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US Income Tax for Expats
In our article on US income tax, we will focus on federal income tax for individuals first. (Income taxes on state or local level are addressed later.) Corporations are treated differently by the Internal Revenue Service (IRS) and are therefore not included in our tax overview.
Moreover, this introduction to US income tax for expatriates is, by necessity, rather broad and general. Tax law is an intricate matter, with about a dozen exceptions to every rule. Depending on your personal situation, you may need help when filing your federal income tax return. If you are interested in hiring a tax consultant, skip to our brief guide to finding the right tax advisor.
So, if you are an "alien" (i.e. a foreign national living and/or working in the United States), what do you need to do in order to pay your federal income tax?
Step 1: Register with the IRS
First of all, you obviously need to inform the IRS that you exist and are a (potential) resident taxpayer.
- Obtain an SSN (a social security number) for yourself, your spouse, and your dependents.
- If you are not entitled to an SSN, get in touch with the IRS and apply for a TIN (taxpayer identification number).
- Some residents may require an EIN (employer identification number) as well. This applies to you if you pay wages to at least one employee or if you have to pay excise tax. (Excise taxes are a special kind of federal tax levied on the production or sale of selected goods within the US.)
Speaking of employers and employees: if you start your own business in the US, the following rules may not apply to you. Taxes for self-employed expats are yet another matter that is beyond the scope of an introductory summary.
Here, we assume that you are a foreign national who has found employment in the United States. If this is not the case, the IRS has published several booklets for self-employed people and small business owners, which you should consult instead. Publication 334, the "Tax Guide for Small Business", should answer most of your questions.
Step 2: Determine Your Tax Residency Status
Once you have obtained an SSN or TIN, you should figure out your status of fiscal residency. For expatriates living in the US, there are several options:
- You can be considered a "resident alien" for tax purposes.
- Or you may count as a non-resident alien.
- Some expats could also be so-called "dual status taxpayers". For a part of the fiscal year, they fulfill all requirements for resident aliens. During the rest of this period, the tax office defines them as non-resident aliens, though.
Please be aware that we are talking about fiscal residence. It is indeed possible to count as a non-resident alien when you pay US income tax, but to be considered a US resident in other matters, e.g. regarding immigration law.
Resident aliens are treated like US citizens when it comes to filing their federal income tax return. For instance, they are entitled to the same tax rates and tax credits. However, different tax rules apply to non-resident aliens and dual-status taxpayers. They have to pay higher tax rates on some sorts of income, for example.
Criteria for Fiscal Residency
How do you determine if are a fiscal resident of the United States when you file your taxes? You are a resident alien if you fulfill either of the following conditions:
- You have a Green Card.
- You pass a "substantial presence test".
Please take a look at the number of days you have spent in the USA during the tax year for which you are filing (e.g. 2012), as well as the two previous years (e.g. 2010 and 2011). To establish a "substantial presence" in the US, you need to be present at least 31 days in the tax year in question (i.e. 2012), and 183 days or more during a three-year period (i.e. from 2010 till 2012).
However, for the entire three-year period, not all days spent in the US count in full. You do need to add every day from the tax year you’re filing the income tax return for (2012 in our example). But for the previous tax year (2011) and two years prior (2010), you are only allowed to count 1/3 and 1/6 of all days, respectively.
If you are an expat employed in the US who has passed the substantial presence test, fiscal authorities will treat you as a resident alien with regard to income tax. On the following pages, we will now explain how to go about filing your income tax return as a resident alien.
If you file as a non-resident alien or dual-status taxpayer, please don’t forget to check out our other introduction to US tax for expatriates, too.
We do our best to keep this article up to date. However, we cannot guarantee that the information provided is always current or complete.