THE tax laws refer only to two controlling principles whether you are a resident alien or nonresident alien while the immigration laws of the US refer to aliens as immigrant, nonimmigrant, and undocumented or illegal aliens.
Who are resident aliens and nonresident aliens or both?
For tax purposes unless you are an exempt individual, you are a resident alien if you meet either substantial presence test or green card test for the tax year. You are considered substantially present in the US at least 31-days (count all days present) during the current tax year (2018) and 183 days during the 3- tax year period (2018, 2017, 2016) including current year (2018 count all days present) and 2-years (2017 count 1/3 of days present, 2016 count 1/6 of days present) immediately before the current year. And you will be taxed the same as US citizens based on worldwide income. For more information refer to Publication 519 US tax guide for aliens.
If you are a green cardholder, your residency starts on the first day you are present in the US as a lawful permanent resident or if you choose to be taxed as a resident alien for the entire tax year.
Anyone who is not considered resident alien is a nonresident alien except if you are an exempt individual. Refer to Publication 515 the tax withholding guide for nonresident aliens for more information.
Are you an exempt individual?
Exempt person are exempt from counting of days presence in the US and do not refer to anyone exempt from tax.
Person/s who are temporarily present in the US are exempt individual/s: Foreign government-related, teacher or trainee under J or Q visa and have substantially complied with the visa requirements, student under F, J, M, or Q visa and have substantially complied with the visa requirements, and professional athlete to compete in a charitable sports event.
Closer connection exception
You may claim the closer connection exception even if the substantial presence test is met, if 1) you have a tax home in foreign country which you can establish closer connection than in US. ; And 2) you are present in the US for less than 183 days during the tax year. You must attach Form 8840 closer connection statement upon filing of Form 1040NR or 1040NR-EZ. Form 8840 must be filed separately if you are not required to file for the tax year.
To be continued in the next issue.
the appropriate parts of Form 2555. Since it is voluntary, your choice to exclude foreign earned income remains in effect for that year and all years unless you revoke it.
Housing Cost Exclusion or Deduction. You may also claim an exclusion or deduction from gross income for your housing amount if you meet the following requirements:
• Have foreign earned income.
• Your tax home is in a foreign country.
• You qualify for the bona fide residence test or the physical presence test.
The housing exclusion applies only to amounts considered paid for with employer-provided amounts while the housing deduction applies only to amounts paid for with self-employment earnings.
Like the foreign earned income exclusion, the housing cost exclusion or deduction is filed by completing Form 2555. However, a separate election is required for each exclusion claimed. You may choose to revoke the exclusion for any year.
Foreign Tax Credit or Deduction. The credit and deduction are intended to relieve U.S. taxpayers of double taxation on foreign source income. The election is made on an annual basis. If a U.S. citizen incurs or pays income taxes to a foreign country, he may elect to deduct them in determining his taxable income, or take them as a credit against his U.S. tax. The election must be made as to all foreign taxes of the tax year. The credit will be limited to the percentage of the total tax that the taxable income (before deduction for personal exemptions) from foreign countries is of the total taxable income.
Other Reporting Requirements. Please note that any person or entity subject to the jurisdiction of the United States includes individuals, corporations, partnerships, trusts, and estates having a financial interest in, or signature or other authority over, bank accounts, securities, or other financial accounts having an aggregate value exceeding $10,000 at any time during the calendar year in a foreign country, shall report such a relationship. Although there are some limited exceptions, filing requirements also apply to taxpayers that have direct or indirect control over a foreign or domestic entity with foreign financial accounts, even if the taxpayer does not have foreign accounts. For example, a corporate-owned foreign account would require filings by the corporation and by the individual corporate officers with signature authority. Failure to disclose the required information to the U.S. Department of the Treasury may result in substantial civil and/or criminal penalties.
In addition, the Internal Revenue Service also requires information reporting under applicable Internal Revenue Code sections and related regulations, and the respective IRS tax forms are due when your income tax return is due, including extensions. The IRS reporting requirements are in addition to the U.S. Department of the Treasury reporting requirements stated above. Therefore, if you fall into one of the below categories, or if you have any direct or indirect foreign interests, you may be required to file applicable IRS forms.
• File Form 8938: For individual or entity with ownership of foreign financial assets and meet the criteria. There is a penalty of $10,000 for failure to file, am additional penalty of up to $50,000 after IRS issued notification for continued failure to file.
• Form 5471: If you are an officer, director, or shareholder with respect to certain foreign corporations attach Form 5471 to your income tax return by the due date including extensions for that return.
You are a foreign-owned U.S. corporation or foreign corporation engaged in a U.S.
• trade or business, Form 5472;
• You are a U.S. transferor of property to a foreign corporation, Form 926;
• You are a U.S. person with an interest in a foreign trust ,Forms 3520 and 3520-A; or
• You are a U.S. person with interests in a foreign partnership, Form 8865.
Code section 965 of the 2017 tax cuts and jobs act added that US shareholder in a foreign corporation are possibly liable for the transition tax.
Failure to timely file the appropriate forms with the U.S. Department of the Treasury and the Internal Revenue Service may result in substantial penalties. Calendar year corporation ending December 31, 2017, the tax us due and payable with the US shareholder’s 2017 return.
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Disclaimer: Any accounting, business or tax advice contained in this communication is neither intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.
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Al-os & Associates Accountancy Corporation provides accounting and tax services to individuals, corporations, LLCs and business entities. The Firm has a niche in defending taxpayers audited by the IRS and other governmental agencies.