Tax Facts for Foreigners Moving to the United States

Say you work and live in Greece, where you are a citizen. And now you receive a very desirable job offer from a company in the United States. It’s a great career opportunity, but you’re going to have to leave your native country of Greece and move to the U.S.

You accept the offer.

What are the tax implications that come with this move? Let’s explore the key federal-income-tax points foreigners face when moving to the U.S.

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Tax Obligations

As a foreign individual from Greece, you have income tax obligations in the U.S. that depend on your tax residency status. The U.S. tax system categorizes individuals as resident aliens or non-resident aliens.

Resident alien. If classified as a resident alien, you must report your worldwide income on your U.S. tax return, similar to how U.S. citizens report. This includes income earned both within and outside the U.S.

Non-resident aliens generally report only their U.S.-sourced income. This may include both wages and business or rental income derived from U.S. activities.

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Tax Residency

So, for tax purposes, who is a resident alien and who is a non-resident alien?

A U.S. resident alien is an individual who resides in the U.S., either temporarily or permanently, but is not necessarily a U.S. citizen. Residency status can be based on various factors, such as employment, study, family ties, or intent to establish a home in the country.

There are three ways that you can be considered a resident alien of the U.S.:

1. You are a lawful permanent resident.
2. You have a substantial presence in the U.S.
3. You make a first-year election to be taxed as a resident.

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Lawful Permanent Resident

A lawful permanent resident alien has been granted authorization by the U.S. government to live and work in the U.S. permanently. This is often referred to as a green card holder (because the identification documents for this immigration status have a bit of green tint).

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Substantial Presence

The second way for you to be a resident alien of the U.S. for tax purposes is through the substantial presence test.

This test is unrelated to your immigration status.

In other words, by meeting this test, an undocumented individual—someone who is in the U.S. without legal authorization—would still be considered a U.S. resident alien for tax purposes.

What is “substantial presence”? The substantial presence test is all about time: once you spend sufficient days in the U.S., you should be taxed as a resident alien on your worldwide income.

To meet the substantial presence test for a calendar year, you need to be present in the U.S. for at least

• 31 days in the current year, and
• 183 days over a three-year period, using the sum of days present in the current year, one-third of the days present in the first preceding year, and one-sixth of the days present in the second preceding year.

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First-Year Election

Finally, the third way for you to be a resident alien for U.S. tax purposes is through the first-year election.

To make this first-year election,

• you must be present in the U.S. for at least 31 days in a row in the current year; and
• you must be present in the U.S. for at least 75 percent of the number of days following the 31-day period, beginning with the first day of the 31-day period and ending with the final day of the current year; and
• you must meet the substantial presence test in the following tax year.

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Why Do It?

Remember from earlier that the United States taxes resident aliens on their worldwide income and non-resident aliens only on their income earned in the U.S.

You may be asking, why would a taxpayer elect or opt in to worldwide taxation by the U.S.?

An individual whose income is mostly or entirely U.S. sourced and already subject to U.S. taxation may benefit from the more favorable tax treatment afforded to residents over non-residents.

For example, resident aliens can claim a standard tax deduction on their tax returns, which most non-resident aliens cannot do.

In summary, the United States taxes individuals who are citizens or resident aliens on their worldwide income.

• Individuals are residents of the U.S. if
• they are a lawful permanent resident, aka a green card holder, or
• they pass the substantial presence test, or
• they make the first-year election to be taxed as a resident.

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U.S. Non-Resident Alien

A U.S. non-resident alien is an individual who is neither a U.S. citizen nor a U.S. resident alien. Non-resident alien status usually applies to temporary U.S. residents, such as tourists, business travelers, and international students.

As a U.S. non-resident alien, you are generally subject to U.S. income tax only on your U.S.-sourced income. You are subject to two different tax rates:

• one for effectively connected income, and
• one for fixed or determinable, annual, or periodic (FDAP) income that is non-effectively connected income.

Let’s explain these terms.

Effectively connected income (ECI) is from the operation of a business in the U.S. and also from personal service income earned in the U.S. (such as wages or self-employment income). It is taxed for a non-resident alien at graduated rates just as for a U.S. citizen, However, EIC is limited to the higher-bracket rates of “single’ or “married filing separately” statuses.

FDAP is passive income such as interest, dividends, rents, or royalties. FDAP income unrelated to the operation of a business in the U.S. is taxed at a flat 30 percent rate on the gross income unless a tax treaty specifies a lower rate.

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Reporting and Filing Taxes

U.S. resident aliens file their taxes as if they were U.S. citizens, claiming the same deductions and using IRS Form 1040, U.S. Individual Income Tax Return.

A non-resident alien files Form 1040-NR, U.S. Non-Resident Alien Income Tax Return. This return is required if

• you have any income subject to graduated tax rates,
• you are claiming tax treaty benefits, or
• you have insufficient withholding on FDAP income.

The state income tax rules for resident and non-resident aliens are the same as those for U.S. citizens. The rules vary by state.

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Taxpayer Identification Number (TIN)

To file taxes in the U.S., the foreigner needs a Taxpayer Identification Number (TIN). Most non-U.S. citizens can obtain an Individual Taxpayer Identification Number (ITIN)9 or a Social Security number (SSN).

An ITIN is specifically designed for tax purposes, while an SSN is typically assigned to individuals who are eligible to work in the U.S. The IRS issues ITINs to help individuals comply with the U.S. tax laws.

ITINs provide a way to process and account for tax returns and payments for those not eligible for Social Security numbers. They are issued regardless of immigration status because both resident and non-resident aliens may have U.S. filing requirements under the Internal Revenue Code.

ITINs generally serve no purpose other than federal tax reporting. But sometimes individuals will use the ITIN to open bank accounts or apply for credit. A landlord or housing authority may use an ITIN in its application process for those without Social Security numbers.

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Social Security and Medicare Taxes

International agreements known as Totalization Agreements generally eliminate dual taxation on Social Security and Medicare taxes.

This is a beneficial tax break if your earnings are subject to taxes or contributions for similar purposes under the social security system of your native country. A similar exemption exists if you are self-employed.

Understanding the implications for Social Security benefits while living in the U.S. is essential because rules may vary depending on the country you came from.

For example, Social Security credits from Greece and the U.S. can be counted when necessary to meet the eligibility requirements for Greek benefits.

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Reporting Foreign Financial Accounts

You may have reporting obligations beyond income tax returns. For instance, if you have foreign financial accounts with a total value exceeding $10,000, you may need to file the Report of Foreign Bank and Financial Accounts (FBAR). Also, if you own certain specified foreign assets, you may be required to report them on Form 8938, Statement of Specified Foreign Financial Assets.

If you have relatives or assets in foreign countries, your reporting obligations may be far greater than what you have to report on the FBAR and Form 8938.

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Tax Treaties

The U.S. has tax treaties with many countries to prevent double taxation and to provide relief for certain tax matters. These treaties can affect your tax obligations and determine whether you are eligible for reduced tax rates or exemptions.

Under these treaties, you may be eligible for certain credits, deductions, exemptions, and reductions in the rate of taxes on certain items of income you receive within the U.S.

For example, Article XIV of the 1953 tax treaty between the U.S. and Greece allows you to avoid double taxation. If you pay income tax in the U.S., you can receive a credit against the Greek tax on the same income.

Important. Foreign taxing authorities may require proof from the U.S. government that you filed an income tax return as a U.S. resident or non-resident alien. This proof would be needed to entitle you to the treaty benefits. Make sure you obtain these documents to help minimize your U.S. tax liability.

Tax treaties with the U.S. vary from country to country. It’s best to consult with an international tax specialist who can provide greater certainty and clarity for foreign individuals and businesses operating in the U.S.

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Takeaways

Tax residency. A foreign individual’s income tax obligation in the U.S. hinges on his or her tax residency status: resident aliens are taxed on their worldwide income, whereas non-resident aliens report only U.S.- sourced income.

U.S. resident alien. There are three primary ways to become a U.S. resident alien:

• Be a lawful permanent resident (i.e., green card holder).
• Meet the substantial presence test (a formula based on days spent in the U.S.).
• Make a first-year election.

Non-resident aliens are generally taxed only on U.S.-sourced income and are subject to different rates based on the nature of that income.

Reporting and filing. Resident aliens use Form 1040, similar to how U.S. citizens do. Non-resident aliens utilize Form 1040-NR. State tax rules apply uniformly for both, though rules vary by state.

Taxpayer identification. The U.S. requires every taxpayer, including foreigners, to have a Taxpayer Identification Number, through either an Individual Taxpayer Identification Number (ITIN) or a Social Security number (SSN).

Social Security and Medicare taxes. Totalization Agreements exist to eliminate dual taxation on Social Security and Medicare. For certain countries, such as Greece, credits from both the U.S. and the native country can be combined for benefit eligibility.

Foreign financial accounts reporting. Those with foreign financial assets might have reporting duties beyond mere income tax returns, including the FBAR and IRS Form 8938.

Tax treaties. The U.S. has multiple tax treaties to prevent double taxation. The treaty with Greece, for instance, offers a tax credit system to avoid taxing the same income twice.

Recommendation. Due to the complexity and variances in tax obligations based on individual circumstances, consulting with an international tax specialist is highly advised for clarity and compliance.