4 Things Every Non-U.S. Resident Should Know About Taxes

When you arrive in the US as an international student or J-1 member, you are likely to be very busy. However, while thinking about boring financial forms may not be the most exciting prospect, it is very important for every non-resident in the US to understand and comply with their tax obligations. Why? Well, if you don't meet your tax obligations, your future US visa and green card applications are at risk. You may even be charged fines and penalties.

Many international students and J-1 members are eligible to claim large tax refunds at the end of the tax year. Lets discuss the type of tax you must pay while in the US, the paperwork you need to file, and your tax benefits.

Since 2010, the US has adopted the FATCA (the Foreign Account Tax Compliance Act) law, which opened the IRS tax service access to foreign bank accounts of local citizens. Also in the USA, there are rules for taxes on global income for residents and immigrants, regardless of the country of origin of the profit. Such global measures have become an occasion to think about how to reduce the tax burden and become a non-resident of the United States.

At the legislative level, it is possible to obtain the status of a non-resident, but at the same time retain citizenship by applying the Exclusion of Foreign Earned Income (FEIE) - the exclusion of foreign earned income from the taxable base in the States. This option has become especially relevant for expats who have work abroad.

Who Can Benefit from Becoming a US Non-Resident?

Becoming a US non-resident is good for individuals, but far from relevant for companies with large assets. The thing is that there are distinctions according to FEIE:

- Only salaries, income from self-employment, and the provision of services can be excluded;

- Income from gambling, benefits, investment, and pension payments cannot be excluded;

- Just one day of stay in the country (USA) more than the established period completely eliminates the application of FEIE and returns the status of a resident of America;

- Income on which you may not pay taxes in the United States, becoming a non-resident for all departments of the country, in 2020 amounted to $107,600, and in 2021 - $108,700.

Expats must become non-residents of the United States, and pass a qualification check, but must continue to file returns with the IRS before they qualify for a tax reduction. Due to the low available limit on the amount, this method of tax planning will be of interest only to individuals and micro-businesses.

Here are 4 things every non-resident in the US should know about taxes.

1. You should determine your tax residency status

It is very important to correctly determine your tax residency status as soon as you arrive in the US.

Once you have determined your tax residency status, you will be able to file fully compliant US tax documents.

In general, international students and J-1 participants are considered non-resident aliens for tax purposes during their first five calendar years in the United States.

The main difference between residents and non-residents is that US citizens are taxed on all their income regardless of in what country it is earned, while non-resident aliens only have to report their income earned in the US.

The US tax authorities - the Internal Revenue Service (IRS) - use the Substantial Presence Test (SPT) to determine whether an individual should be taxed as a US citizen or as a nonresident alien for a given year.

An individual will take the Long Term Stay Test if they have been in the US for at least 31 days in the current year and a total of 183 equivalent days in the current year and the previous two years.

If you fail the Long Term Stay Test, you will be classified as a non-resident alien for tax purposes.

2. You should submit tax documents on time

If you are earning income as a non-resident alien in the United States, you must file Form 1040NR before the May 18, 2023 tax filing deadline.

And it's important to note that even if you don't earn any income in the US, you still have an obligation to file a tax return. You must file Form 8843 with the IRS by the tax due date.

What You Will Need to File Tax Documents

When you sit down to prepare your US tax documents, you should have the following materials on hand:

1. Your residency status

2. Your Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN):

If you want to work in the US, you will need an SSN or ITIN to identify you for tax purposes. You must include your tax identification number on your tax returns, statements, and any other tax documents.

SSNs are the most common type of tax identification number. However, you will need an ITIN if you are expecting to receive taxable scholarships or grants and are not eligible for a Social Security Number (SSN).

3. Your income documents

There are three main types of income documents:

- If you received wages or tips in the US, you should have received a W2 form from your US employer by the end of February;

- You will receive a Form 1042-S from your school or institution if you received a taxable scholarship (such as a scholarship or housing allowance);

- 1099 is less common, but you can get this document if you have earned rental income, investment income, or worked as an independent contractor.

If you do not file a tax return:

- You may be subject to fines and penalties;

- You may also jeopardize your future visa applications;

- You will not receive a tax refund.

3. You can claim tax benefits under the treaty

The US has tax treaties with 65 countries around the world that non-residents are not subject to double taxation (in other words, they do not pay tax in two countries).

Under the terms of the tax treaties, many non-residents in the United States are:

- Taxed at a reduced rate;

- Exempt from US tax on income derived from certain US sources.

The United States has signed tax treaties with Armenia, Australia, Austria, Azerbaijan, Bangladesh, Barbados, Belarus, Belgium, Bulgaria, Canada, China, Cyprus, Czech Republic, Denmark, Egypt, Estonia, Finland, France, Georgia, Germany, Greece, Hungary, Iceland, India, Indonesia, Ireland, Israel, Italy, Jamaica, Japan, Kazakhstan, Korea, Kyrgyzstan, Latvia, Lithuania, Luxembourg, Malta, Mexico, Moldova, Morocco, Netherlands, New Zealand, Norway, Pakistan. Philippines, Poland, Portugal, Romania, Russia, Slovakia, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Tajikistan, Thailand, Trinidad, Tunisia, Turkey, Turkmenistan, Ukraine, UK, USA, Uzbekistan, and Venezuela.

If you fall into this category, you can apply for tax credits by filing your tax return at the end of the tax year.

4. You can claim a tax refund

The purpose of filing a tax return is to verify the income you received during the tax year and the tax deducted. It is also an opportunity to claim any deductions you may be eligible for.

If there is a tax underpayment, you will have to pay the balance of the debt to the IRS.

On the other hand, if you overpaid your tax bill, you will be entitled to claim a refund of the overpaid amount.

Each year, thousands of international students and J-1 participants are eligible to claim a US tax refund. For many non-residents, the refund amount can be up to four digits.