Tax Implications on Certain Immigrants and Non-Immigrant

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Many believe that if they do not have a social security number, they are exempt from taxation. The ITIN (Individual Taxpayer Identification Number) is a 9-digit tax processing number issued by the IRS.

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Tax Implications on Certain Immigrants and Non-Immigrant

  1. 1. Tax Implications on Certain Immigrants and Non-ImmigrantITIN’sMany believe that if they do not have a social security number,they are exempt from taxation. The ITIN (Individual TaxpayerIdentification Number) is a 9-digit tax processing number issuedby the IRS. ITIN’s are issued regardless of immigration statusbecause both resident and non-resident aliens may have U.S.tax return and payment responsibilities under the InternalRevenue Code. ITIN’s do not authorize work in the U.S. orprovide eligibility for social security benefits. An originalpassport is one of the 13 types of documents that areacceptable proof of identity and foreign status.IRS Publication 1915 states the following question: “Can I get anITIN if I am an undocumented alien?” And it gives the answer:“Yes, if you are required to file a U.S. federal income tax returnor qualify to be listed on another individual’s tax return, youmust have either a valid social security number or an ITIN. Ifyou are an undocumented alien and cannot get a social securitynumber, you must get an ITIN for tax purposes.”
  2. 2. Resident AlienAn individual who is not a U.S. citizen is classified as a residentalien if he meets 1) the lawful permanent resident test, 2)thesubstantial presence test, or 3)elects to be treated as aresident. The substantial presence test uses a complicatedformula under which the individual is treated as a resident alienif they are present in the U.S. a) for at least 31 days during thecurrent year, and b) for a total of 183 adjusted days under theformula.Non-Resident AlienOn the other hand, income of a non-resident alien that is noteffectively connected with the conduct of a U.S. trade orbusiness is generally exempt from U.S. income tax unless it isfrom sources within the U.S. and falls within the definition of“fixed or determinable annual or periodical gains, profits, andincome” (otherwise known as “FDAP”). FDAP includes wagesand compensation, interest, dividends, rents and royaltiesreceived from U.S. sources, but does not include capital gainsand other income realized from the sale of property. The tax onFDAP is applied at a flat rate of 30 percent and is usuallycollected by the payer of income who withholds this tax fromthe nonresident alien and remits the tax to the IRS. Nodeductions are allowed in arriving at the taxable amount.
  3. 3. Salaries, wages and compensation from U.S. sources areincluded in FDAP and these payments are subject to either (i)the 30 percent withholding tax, or (ii) wage withholding on thesame basis as U.S. citizens and residents. Wages, salaries andcompensation are U.S. source if such payments relate toservices performed in the U.S. However, if such compensationdoes not exceed $3,000 for a tax year the income is treated asforeign source, and not subject to withholding, if (1) thenonresident is temporarily present in the U.S.; (2) thenonresident is not present in the U.S. for more than 90 daysduring the tax year; and (3) the employer is either a foreignperson not engaged in business in the U.S., or is a foreign officeof a U.S. employer. Most students will fail to qualify for thisexemption. Still, because the performance of services in theU.S. generally gives rise to the existence of a U.S. trade orbusiness (and because nonresident student aliens holding F, Jor M visas are always considered engaged in a U.S. trade orbusiness), payments for such services are often not subject tothe withholding tax and are instead taxed under the effectivelyconnected income rules.Income of a nonresident alien that is effectively connected withthe conduct of a U.S. trade or business (otherwise known as“effectively connected income” or “ECI”) is subject to taxationon a “net basis,” meaning that the nonresident may take intoconsideration certain allowable deductions when computing
  4. 4. taxable income. Additionally, tax is payable following the closeof the tax year at normal, graduated tax rates.Items ordinarily included in FDAP are instead treated as ECI ifone of two tests is satisfied. The first test is satisfied if the FDAPtype income arises from assets used or held in the conduct ofthe U.S. business. The second test is satisfied if the activities ofthe U.S. trade or business were a material factor in producingsuch income.The U.S. has income tax treaties in effect with many countries.If you are a resident or citizen of such a country you may qualifyfor certain benefits that reduce or eliminate the need towithhold income or employment taxes.Foreign StudentsWhen determining the impact of U.S. income taxes on a foreignstudent, the analysis always begins with determining whether astudent is a “resident alien” or “non-resident alien” for taxpurposes.Since most school years start in August or September, mostforeign students will likely not meet the substantial presencetest above during their first year. Also, there is an exemption tothe substantial presence test for students. A special form needsto be filed with the IRS to verify this exemption. If a person isdetermined to have violated their F, J, or M visa according to
  5. 5. the IRS, they can lose this exemption. There are severalexceptions to this exemption, so please call us at 281-340-2074with any questions.Taxable scholarships and grants received by nonresident aliensare subject to the withholding tax if the payer of thescholarship or grant resides in the U.S.; however, the rate of taxis reduced to 14 percent. Generally, scholarships and grants aretaxable to the extent not used for qualified expenses, whichinclude tuition and fees required to enroll in school. Therefore,amounts used for living expenses are generally taxable. To theextent a scholarship or grant is provided by your educationalinstitution, the school may actually withhold tax from thatportion of the scholarship or grant payable towards expensessuch as room and board. Ordinarily, nonresident studentsadmitted to the U.S. under F, J or M visas that receive incomefrom wages, tips, scholarships and grants are subject to tax as ifsuch income is ECI.Foreign students who are treated as resident aliens are taxedon their worldwide incomes in a manner identical to that ofU.S. citizens. Annual income tax returns must be completed andincome tax should be paid to the U.S. government.
  6. 6. In SummaryNon-Citizens with U.S. source income should always considerconsulting with a qualified tax professional as the tax rulesaffecting these groups is unfortunately very complex.Disclaimer: This article is not meant as specific advice regardinga person’s individual case. An attorney should be consulted.This article does not create an Attorney-Client relationship. Anytax information or written tax advice contained herein(including any attachments) is not intended to be and cannotbe used by any taxpayer for the purpose of avoiding taxpenalties that may be imposed on the taxpayer. (The foregoinglegend has been affixed pursuant to U.S. Treasury Regulationsgoverning tax practice.)

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