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Q&A: Taxigration (Where Tax and Immigration Intersect)

08Jul2016

Q&A: Taxigration (Where Tax and Immigration Intersect)

Q. What is the difference between a resident for tax purposes (tax resident) and a resident for immigration purposes (lawful permanent resident)?

A. A lawful permanent resident is someone authorized to live in the U.S. permanently and is always a tax resident.  A tax resident includes a U.S. citizen, a lawful permanent resident and an alien that meets the “substantial presence” test (nonresidents that have been physically present for at least 183 days during the current and past three years, counting all the days in the current year plus 1/3 of the days present in the prior year plus 1/6 of the days present in the year before that).

Q. Who must file a US tax return?

A. All U.S. citizens and lawful permanent residents must file a Form 1040 U.S. tax return and pay taxes on worldwide income.  Nonresidents must file Form 1040NR and pay taxes earned income from U.S. sources.  Other non-residents (F-1, M, Q, in limited circumstances, and those who do not meet the substantial presence test) do not need to file a U.S. tax return.

For those who are required to file a return, there are vehicles to avoid taxes such as
– Treaties between the US and other countries
– Credits for foreign earned income

Note: You need to file a return even if you do not owe taxes.  For example, if you have foreign earned income, you do not actually get the credit unless you file a return. If you do not file a return the IRS can file a return for you  – but it will favor the IRS and most likely determine that you owe.

Example 1: L visa non-immigrant visa holder enters the U.S. in February but does not stay in the U.S. 183 days in the first year. Is he or she a tax resident? No, because the visa holder is not a U.S. citizen or green card holder (permanent resident) and does not meet the substantial presence test. The taxpayer will file a 1040 NR nonresident return. Next year, the visa holder could trigger tax residence. If that person is from a country with no tax treaty with the U.S. there may be no relief from U.S. taxation.

Example2: If H-1B visa holder enters the US on October 1, must he or she report U.S. income? No because the visa holder did not meet the substantial presence test.

Example 3: What if the H-1B visa holder had an adjustment of status application approved and converts to a green card on December 1? A non-immigrant visa holder that transitions from a nonresident and a resident for tax purposes in the same year is considered a Dual-Status Taxpayer. A Dual-Status Taxpayer files two tax returns for the year—a 1040 for the portion of the year when considered a nonresident, and a 1040NR for the portion of the year considered a resident.

Example 4: A Lawful Permanent Resident who leaves the U.S. for a year or more (and hopefully filed a re-entry permit prior to departure) should file a 1040 resident tax return not 1040NR. Notably, failure to file a resident tax return can also be used to show abandoned of LPR status.

Q. What is the Foreign Bank Account Report (FBAR)?

A. FBAR is the disclosure of foreign bank accounts by lawful permanent residents and U.S. citizens on Form TD F 9022. Although the FBAR does not trigger tax, if the highest balance of any account during the year is $10,000 or more then the account holder(s) are subject required to disclose the amount of account assets.

Caution: An adult daughter who is a signer on her mother’s account with more than $10,000 is required to file the FBAR. So beware if you are an authorized signer on a foreign bank account. Failure to file the FBAR can result in a penalty of up to 50% of the highest balance on accounts owned by the taxpayer in the year in question.

Q. Can failure to pay taxes prevent a permanent resident from getting citizenship?

A. An improperly filed tax return can affect naturalization petitions that require “good moral character” for a statutory period (typically five years, or three years if the naturalization is based on marriage to a US citizen), because it raises the issue of fraud, or knowledgeable, willful or malicious conduct.

Tax errors that raise a presumption of fraud:
– Improper claims to dependents: Claiming other people’s children to get a higher exemptions and deductions, or allowing someone else to use your kids for their return. Immigration will certainly presume that you conspired with other taxpayers to cheat the IRS and split the refund.

– Child Tax Credit: Claiming a dependent for the credit when the dependent did not live with you.

– Earned Income Tax Credit: Using the single or head of household status instead of married filing jointly when your spouse has an ITIN in order to get the credit. ITIN does not authorize employment, therefore the taxpayer would not qualify for the earned income credit. USCIS looks at the tax returns to see if the couple earns too much money for the Earned Income Credit, but files separate returns so that one parent files as Head of Household and claims the kids to get the credit.

Q. Can family members abroad be claimed as dependents?

A. Dependents can include Canadian, Mexican and Indian residents that meet the definition of dependent because the U.S. has special tax treaties with these countries. There are two types of dependents:

1. Qualifying family members. This includes relative that do not live with you (and the taxpayer claiming the dependent gets a bonus deduction if child under age 17).  Keep receipts where you sent the money in Mexico. Be careful that other family members sending money home are not also claiming more than 50% support of the same dependent.

2. Qualifying member of the taxpayer’s household.  This includes non-relatives that live with you.

Q. Who qualifies for retroactive Earned Income Tax Credit (EITC)?

A. A taxpayer can claim the EITC after his or her spouse or child  becomes a U.S. permanent resident and gets a social security number.  A refund for EITC can be claimed for up to 3 years back. This can result in a significant financial windfall.

– Hortencia Torres and Suzette Blackwell

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  • 8 Jul, 2016
  • suzette blackwell
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  • H-1B visa, naturalization, nonimmigrant visa, permanent resident,

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