Noncitizens who are filing their first U.S. tax return have a confusing set of tax laws to try to understand. Many listen to friends who have talked to someone else or who have worked with someone else and nobody may truly understand what they are doing. If this is your first tax return please do not use electronic filing! It is not permitted for the type of return you can legally file.
Are You a Nonresident, Part-Year Resident or Full-Year Resident for U.S. Tax Purposes?
U.S. tax laws define a nonresident for tax purposes as someone who has been physically present in the United States for less than 183 days using the current tax year plus a certain percentage of the days in a two year look-back period. This is called the substantial presence test. A part-year resident is someone who has been present in the U.S. at least 183 days, but less than the entire year. A full-year resident is someone who has been in the U.S. the entire year or who qualifies and chooses to be taxed as a full-year resident.
The U.S. tax year for individuals most frequently begins on January 1 and ends on December 31, or a calendar year basis.
Here’s an example. 2015 is your first year working and living in the United States. You are single and arrived in the U.S. on July 5, 2014, under an H-1 work visa. You have never been in the U.S. before. The formula to determine if you are a nonresident for tax purposes is:
2015: 180 days + 2014: (0 days * 1/3) 0 days + 2013: (0 days * 1/6) 0 days = 180 days.
You have been present in the U.S. for fewer than 183 days so you are taxed as a nonresident alien. This means that you must use Form 1040NR as the base tax form and follow the rules and regulations applicable to that form. There are restrictions on:
- filing status (single or married filing separately from your spouse)
- claiming dependents (can’t claim dependents unless you and your dependent meets specific criteria) and,
- claiming certain deductions.
A tax treaty may change those restrictions. There are also certain tax laws which can be cited to allow you to elect to be taxed as a part-year resident if you meet the requirements, follow the rules, and if it would be beneficial in the United States AND in your home country for you to do so.
Part Year Resident (Dual Status Resident)
Here’s another version of our example, same arrival date for work, same work visa. The difference is that you were in the United States during 2013 and 2014 on a visitor visa for vacation for 9 days in 2014 and 12 days in 2013.
2015: 180 days + 2014 (9 days * 1/3) 3 days + 2013: (12 days * 1/6) 2 days = 185 days
In this example you will be taxed as a part-year resident of the United States beginning on July 5, 2015, because you would have been present in the United States, per the formula, for 183 days or more. The IRS refers to part-year residents for tax purposes as dual status residents. Your tax return would consist of two tax forms: Form 1040 for the part of the tax year that you were physically present in the U.S. and Form 1040NR for the part of the tax year that you were not in the U.S. There are restrictions on filing status and deductions since you wouldn’t have been in the U.S. for the entire tax period.
There are certain laws which can be cited to allow you to elect to be taxed as a full year resident, but only if you are married. This election is not available to a single person. There are specific requirements you must meet to make this election and it must be beneficial to you in the United States AND in your home country.
Full-year residents are taxed the same way as U.S. citizens or permanent residents (green card holders). Form 1040, 1040A or 1040EZ are the base tax forms used for the return. Worldwide income from all sources is reported on the return and there are no limitations for dependents or deductions allowed provided you are legally able to claim them.
There may be a tax treaty between the United States and your country of origin or country of last residency which could affect any of the tax returns mentioned above. It takes an in depth gathering of your facts, the tax treaty and an analysis of how it impacts you if claimed.
Special Rules for Last Year in the U.S.
You are automatically treated as a full-year resident of the U.S. in the year you leave the country if you have met the substantial presence test in a prior year and leave the U.S. during the current tax year. There are certain laws you can elect to permit you to end your tax residency on the last day you were in the U.S. These elections, when properly made, will allow you to either be taxed as a nonresident alien or as a dual status resident if it is to your benefit.
Correcting Incorrect Tax Returns
Is is not unusual for noncitizen taxpayers to make mistakes on their U.S. tax returns because the laws are quite complicated. So complicated that many tax preparers unfortunately make mistakes, too. It takes countless hours of specialized education, training and experience for a tax preparer to gain expertise in preparing tax returns for noncitizens. The education and training are ongoing as the U.S. tax laws often change.
If mistakes were made on the tax returns you have filed, they should be corrected using a process called “amending the return”. The tax form that does this is Form 1040X. This form requires a detailed explanation of the corrections and often includes exhibits or statements to provided detailed calculations of income, deductions and taxes. There are consequences for filing incorrect tax returns and failing to correct them. A failure to file a corrected return can result in the IRS assessing penalties which may be eliminated or reduced by filing the 1040X before the IRS discovers the error.
State Income Tax Returns
Just a short note about state income tax returns. The laws vary from state to state so it’s difficult to go into any detail using an overview basis except to say that your state tax return should be consistent with your federal tax return. If you amend your federal tax return, you should also amend your state tax return.
This article just touches on the tip of the iceberg of U.S. tax return issues for noncitizens who are working and living in the U.S. Each person’s tax situation has to be developed using the unique facts and circumstances for that person. There are no cookie cutter tax returns for noncitizens.
Judy Coker, EA, CAA is a Certifying Acceptance Agent under agreement with the IRS to facilitate the ITIN application process for taxpayers and an Enrolled Agent. Many hours of her continuing professional education and training has helped her develop expertise in tax returns for noncitizens, green card holders and U.S. taxpayers living overseas. She works in Rogers, Arkansas and has helped many taxpayers, in the United States and in other countries around the globe, over her 13+ year career as a tax professional.