Paying Taxes in the U.S. as a Foreigner
U.S. tax laws are complex and constantly evolving. Therefore, it can be difficult to comprehend, especially for foreigners who may find the tax system is different from their home country. A good understanding of these laws and how they operate is critical to enable you to navigate the complex process involved in paying taxes as a foreigner.
Are you a foreigner with little or no knowledge of the U.S. tax system? Well, rest easy because this page will provide you an insight on tax filing requirements, how to file tax based on your resident status and all the specifics of paying taxes in the U.S. as a foreigner.
Who Is Required to Pay Taxes in the United States?
Every foreign U.S. resident, including both resident aliens and nonresident aliens who work and accrue taxable income, must pay taxes through the Internal Revenue Service (IRS) to the U.S. government. Publication 519, the U.S. Tax Guide for Aliens, explains that a key difference in how you are taxed depends on whether you are a resident alien or a nonresident alien.
For tax purposes, a resident alien is someone who is a U.S. citizen or a foreign national who is either a green card holder or meets the “substantial presence” test for the calendar year. A non-resident alien, on the other hand, is someone who is not a U.S. citizen and who does not meet either the “green card” or the “substantial presence” test.
To pass the substantial presence test, you must meet the following two requirements:
- Physically present in the United States for 31 days during the current year
- Physically present in the United States for 183 days during the 3-year period that includes the current year and the two years immediately before that. The calculations for the 183 days are as follows:
- All the days you were present in the current year
- 1/3 of the days you were present in the year before the current year
- 1/6 of the days you were present in two years before the current year
Say you lived in the United States for 140 days each year during 2020, 2019, and 2018. According to the substantial presence test, you are a resident alien because you maintained a physical presence in the U.S. for more than 183 days over the last three years--specifically 140 days in 2020, 46 days in 2019 (⅓ of 140), and 23 in 2018 (⅙ of 140).
When it comes to paying taxes, a resident alien is taxed on their worldwide income, while a nonresident alien pays tax based solely on their U.S. source income.
Is it illegal not to pay your taxes in the USA as a foreigner?
Yes, it is illegal not to pay taxes in the U.S. whether you are a citizen or a foreigner. Intentionally under representing your tax liability, filing an incorrect U.S. tax return, making a willfully misleading statement on your tax return, or complete failure to comply with the U.S. tax law constitutes tax evasion. Failure to pay taxes may result in fines and criminal penalties that may impact a future residency application.
How Much Tax Do You Pay in America?
How much you pay in taxes as a foreigner in the United States largely depends on whether the government classifies you as a resident or nonresident alien.
Resident aliens are usually considered permanent residents and become subject to the same tax obligations as U.S. citizens, meaning their worldwide income is also taxable.
Nonresident aliens pay taxes on their U.S. source income, and they generally are taxed at a flat rate of 30 percent. This income comprises of two categories:
- Effectively Connected Income (ECI): Income connected with a trade or business in the United States
- Fixed, Determinable, Annual, Periodical (FDAP) Income: Predictable Income, such as rental property income, interest, etc.
A reduced tax rate may apply if there is a tax treaty between the U.S. and a foreign country. Note that you must have either a Social Security Number (SSN) or an Individual Taxpayer Identification Number (ITIN) to take advantage of this benefit.
Along the same lines as tax treaties, the U.S. has entered into totalization agreements to avoid double taxation--specifically regarding social security taxes in the U.S. and the recipients’ home country. Through our independent marketplace at Relocate, you can connect with a qualified Advisor who can determine whether or not your country allows you to qualify for these tax benefits.
<h2>How to File a U.S. Income Tax Return</h2>
Below we will take a closer look at how to file your U.S. Income Tax Return properly. It is an extensive process, and this page is meant to solely provide an overview.