanent Resident. Not only does this mean that the United States will tax the person on the worldwide income, but they are also required to comply with all foreign account reporting requirements.
The failure to comply with foreign account reporting may result in significant fines, penalties, and even criminal investigation depending on the facts and circumstances of their case. In addition, if the person is found to be willful and their failure to report then their entire foreign accounts can be subject to a 100% penalty.
Example of How Substantial Presence Works
As a non-US citizen and non-US green card holder, you are generally only required to pay tax on your “US Effectively Connected Income” (money you earn while working in the United States). However, if you qualify for the Substantial Presence Test, then the IRS will tax you on your WORLDWIDE income.
IRS Substantial Presence Test generally means that you were present in the United States for at least 30 days in the current year and a minimum total of 183 days over 3 years, using the following equation:
- 1 day = 1 day in the current year
- 1 day = 1/3 day in the prior year
- 1 day = 1/6 day two years prior
Example A: If you were here 100 days in 2016, 30 days in 2015, and 120 days in 2014, the calculation is as follows:
- 2016 = 100 days
- 2015 = 30 days/3= 10 days
- 2014 = 120 days/6 = 20 days
Total = 130 days, so you would not qualify under the substantial presence test and NOT be subject to U.S. Income tax on your worldwide income (and you will only pay tax on money earned while working in the US).
Example B: If you were here 180 days in 2016, 180 days in 2015, and 180 days in 2014, the calculation is as follows:
- 2016 = 180 days
- 2015 = 180 days/3= 60 days
- 2014 = 180 days/6 = 30 days
Total = 270 days, so you would qualify under the substantial presence test and will be subject to U.S. Income tax on your worldwide income, unless another exception applies.
Exceptions to SPT
There is an exception to this filing rule, depending on the purpose of the foreigner being in the United States and what role/job the person is doing in the United States.
The IRS provides the following involving the substantial presence exception:
Do not count days for which you are an exempt individual. The term “exempt individual” does not refer to someone exempt from U.S. tax, but to anyone in the following categories:
- An individual temporarily present in the U.S. as a foreign government-related individual under an “A” or “G” visa, other than individuals holding “A-3” or “G-5” class visas.
- A teacher or trainee temporarily present in the U.S. under a “J” or “Q” visa, who substantially complies with the requirements of the visa.
- A student temporarily present in the U.S. under an “F,” “J,” “M,” or “Q” visa, who substantially complies with the requirements of the visa.
- A professional athlete temporarily in the U.S. to compete in a charitable sports event.
- If you exclude days of presence in the U.S. for purposes of the substantial presence test because you were an exempt individual or were unable to leave the U.S. because of a medical condition or medical problem, you must include Form 8843, Statement for Exempt Individuals and Individuals With a Medical Condition, with your income tax return. If you do not have to file an income tax return, send Form 8843 to the address indicated in the instructions for Form 8843 by the due date for filing an income tax return.
If you do not timely file Form 8843, you cannot exclude the days you were present in the U.S. as an exempt individual or because of a medical condition that arose while you were in the U.S. This does not apply if you can show, by clear and convincing evidence that you took reasonable actions to become aware of the filing requirements and significant steps to comply with those requirements.
Closer Connection Exception to the Substantial Presence Test
Even if you passed the substantial presence test you can still be treated as a nonresident alien if you qualify for one of the following exceptions;
The closer connection exception available to all aliens. Please refer to Conditions for a Closer Connection to a Foreign Country.
The closer connection exception available only to students.
Please refer to The Closer Connection Exception to the Substantial Presence Test for Foreign Students and Sample Letter.
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