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Tips for Immigrants & Green Card Holders Filing a U.S. Income Tax Return

Tips for Immigrants & Green Card Holders Filing a U.S. Income Tax Return

You must be a U.S. citizen, lawful permanent resident (green card holder), or pass the "substantial presence" test to be recognized as a U.S. resident for tax purposes. Some non-immigrant visa holders are also considered residents for tax purposes.

Being a resident does not necessarily mean that you live in the United States full time. You are considered a U.S. tax resident from the year you receive the green card. You are liable for reporting and paying your overall income tax if you fall into any of these categories.


What is the substantial presence test?

The IRS defines "substantial presence" as being physically present in the U.S. for at least 31 days per year and at least 183 days in the past three years, including the current year. 

However, calculating the 183 days over the past three years is not easy. Each day of the current year counts as one day, but the days of the previous year are only a third of the day. The days in the year before the previous year count as only one-sixth of a day.

The calculation is complicated, but this rule only applies to those who have been considered non-immigrants. Consult a tax expert like TAXES MADE EZ, INC. if you are unsure if you pass this test or think you do.

These rules do not apply to government officials or certain professionals or students. These do not apply if you are traveling to the United States as a resident of Mexico or Canada or cannot leave the United States due to a medical condition that started and was diagnosed in the United States.

 

Americans pay taxes on their global income.

Unlike several other countries, the United States taxes its citizens and residents on global income. However, this only applies to U.S. residents. If you are not a resident, you will only pay U.S. tax on your U.S. income.

Instances of income that must be reported on your U.S. income tax return include rental income, investment income, or savings interest in the country you resided in before coming to the United States.


An overview of the United States federal income tax system.

Citizens and residents of the United States pay income taxes to different levels of government. Federal income tax is paid to the United States federal government. The Internal Revenue Service, which is a division of the Treasury Department, administers the federal tax system.

Federal income tax is determined by measuring income earned during the calendar year. The tax year in the United States is generally the same as the calendar year, but taxpayers can adopt a different tax year from the calendar year if they wish.

Residents and citizens must also pay income tax to the state or states where they live or receive income. Most states levy income tax. As of fiscal 2021, eight states do not collect income tax: Wyoming, South Dakota, Tennessee, Texas, Alaska, Florida, Nevada, and Washington.


Tax credits and deductions

Some types of expenses can be deducted from your income, resulting in a decrease in net taxable income. Other expenses can be used to create tax credits, which can further reduce taxes owed.

Federal income tax works like a mathematical formula that looks like this:

  • Total income – deductions = taxable income

  • Taxable profit x the relevant tax rates = federal income tax

  • Federal income tax – tax credits = net federal income tax

Taxpayers are responsible for calculating amounts owed for federal, state, and local income taxes. This is done by preparing the appropriate tax returns, which you can do on your own (usually using tax preparation software) or with the help of a tax professional.

Although it is again common to itemize between expenses and deductions during the tax period, this has changed since the enactment of the Tax Cuts and Jobs Act in 2017. This legislation has almost doubled the standard deduction, so many taxpayers now choose to go with the standard deduction instead of itemizing.


Tax forms

Form 1040 is the income tax return filed by individuals. You may need to supplement it with some support programs and forms to report certain income, deductions, or credits.

The simpler versions of 1040, known as Forms 1040A and 1040EZ, were available before fiscal 2018. However, the IRS and the Treasury Department have completely redesigned Form 1040, replacing the 1040A and 1040EZ. The rest of the forms are now obsolete, and most taxpayers will use the refurbished Form 1040.

A notable exception concerns non-resident aliens who submit Form 1040-NR.


Social security and health insurance taxes

The United States also has two Social Security programs: Medicare and Social Security. These are often regarded as "payroll taxes" or the Federal Insurance Contribution Act (FICA).

The social security tax finances retirement and disability benefits administered by the social security administration. This is a flat rate of 12.4% for the first $137,700 of wages, salaries, and self-employment earnings you earned each year in 2020. You pay 6.2% or half, and your employer matches that. If you are self-employed, then they are responsible for all taxes.

The Social Security tax rate does not increase in fiscal 2021, but the value of taxable income for Social Insurance increases from $137,700 to $142,800.

Medicare tax is a flat rate of 2.9% on all wages, salaries, and self-employment income. This is also shared between you and your employer if you are not self-employed. There are no limits on Medicare tax revenue.

Some taxpayers must pay an additional 0.9% Medicare fee if they earn more than $250,000 (for married taxpayers filing together) or more than $200,000 (for single taxpayers). Married taxpayers who file separate tax returns must pay the additional Medicare tax on earnings over $125,000.

Over time, you may qualify for Social Security benefits when you reach retirement age or disabled. You may also be eligible for government-subsidized health insurance through the Medicare program.


Paying taxes in the United States

Americans pay their federal income tax through withholding tax, estimated taxes, or a combination of both.


Withholding

"Withholding" means that the person or company that pays your wages deducts an amount from each of your Federal taxes, Social Security, and your Medicare wages. The money withheld is sent to the government on your behalf, and the remainder is received as a "net payment."


Estimated taxes

Self-employed people and others whose income is not subject to withholding tax, such as investment income and rental income, must file four estimated payments with the IRS based on what should be off. 

Taxpayers may be penalized if they fail to make payments deemed required by that date.


Filing Taxes

Once a year, you will file a tax return to ensure that you haven't underpaid or overpaid too much tax to the government throughout the year. This will involve an exemption from withholding taxes and estimated tax payments you have made.

Having to file a tax return is not necessarily a bad thing. This is the only way to get your money back if you are overpaying by withholding or estimating your tax payments and the IRS owes you a refund. You can even take advantage of tax credits that you wouldn't be able to claim if you didn't file.

Your deductions will appear on the W-2 Form that your employer will provide you at the end of the year. The amounts withheld are rarely exactly what you owe the government. The amount withheld from your income may be more or less than the amount of tax you owe when preparing your tax return. The IRS will issue a refund if you overpay. If you paid less, you would be responsible for paying the outstanding balance, although you can enter into an installment agreement with the IRS.

Federal income tax returns generally expire on April 15 of each year. This date can be increased by one or two days if it falls on a weekend or a public holiday.

The IRS has extended the personal income tax filing deadline from April 15, 2021, to May 17, 2021. The payment of federal personal income tax has also been extended until May 17.


Income and assets abroad

You may have investments, property, or financial accounts in countries outside of the United States. If you earn from these sources, including government pensions, interest, or investment gains, that income usually needs to be reported as well. On your U.S. tax return

You may also need to report details of any financial assets held outside the United States by completing a Foreign Bank Account Report (FinCen Form. 114) and a Foreign Financial Assets Return (IRS Form 8938) with your income tax return. Form 114 is completed separately from the income tax return.

These two forms require a lot of information. There are no fees or commissions associated with filing them, but there are severe no-show penalties.

Tax-free or deferred savings plans that you have in your home country cannot be tax-exempt or deferred here in the United States. For example, Canadian tax-free savings accounts (TFSAs) and British individual savings accounts (ISAs) are not tax-exempt. Income generated in these accounts is taxable in the United States.

If you have assets in a mutual fund or investment fund, these are passive foreign investment companies. There are special rules on taxing this type of investment income, and proper documentation will be needed to complete the tax form properly. You may need the help of a tax preparer.


Be aware of tax treaties.

The United States has negotiated tax treaties with many countries. Sometimes these treaties require that certain types of income be taxable in one country or another, but not in both, or they may set a lower tax rate or provide for special rules to determine the state of residence.

You may find that a tax treaty has special rules on how to act in certain situations if you have assets or get income from other countries. This is another good reason to consult a tax professional.


Before leaving the United States

You may need to apply for a "sailing permit" from the IRS before leaving the United States if you are the holder of a green card, a resident alien, or a non-resident alien. You may be subject to exit tax if you are permanently leaving the United States and plan to withdraw your green card. This is a special tax only for the privilege of permanently leaving the U.S. tax system. This applies to individuals and U.S. citizens who have been permanent legal residents for at least eight of the past fifteen years.

You can evade the exit tax, which is basically a tax on equity, by ditching the green card before you get to the eight-year mark. You will still need to complete the exit tax documents, but the tax itself will not apply until the eighth year of residency.

You will need to know the market value of all of your assets when you become a resident of the United States. Take a full inventory of your assets on that date. The information can be useful if you ultimately decide to forgo the green card.


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