Immigration and Compliance Briefing: Tax Law Considerations Related to U.S. Immigration Status
Wiggin and Dana’s Immigration and Nationality Law and Compliance Practice Group addresses the spectrum of business immigration needs for employers and related individuals, including the incidental compliance areas that intersect with immigration law. Tax law is one such area. As we begin a new year, we are providing a quick refresher on some primary tax law considerations related to U.S. immigration status. Of course, it is imperative to consult with immigration and tax advisors to ensure compliance in both areas.
For U.S. federal income tax purposes, the Internal Revenue Service (“IRS”) categorizes individuals into three groups: 1) U.S. citizens, 2) resident aliens, and 3) nonresident aliens. Each group is subject to different rules with respect to U.S. tax payment and filing obligations, and there are different withholding requirements for payments made to individuals in different groups. The discussion below will focus on the U.S. tax considerations for resident aliens or nonresident aliens. All individuals working in the U.S. should be aware of who, and who is not, a resident for tax purposes. Further, it is possible to be both a resident alien and nonresident alien in the same year, typically the year that an individual arrives in the U.S. Such individuals have “dual status” for that year and should consult with a tax advisor regarding the requirements associated with that status.
An individual does not need to be a U.S. citizen to be deemed a “resident” for U.S. tax purposes. An individual that is not a U.S. citizen will be a resident alien if such individual meets either of two tests: the “green card” test or the “substantial presence” test. The green card test is satisfied if, at any time during the calendar year, the individual obtains lawful permanent resident status in the U.S. (an alien registration or “green card”) issued by the U.S. Citizenship and Immigration Services. Alternatively, an individual satisfies the substantial presence test for 2021 if such individual is physically present in the U.S. on at least (1) 31 days in 2021 and (2) 183 days during the 3-year period that includes 2021, 2020 and 2019, counting:
All days present in 2021;
1/3 of the days present in 2020; and
1/6 of the days present in 2019.
Once an individual becomes a resident alien, all worldwide income becomes subject to U.S. taxation. This means that all interest, dividends, wages, or other compensation for services, income from rental property or royalties, and other types of income, must be reported on U.S. tax returns.
A nonresident alien is any non-U.S. citizen who is not a resident alien. There are many different visas available to nonresident aliens spending time in the U.S. While the specific tax treatment of nonresident aliens generally depends on the individual’s visa status, a nonresident alien usually is subject to U.S. federal income tax only on U.S.-source income.
A nonresident alien who is spending time in the U.S. and receives U.S. source income should file taxes on form 1040NR (or, if qualified, 1040NR-EZ). A nonresident alien will be required to enter an “Identifying Number” on the tax return, and if s/he is not eligible for a Social Security Number, s/he should apply for an ITIN (individual taxpayer identification number).
It is also important to consider non-income taxes, such as federal unemployment taxes (generally referred to as “FUTA”) and federal taxes that fund Social Security and Medicare programs in the U.S. (generally referred to as “FICA”). These are taxes that are paid on wages. Only employers are responsible for paying unemployment tax, while taxes for FICA are paid in part by employers and in part by workers. The worker’s portion of the FICA tax typically is withheld from such worker’s paycheck.
However, certain nonresident aliens are not subject to FICA tax and employers of these nonresident aliens are not obligated to pay either FICA tax or unemployment tax with respect to these individuals. Examples of nonresident aliens not subject to these taxes include students, scholars, teachers, professors, researchers and other aliens temporarily present in the U.S. in F-1, J-1, M-1, or Q-1/Q-2 nonimmigrant status.
In cases where nonresident aliens are required to pay FICA tax, such nonresident aliens should be aware of agreements called “totalization agreements” that the U.S. has entered into with a number of other countries, the purpose of which is to avoid double taxation with respect to social security contributions. Currently, such agreements exist between the U.S. and the following countries: Australia, Austria, Belgium, Brazil, Canada, Chile, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Luxembourg, Netherlands, Norway, Poland, Portugal, Slovak Republic, Slovenia, South Korea, Spain, Sweden, Switzerland, the United Kingdom, and Uruguay.
According to U.S. law, all U.S. persons (citizens, green card holders, and residents) are required to file an annual tax return if their income exceeds a certain amount set by the IRS each year, regardless of where they reside or the source of their income. This is due to the U.S.’s relatively unique worldwide taxation scheme basing taxation on status in the U.S. and physical presence rather than source of income or general residence.
U.S. taxation on worldwide income can comes as a surprise, in particular to the colloquially termed “Accidental Americans.” These individuals residing abroad are U.S. citizens by birth, and are often unaware of their U.S. citizenship. The “accidental” citizenship can occur by birth in the U.S. or by birth abroad to at least one U.S. citizen parent. In many instances, the Accidental American has only briefly, or never, lived in the U.S,. and is also a citizen of a foreign country. These individuals often only realize that they are U.S. citizens when a problem arises, such as the death of the U.S citizen parent triggering inheritance and estate review, the denial of a loan, or the receipt of tax delinquency notification from the IRS. In addition, green card holders who have moved abroad and whose physical green cards may have expired but who have not renounced or lost their status in the U.S. may fall into this category.
While the U.S.’ worldwide taxation structure is not new, prior to 2010 the IRS did not generally enforce tax requirements for Accidental Americans. In 2010, Congress passed the Foreign Account Tax Compliance Act 2010 (FATCA) to enforce existing tax laws. FATCA introduced additional reporting requirements for both individuals and institutions, such as banks, and called for increased enforcement.
FATCA’s implementation has led to a renewed focus on tax compliance for all U.S. citizens and green card holders living abroad, regardless of whether they are “Accidental Americans” or simply unaware of their worldwide tax requirements as citizens/green card holders. All persons with permanent U.S. status abroad should be aware of their worldwide tax and reporting responsibilities. Since tax responsibilities vary by country and may be impacted by tax treaties, residence/citizenships or other circumstances, tax and immigration advisors should be sure to have a complete understanding of an individual’s citizenship(s) and residency in order to comprehensively assess an individual’s tax responsibilities/requirements.
Employees with L-1 or H-1B Visa Status
Due to the length of time some L-1 and H-1B visa holders remain in the U.S., it is possible that they transition from being nonresident aliens to resident aliens (and therefore must begin to file Form 1040 tax returns with the IRS). It is even possible, noting the formulation above, that an employee on an L-1 or H-1B visa becomes a tax resident of the U.S. during the first year spent in the U.S. If so, s/he is required to file a tax return as a “dual-status alien,” or, more simply, as an individual who is both a resident and a nonresident for any given year.
Once an individual on an L-1 or H-1B visa becomes a resident for U.S. tax purposes, s/he should review whether his/her home country has a tax treaty with the U.S. to avoid double taxation. Some countries require a “certification of residency (Form 6166)” to take advantage of such treaties. To receive the Form 6166 certification or a letter of U.S. residency certification, an individual should complete Form 8802, Application for United States Residency Certification.
Other Concepts to Consider
In addition to the points discussed above, there are other areas where tax law and immigration law overlap. Tax and immigration advisors can assist in processing these complex areas of law within an individual’s specific situation and circumstances. These areas include, but are not limited to: 1) tax treaties between the U.S. and other countries, which may serve to reduce both the rate of withholding and the actual tax due on certain U.S.-source income; 2) the “exit tax” applicable to U.S. citizens and certain permanent residents wishing to expatriate from the U.S.; and 3) U.S. estate tax and inheritance taxes applicable in many countries outside the U.S.
Tax and immigration laws are complex. Anyone impacted by these laws may review IRS Publication 519 U.S. Tax Guide for Aliens, and should consult with tax and immigration advisors regarding individual circumstances, including classification as a resident or nonresident alien, whether any special rules apply as a result of family relationships with U.S. citizens, whether and how tax treaty benefits apply, and what income should be taxed in the U.S.
 As noted above, a “resident” is anyone who meets the IRS “substantial presence” test for the calendar year. In addition, the U.S. taxes U.S. citizens and green card holders on their worldwide income even if they have not resided in the U.S. for many years.