Foreign nationals working in the US – beware!

A look at some of the numerous complex tax rules associated with working as a foreign national in the US.

If you’re a foreign national working in the US, it’s important to fully understand your worldwide income and report it to the US Government along with disclosing particular information about all your foreign financial accounts. The IRS penalties to foreign nationals for non-compliance with the rules are severe and could range in the hundreds of thousands of US dollars.

Tax residency status

If you obtain a green card, you will be a US tax resident from the day you enter the country. If you enter the US with a non-immigrant visa, generally, you may become a US income tax resident under a certain test under the US tax code that is based on the number of days that you are physically present in the US.

If you meet the criteria of being a US tax resident you must report certain information to the US taxing authorities. You must file certain tax forms by specified deadlines so that you are not monetarily penalized for not doing so.

You could qualify for an exception to meeting the US resident tests. Two of these exceptions are the ‘closer connection exception’ and the ‘income tax treaty tie-breaker’.

Closer connection exception

To meet the ‘closer connection exception’ you are required to meet certain conditions, including the following:

  • You have a ‘tax home’ in a foreign country for the current year
  • You have a ‘closer connection’ with the same foreign country than with the US for the current year
  • You do not have an application for a green card pending at any time in the year, and you have not taken any steps to apply for green card status
  • You have notified the IRS of qualification for this exception on Form 8840, ‘Closer Connection Exception Statement for Aliens’

Income tax treaty tie-breaker

If you become a US tax resident, using the rules mentioned above, and you are also a tax resident of another country that has a tax treaty with the US, you may be eligible to be treated as a tax resident of the other country and not the US using the so-called treaty-tie breaker rules.

Generally, you would be treated as a tax resident of only one of the countries in the following circumstances:

  • Where you have a ‘permanent home’ available
  • If permanent homes are available in both countries, where you have your ‘center of vital interests’, i.e., where your personal and economic relations are closer
  • If your center of vital interests cannot be determined, or if no permanent home is available to you in either country, where you have ‘an habitual abode’
  • If an habitual abode exists in both countries (or neither), an individual may be treated as a resident of the country that they are a citizen of
  • If you are a citizen of both countries or neither, as determined under the treaty's mutual agreement/competent authority procedure.

Forms to complete

The tax forms required to utilize the treaty tie-breaker rules and/or be compliant with the US tax code vary for residents, non-residents and US taxpayers according to their individual circumstances. So it’s important to consult with your tax accountant to ensure that you file the right tax forms correctly.

For more information, contact:
Dale Mason
The Wolf Group, US
T: +1 (703) 502-9500 x121
E: dmason@thewolfgroup.com

www.thewolfgroup.com

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