Tax Season Tips for U.S. Immigrants

Immigrants coming to the US would be considered resident alien if spending too much time in the US. With that classification comes 1) the fact that they are taxed on their worldwide income 2) various reporting requirements for foreign bank accounts, foreign corporations, foreign trusts (including banking products which were typical/widespread in their home country).
Similar reporting requirements apply to US citizens living abroad, but US citizens moving abroad are more likely to inquire about the implications of that than people who invested in non-US products without envisioning that they would become US taxpayers. Dude J all of these financial products that you have left in your home country, well, you might not realize it but they will impact your US tax return once you become a US resident for tax purposes.

“dos-and-don’ts”

DO file all the informational forms you are supposed to file
DO be mindful about the implications of being a US resident for tax purposes (tax on worldwide income and informational forms)
DO try to remain a non-resident, especially if you have significant income or activities (corporation, bank accounts) occurring outside the US.
DO sell toxic assets before becoming a US resident (foreign corporation generating subpart F income, PFICs, well, basically check with a CPA who knows what he’s talking about to determine if you have toxic assets and what can be done about it)

DON’T ignore your non-US income or activities when preparing your US tax returns if you are a US resident.
DON’T assume that a tax preparer in the US will know these rules, unless he already has clients with reporting requirements for foreign bank accounts, corporations or trusts.

 

general tips and strategies, and common mistakes or pitfalls. 

I’ll just details the rules here. The tips would be to 1) avoid being a US resident or else, 2) comply by reporting the foreign income as well as all the informational forms.

common mistakes or pitfalls: People just screw up by not filing a form they didn’t know existed, or they become US resident by failing to take advantage of one of the exception available to them.

 

  1. How does one become a US resident for tax purposes?

1.1. If you are a lawful permanent resident (i.e. have a “green card”), you are a US resident for tax purposes (there is one exception, but it could jeopardize your immigration status). That means that if you want to avoid being a US resident for tax purposes, you should stay in the US with a non-immigrant immigration status (some of which still allow extended stay, such as E, H1-B, L-1)
1.2. If you meet the substantial presence test
1.2.1. What is the substantial presence test?
– Take the number of days you were in the United States in the current tax year (2015). Write down that number.
– Take the number of days you were in the United States in the previous tax year (2014). Divide it by three. Write down that number.
– Take the number of days you were in the United States in the tax year before that (2013). Divide it by six. Write down that number.

Add the three numbers you wrote down, if the sum equals or is greater than 183 (and you spent at least 30 days in the United States in the current tax year), you are a US resident for tax purposes.

 

1.2.2. Exceptions to the substantial presence test

Even if you meet the substantial presence test, you can still avoid being a US resident for tax purposes by:

1.2.2.1. Excluding days using form 8843. Some days don’t count for the purposes of the substantial presence text, most notably days spent as a student on an “F, ” “J, ” “M, ” or “Q ” non-immigrant status.

1.2.2.2. Not being a US resident for tax purposes by filing form 8840. This can only be used if the taxpayer genuinely had a closer connection with a foreign country or countries. It can only be used if the taxpayer spend less than 183 days in the United States during the current tax year. It exempts the taxpayer from having to file all informational forms. To be valid, form 8840 must be timely filed (it can not be attached to a tax return filed after the deadline)

1.2.2.3. Not being a US resident for tax purposes by taking a treaty position (form 8833). One still essentially need a closer connection to a foreign country (as defined by the tax treaty between the US and the country where the taxpayer claims to be a resident). By using this one, the taxpayer avoids being taxed on their worldwide income, but he/she is still subject to essentially all the informational forms (with the exception of form 8938). This one can be filed with a late return.

 

 

  1. What are all these nasty informational forms?
    (All these penalties can be avoided using a “reasonable cause letter”. Innocent taxpayers are not usually paying it, but it definitely did happen)

2.1. FBAR. Form Fincen 114 is used to report non-US bank accounts. It is required once the aggregate maximum balance is more than $10,000 (yep, they set that amount in the 70s, never adjusted it for inflation or otherwise). The penalty for failure to file can be as high as 50% of the account balance (in case of willful failure to file). The IRS can go back 6 years, so after more than 2 years it would be greater than the total account balance but the in its great generosity, the IRS recently took an administrative position that at most they’ll take (the penalty will be equal to) the totality of the account balance. They will just take everything, nothing more than that, these are really nice people.

2.2. Form 8938. This is essentially the same version as the Fincen 114, it is attached to the tax return and covers some other foreign assets (such as interest in a foreign corporation or trust). For taxpayers living in the United States, it is to be filed if the value of such foreign assets is greater than $50,000 (unmarried taxpayers or married filing separately) or $100,000 (married filing jointly). Interesting caveat: if the taxpayer is not required to file a tax return, he/she is not required to file form 8938 either. Penalty for failure to file is $10,000 (that’s going to be a common theme here)

2.3. Form 5471. That’s essentially a corporate tax return for a foreign corporation that the taxpayer owns. There are some rules to work around to properly report the income of the corporation (subpart F – hint: just because the corporation didn’t distribute the income doesn’t mean you won’t have to pay tax on it). The penalty for failure to file is … did you say $10,000? If so, you got it, $10,000. (there are forms similar to the 5471 for partnerships (form 8865) and disregarded entities (form 8858))

2.4. Form 3520 (and most likely a “substitute” form 3520-A). This one is to be filed by people essentially owning part of all of a foreign trust. In the IRS view of the world, foreign trusts include exotic products such as a Canadian product used to save for university fees for their children (RESP, a product similar to a 529 college savings plan) or foreign pension plans similar to a 401(k). In its great generosity, the IRS however ruled that in most cases Mexican Fideicomiso are not trusts (considered as a trust for Mexican purposes and used to hold Mexican real estate). The penalty for failure to file is … $10,000 (you got it)

2.5. Form 8621 and PFIC are beyond the scope of this article, but if you have large holdings of a foreign corporation or mutual fund which could be considered a PFIC, you might want to sell it before becoming a US resident.

 

  1. Coordination with immigration status

Not much going on here. Main ideas:
– One you have a green card, you are a US resident for tax purposes.
– Some non-immigrant status will have the days excluded from the physical presence test, mostly a student on an “F, ” “J, ” “M, ” or “Q ” non-immigrant status. The same applies to diplomats (diplomats don’t even have to file form 8843)
– also another reason against getting a green card: once one has a green card for 8 years out of a 15 year period, they are subject to an exit tax once they leave the US (form 8854, essentially the same rules as people surrendering US citizenship). That said, of course, a green card is the most “permanent” immigration status, but you have to decide what you want, if you want to stay in the US, get a green card, you will also be taxed similarly to a US citizen.

 

My bio: I am Olivier Wagner, CPA. I am operating 1040abroad.com – I mostly prepare returns for US citizens living abroad. But once somebody becomes a US resident, essentially the same rules apply (I can also prepare returns for non-resident). I grew up in France, immigrated to the US (my history of immigration status: J-1 (2 times), visa waiver, K-1, adjustment of status, green card, naturalization as a US citizen). Since I am not an attorney, I can not provide immigration services to my clients, but I completed all my immigration forms myself, so feel free to send me any immigration question for the purpose of this article. opwagner@gmail.com (personal) & owagner@1040abroad.com (work)

You might want to use the following for my bio in the article:

Olivier Wagner is a tax preparer who is both an Enrolled Agent and a CPA (New Hampshire) very well aware of the tax situation of both US non-residents, US citizens living abroad and immigrants becoming US tax re. He runs the tax practice 1040 Abroad.

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