Tag Archives: Form 1040

Foreign Earned Income Exclusion and Covid-19

 
Comments Off on Foreign Earned Income Exclusion and Covid-19

Covid-19 has caused a global health emergency and is an ‘adverse condition’  meriting relief for individuals that reasonably expected to become a “qualified individual” for purposes of claiming the foreign earned income exclusion, FEIE, under IRC section 911, but left the foreign jurisdiction during the period described in Revenue Procedure 2020-27.

Do read the revenue procedure carefully if you think this may apply to you!

There may be things you need to do later in 2020 for this to be available to you.

Rev. Proc, 2020-27 will be published in Internal Revenue Bulletin 2020-20 to be issued on May 11, 2020

Substantial Presence Test, Treaty Income Exclusion and Covid-19

  , , , ,
Comments Off on Substantial Presence Test, Treaty Income Exclusion and Covid-19

IRS has issued a revenue procedure that allows the use of the medical condition exception on Form 8843 to except 60 consecutive days spent in the U.S.  from counting towards presence in the U.S.  during the “COVID-19 Emergency Period”. The sixty-day time period that may be excepted may start on a date of the individual’s choice during a time period between February 1, 2020, and on or before April 1, 2020.

The same procedure provides for an individual to exclude those days of presence in order to claim benefits under an income tax treaty with respect to services income.

This revenue procedure, Rev. Proc. 2020-20 will be published in Internal Revenue Bulletin to be issued on May 11, 2020.

This might affect withholding for 2020, the income tax form to be filed for 2020 (1040NR or 1040).  As appropriate, individuals may want to adjust their tax planning and notify employers. Some individuals are eager to meet the SPT and file on Form 1040, others prefer not to become tax residents filing on Form 1040 any sooner than required.

Diversity Immigrant Visa (Green Card) Holders and U.S. Taxes, by Jean Mammen, EA

  , , , , ,
Comments Off on Diversity Immigrant Visa (Green Card) Holders and U.S. Taxes, by Jean Mammen, EA

Winners of the U.S. diversity immigrant visa lottery may welcome more information about the U.S. tax system. They may not have considered tax implications when deciding if or when to accept the visa and enter the U.S. Usually they have not previously spent long periods in the U.S. on a visa, and they may not have family or friends familiar with the U.S. tax system.

Taxable Income

A green card holder becomes responsible for reporting and paying U.S. taxes on total worldwide income, by U.S. tax rules, from the date they enter the U.S. on the immigrant visa and become a ‘Lawful Permanent Resident’ (LPR) (green card holder). This continues until the LPR (later perhaps citizen) formally ends that status as well as all tax responsibilities through  ‘expatriation’ procedures.

Resident vs non-resident

Let’s compare:

Taxpayer DIV was just issued an immigrant visa (IV) through the Diversity lottery program. Once admitted to the U.S., they will become a Lawful Permanent Resident, a green card holder.

Taxpayer H was just issued an H1b visa because they were sponsored for a job in the US. This is a non-immigrant visa (NIV) allowing a temporary stay.

The visas of both taxpayers were issued November 5th, 2019.

This will be the first ever visit to the U.S. for both individuals.

First situation:

Both taxpayers enter the U.S. on November 7, 2019.

Taxpayer DIV will have two different U.S. residency statuses in 2019 – non-resident alien from January 1, 2019, through November 6, 2019, and resident alien by green card, and thus a tax resident, from November 7 through December 31. Form 1040 is their tax return and Form 1040NR is attached as a statement. Total worldwide income is included on Form 1040. The Form 1040NR may show zero income if there was no U.S. source income before they entered the U.S.

Taxpayer H will begin counting days of presence in the U.S. towards meeting the Substantial Presence Test (SPT) on November 7. They will not meet the SPT in 2019 but are likely to meet it in mid-2020.

For 2019, Taxpayer H will be a non-resident alien filing on Form 1040NR and include only U.S. source income.

Second situation:

Both taxpayers delay entry into the U.S. until February 7, 2020.

Neither taxpayer will need a 2019 U.S. income tax return.

Taxpayer DIV is considered a Lawful Permanent Resident (and thus a tax resident) beginning January 1, 2020. They did not enter the U.S. until the year following the year the immigration visa was issued. Their status changed on January 1 of the following year, no matter when they entered the U.S. in the following year. Form 1040 will be the tax return. It will include total worldwide income received during the full year of 2020.

Taxpayer H begins counting days of presence in the U.S. on February 7. They will meet the SPT when the total number of days in the U.S. reaches 183. Once the SPT is met, U.S. tax residency begins on their first countable day in the U.S. in 2020, February 7. Taxpayer H will have dual tax residency for 2020 and use both Form 1040 and Form 1040NR to cover the entire year. Form 1040 will be the tax return. It will include total worldwide income from February 7 through December 31, 2020. Form 1040NR will be attached as a statement, and include only U.S. source income received from Jan 1, 2020, through February 6, 2020.

Simple or complicated tax return

If this is not the taxpayers’ first visit to the U.S., determining the date (tax) residency began will require more information and more steps.

How complicated their U.S. tax return will be will vary according to their life situation. A lottery candidate may be a young high school or college graduate, just beginning their work life, a business owner, a self-employed person, or a mid-career professional. They might be single or have a family. They might have assets in the country where they have been living. Their home country tax situation might be simple or complicated. It interacts with their U.S. tax situation.

Seek out a tax professional with experience preparing dual status returns for visa holders and immigrants. Consult the professional as soon as possible after you arrive.

  If you are an employee, you want correct tax withholding and a correct W-4 in place as soon as possible.

  If you have a business in the U.S. or in another country, you want to report this correctly on your U.S. tax return.

If you have filed an incorrect income tax return, you may not be able to renew your LPR status when it expires.

U.S. tax system is different

Perhaps in your home country there is no personal income tax.

Or, the correct tax may be deducted from most income sources before you get the money. What you get is all yours!

The U.S. describes its system as voluntary compliance by its taxpayers. They are expected to be careful to report all income, and accurately record and document any allowable expenses, deductions, or tax credits on the income tax return.

Income is sometimes described as money you have now that you did not have before. If you are the kind of person who sees coins on the ground, picks them up, and keeps them, those coins are income to you. If they add up to more than $1, their sum ought to be added to your income! That sounds silly, and probably few people who sometimes pick up a coin think about whether they have picked up enough to need reporting, but…that shows the U.S. approach to voluntary reporting!

State and Local (Income) Tax

Most states and many local jurisdictions, such as a county, a city, or a town, also require income tax filing.

Your residency status on your federal return (tax resident or a tax non-resident) may be different from on your state or local tax return. See a tax professional.

Tax Year

The U.S. uses the calendar year, January 1 to December 31, for its annual individual income tax return. Other countries use different tax reporting years. If you have income from countries that use different tax years, you will need to use monthly or quarterly statements and records to put together the financial information for use on the income tax returns.

Your tax professional will help you understand tax law and what applies to your situation.

To do list:

Consult a tax professional early.

Check out the areas of expertise of the tax professionals you are considering.

W-4: Submit an accurate W-4 to your employer. If you are married but your spouse will not have a Social Security number during the tax year, your filing status likely is Married Filing Separately. If you think even more money should be withheld to cover taxes on other income, your W-4 should reflect this. If you have children who will not be with you in the U.S. nor have a Social Security number, they will not help you on your tax return.

Keep detailed records as advised by the tax professional.

Swiss Banks Don’t Guarantee Secrecy Today

The International Data Exchange System provides regular, generally automated, exchange of financial information between the U.S. Treasury and many other governments and financial institutions. If an institution or national tax jurisdiction holds some financial information about you, likely it has been shared with other authorities.

Other Tax Forms:

Form 1116: If you pay taxes in another country on income that you must also report on your U.S. tax return, you may be able to take a Foreign Tax Credit on your U.S. income tax using Form 1116.

(Form 2555: You cannot use Form 2555 – the Foreign Earned Income Exclusion – to subtract from U.S. taxable income any money that you earned in another country before you became a U.S. (tax) resident.)

Form 8938: If you have certain specified foreign assets, which may include investment funds or retirement plans, you report them on this form. Also, if they produced income, you may need to report that income on the income section of Form 1040. Form 8938 is part of the income tax return.

Form 3520 – If you receive gifts totaling more than $100,000 from non-U.S. people you report them on Form 3520. It is not part of the income tax return. It is mailed separately to a different address.

Form 3520 is also used to report foreign inheritances, ownership of a foreign trust, or receipt of distributions from a foreign trust.

Foreign Bank and Financial Account Report (FBAR or Form FinCEN 114). If you have foreign accounts whose total value exceeded $10,000 at any time during the year, you report them on the electronic U.S. Treasury Form FinCEN 114. You submit it electronically through the bsaefiling website. Your tax professional can help you submit the form. This is a required form. Penalties begin at $ 10,000 if you knowingly do not submit it.

Leaving the U.S.

Temporary Departure:

Follow the conditions USCIS placed on you about how long you must stay in the U.S. to maintain your resident alien status, how long you can travel outside the U.S. , and when you may apply for a waiver of the conditions.

It can be a good idea to carry a copy of your most recent tax return with you. It might help you convince Customs and Border Protection that you are up-to-date on your responsibilities.

Ending U.S. Residency:

When your green card reaches its expiration date, you can no longer use it to enter the U.S. You must apply to renew it if you do want to remain a green card holder. Your income tax responsibility does not change.

If you decide you no longer wish to be a lawful permanent resident (LPR – green card holder) of the U.S., you must complete all the steps of the formal process called “expatriation”. Until you have done so, you continue to pay U.S. taxes on total worldwide income.

The main expatriation form is Form 8854

You will need the help of an experienced immigration lawyer to correctly complete all the required expatriation steps and end your U.S. tax responsibility.

Lottery Applicants:

DO NOT assume you will complete the application process or be awarded a diversity visa by the September 30 deadline if you are notified that you have been selected to apply for an immigrant visa.

DO NOT assume that you will be admitted to the U.S. when you arrive with your immigrant visa in your passport. The Customs and Border Protection Officer at the Port of Entry could refuse entry to you because of information they learned during the interview or that was added to your file after the U.S. consulate issued the visa.

Good Luck!

 

 

How to Prepare 2018 Form 1040NR and Treaty Income Exclusion on Form 1040, by Jean Mammen, EA

 
Comments Off on How to Prepare 2018 Form 1040NR and Treaty Income Exclusion on Form 1040, by Jean Mammen, EA

Filing readiness for 2018 returns: the resources available to you are the form instructions (in draft form as of today), the 7th Classic edition of “1040NR? or 1040? U.S. Income Tax Returns for Visa Holders   + International Organization and Foreign Embassy Employees”, recent  blogposts on the website, www.1040nror1040.com., and articles on the IRS website.  Not yet available: the 2018 edition of Publication 519, U.S. Tax Guide for Aliens.

2018 Form 1040NR is relatively unchanged from 2017, compared to the changes in Form 1040. TCJA did not provoke a reorganization of Form 1040NR. Some lines were dropped. A few lines were marked “reserved” or were renumbered. Item M on use of the IRC 871(d) election was added to Schedule OI.  That’s it.

Thus, the TCJA notes in the 7th Classic edition of “1040NR? or 1040: U.S. Income Tax Returns for Visa Holders   +   International Organization Employees”, which uses 2017 forms., plus blogposts with 2018 forms are adequate guides to 2018 form preparation. The 8th edition will consolidate this information in one location.

The overall TCJA provisions apply to Form 1040NR as they do to Form 1040. There are no longer such deductions as personal exemptions, generally no moving expense deductions, and no unreimbursed employee business expense or 2106 expense deductions.

Page 1

Line 7 is now labelled Dependents. It was labelled Exemptions for 2017. You can still enter any qualifying dependents if you wish, but there is no associated exemption amount to be subtracted on Line 39. Mostly likely to be useful for people filing dual status returns, who can claim dependent related deductions or credits on Form 1040 and who are residents of Canada, Mexico, South Korea, and students who are residents of India.

Line 16 is now marled “Reserved”.

Line 17 includes both IRA distributions, which in 2017 were on Line 16, and pension and annuity distributions which were alone on Line 17 in 2017.

Line 34 in 2018 now holds the sum of the numbers in lines 24 through 33. (In 2017, line 34 had been for the Domestic Production Activities Deduction, which is gone from the form.)

Line 35 is now Adjusted Gross Income. (AGI).  In 2017, AGI had been on Line 36.

Line 39, now labelled “Exemptions for estates and trusts only”, is the equivalent of the 2017 Line 40, Exemptions, in the Tax and Credits section of form. (Now at the bottom of page 1, instead of the top of page 2.)

Page 2

Now starts with a continuation of the “Tax and Credits” section, as

Line 40, sum of deductions on lines 38-39

Remaining sections and lines on pages 1 and 2 are unchanged in 2018 from 2017.

Page 3 Schedule A

Reflects the TCJA changes

Only state and local taxes, gifts to U.S. charities, casualty and theft losses, and unusual “Other Itemized Deductions” remain.

Job expenses and “Certain Miscellaneous Itemized Deductions”, such as tax preparation fees are gone, per TCJA.

Page 4 Schedule NEC

unchanged.

Page 5 Schedule OI

Item M is new. Schedule OI is otherwise unchanged.

Item M asks if you are making, or have made, the IRC 871(d) election to treat a rental property as the taxpayer’s own U.S. trade or business, and thus reporting income and expenses on Schedule E, as ECI,. (If this election is not made, the property is treated as an investment property and taxes are paid on the gross income, entered on Schedule NEC).

I do not know if Item M is relevant if no rental income is entered on Form 1040NR. The draft instructions for Form 1040NR, posted December 26, 2018, are not clear. The draft instructions refer the reader to Publication 519 for further information. The draft of that publication was not available on January 12, 2019.

 

Treaty Benefit Income Exclusions on Form 1040

In 2018, this exclusion continues to be an adjustment to gross income that is entered on Line 21.

Line 21 moved to the new Schedule 1.

A statement is still required to be attached to Form 1040 which explains the justification for the income exclusion. Cite the treaty article and exclusion history just as was done on Form 1040NR with Schedule OI, Item L, then summarize the taxpayer’s qualification history and exclusion claim history

And that’s it!.

 

Why the 7th is Classic, by Jean Mammen, EA

 
Comments Off on Why the 7th is Classic, by Jean Mammen, EA

The 7th edition of “1040NR? or 1040?    +   International Organization and Foreign Embassy Employees” is Classic because:

There will always be people living and working outside their home country

Formats or laws may change, but they don’t all change at once

The 7th Classic introduces the tax law changes TCJA (Tax Cuts and Jobs Act) puts into effect for 2018 U.S. income tax returns.

Personal exemptions are “suspended”.  The 7th Classic is annotated (2018 n/a) where personal exemptions are mentioned.

Will this suspension of personal exemptions mean the 2018 Form 1040NR will no longer have boxes for qualifying dependents and spouses for residents of Canada, Mexico, South Korea, and Indian students and business apprentices? We won’t know until later. Maybe much later. But we do know that for 2018 and on, NR filers, like 1040 filers, will not be able to subtract the personal exemption amount from their gross income to lower their taxable income.

Filers of original and amended returns for 2017 and earlier will continue to apply the Classic rules, the pre-TCJA rules.

People who move to a new job location, post-TCJA, will not be able to deduct moving expenses, unless they are military with orders for a permanent change of station. That too is noted in the 7th Classic.

Is there or will there be an exception carved out for foreign service personnel, as usually is done?

For sure, an arriving J-1 teacher will not be able to deduct the expenses of moving themselves and their possessions to the U.S. in 2018 to take up that job.

The 7th is classic for all the things that were not changed by TCJA.

For Form 2555 – Foreign Earned Income Exclusion.  For Form 1116 – Foreign Tax Credit.

For using the best tax strategy to meet  the FIRPTA requirements when a foreign individual sells U.S. real property,

For determining what is taxable and what filing form, 1040NR? or 1040? should be used by an employee of an international organization or a foreign embassy located in the U.S., looking at the immigration status of the employee: U.S. citizen, U.S. tax resident by green card or by substantial presence test, an A visa holder (Vienna Convention), treaty, comparable treatment, or a G visa holder, full year or part year.

The 7th Classic sports its evergreen rosette in the lower right hand corner of the cover.

The 7th Classic helps taxpayers anticipate how TCJA will affect their 2018 tax returns, as well as providing guidance for 2017 and earlier income tax returns.

It will be available indefinitely.

The 8th edition will be published as soon as possible in 2019. And of course it will present  2018 forms and rules. When “as soon as possible”  will be is unpredictable.

The 7th Classic presents the basic tax information, if not the form detail, that will be needed in 2019 to complete 2018 tax returns.

 

 

6th Edition – Available Now

  , , ,
Comments Off on 6th Edition – Available Now

The 6th edition of 1040NR? or 1040?  U.S. Income Tax Returns for Visa Holders   +   International Organization and Foreign Embassy Employees is available for ordering now.

The Sixth presents   new information on

-things to check for when deciding if a treaty provision applies in a specific situation, especially for those consulting Table 2

-Competent Authority Agreements

-Competent Authority determinations and ruling letters

And the new updated charts on:

-1042-S codes.

-Comparison of Form 8938 and FBAR requirements

-and more…

Ordering sites:

On the Amazon website, US and Europe

http://https//www.amazon.com/dp/1543050948,

on the CreateSpace estore at

https://www.createspace.com/6926188

When ordering on Amazon, choose carefully so that you order the 6th edition. It is now the first edition listed among the various editions.

The rosette is in the upper left-hand corner. Its color is like the sky when the sun is near the horizon, at dawn or dusk.

Next year I hope the IRS will post final versions of forms and instructions earlier, so the the next edition will be available to you before the start of filing season.

Visa Type Change: Changing Status, Visa, U.S. Tax Obligation, by Jean Mammen, EA

  , , , ,
Comments Off on Visa Type Change: Changing Status, Visa, U.S. Tax Obligation, by Jean Mammen, EA

Changing Status, Changing Visa, Changing U.S. Tax Obligation

 Part II of III

For a first-time visitor to the U.S., determining U.S. tax obligations can follow a straight path. And the same is true if you have never visited the U.S. See Part I.

If you changed your visa type during your first visit, or if this is your second visit, more possibilities exist, and more analysis is needed.

VISA TYPE CHANGE:  What are the tax and tax residency effects if you changed visa types?

If your new visa allows counting days immediately, you do so.

Example: You had an F1 visa and were still in the eXempt period. You did not count days in the U.S. as days of presence. Now you have an H1b visa. You begin to count days.

 Example: Your new visa is a kind where you can never count days, such as a G visa, or do not count days during an eXempt or eXclusion period. You do not count days while in this period.

Tax residency status change? Immediately before you got the new visa type, what was your tax residency status?  Non-resident alien? Or tax resident? Filing on form 1040NR? or on Form 1040?

Example: First visit, you were in your sixth year on an F1 visa and had begun counting days. Maybe you reached 183 days and met the SPT, or maybe you had almost enough countable days.  Then, with just a short break, you get an H1b visa. You resume counting days. On December 31st, you add together your countable days from the F visa period and the H1b visa days.  Did you meet the SPT?  If so, you are now a US tax resident. You file on Form 1040.

Example: First visit, you were in the third year of an H1b visa. You rarely left the US. You had met the SPT. After a brief break, you got a G visa and stopped having countable days of presence in the US. You had already met the SPT. You were a tax resident. You will file on form 1040 for this tax year. But the following year, you are on the G visa for all the time you are in the US. You do not have 31 countable days in the US for that tax year. Or maybe you got the G visa the following year but before you spent 31 countable days in the US.  Either way, for this year you are now a non-resident alien. If you do have US source income, perhaps from rental real estate or investment income, you are back to filing on form 1040NR.

Example: You were in the US on an H1b visa and then decided to get an advanced degree. After a brief break, you got a student visa. On this student visa, whether F1 or J1, you are usually eXempt or eXcluded from counting days for any part of five calendar years. You had met the SPT in an earlier year. You were a tax resident. You filed on form 1040. If you had at least 31 countable days in the US during this year, and were in the US for most days in the prior two years, you would remain a tax resident through December 31st of this year and file as a tax resident on form 1040 at least one more time.

You must do the math to be sure whether or not you are a tax resident. If you spent just 31 days in the U.S. in this tax year, and 365 days in the US in each of the two prior years, your three-year day count exceeds 183 by 30 days. This leaves a small margin for spending days outside the US and still meeting the SPT.  31 + 1/3(365) + 1/6(365) = 31 + 121 2/3 + 60 2/3 = 213 1/3. Then 213 – 183 = 30.

The following year is your second year on a student visa. You spent no countable days in the U.S. You are a non-resident alien. You file on form 1040NR if you have any US source income.

This Series

FIRST VISIT / NO VISIT: If you have U.S. source income, how do you choose between form 1040NR and form 1040?. What are the tax and tax residency effects?

See Part I

 

VISA TYPE CHANGE:  What are the tax and tax residency effects when you change visa types?

Part II, above

 

SECOND VISIT/MULTIPLE VISITS: If this is not your first visit to the U.S., how do you determine your tax status?

See Part III

 

 

Second Visit or Multiple Visits to the U.S.: Changing Status,Visa, U.S. Tax Obligations, by Jean Mammen, EA

  , , ,
Comments Off on Second Visit or Multiple Visits to the U.S.: Changing Status,Visa, U.S. Tax Obligations, by Jean Mammen, EA

Changing Status, Changing Visa, Changing U.S. Tax Obligation

 Part III of III

For a first-time visitor to the U.S., determining U.S. tax obligations can follow a straight path. And the same is true if you have never visited the U.S. See Part I

If this is your second visit, or if you have changed visa type, more possibilities exist, and more analysis is needed. See Part II for the effects of visa type changes

SECOND VISIT/MULTIPLE VISITS TO THE US

If you leave the US, and then return on another visit, you must then look back at your past visa history to determine which form to use to report income, 1040NR or 1040.

Q: Were you a tax resident of the U.S. during any part of your most recent year in the U.S.?

Maybe you were gone only a few months, maybe you were outside the US for several years, but while here you were already a tax resident. You may or may not be a tax resident in your first year of this visit.

Q: Were you outside the U.S. for more than a full calendar year between this visit and your most recent visit? Yes? No?

If you were gone less than a full calendar year, were you a tax resident during any part of last year? And when you returned, did you become a tax resident again during this year?

If so, you continued to be a tax resident of the U.S. while you were outside the U.S.

Even if your only income was from foreign sources, and none of it was from U.S. sources, it is subject to U.S. taxation by the U.S. Internal Revenue Code provisions for form 1040.

Residency persists during this absence from the U.S. by the “no lapse” sections of the U.S. tax code: IRC 301.7701(b)-4(e)(1) and (2)

Q: Was your most recent year in the U.S. within the three-year window for counting days for the substantial presence test (SPT)? Did you have any countable days of presence? As a tourist? On an “all the rest, count your best’ visa type? Or on a student or exchange visitor (teacher, trainee, researcher) visa like F or J, after the eXempt period had ended?

If so, do the calculation over the three years to determine if you meet the SPT during this tax year.

Q: On your most recent visit, were you not able to count days for the SPT because you were on an A or G visa?

If so, double-check back through the three-year window, and do the SPT calculation over the three years, as if this were your first visit to the U.S,

Q: Is your current visa a student visa (F, J, M)? If so, to determine if you have already used up some of the 5 calendar years of the student eXempt/eXclusion period, look back all the way to 1985. Why 1985? That is the year this section of the tax code came into effect. Treasury Regulation governing the transition: 301.7701(b)-3(b)(7)(iv). Look back at your visa history during all your prior visits to the U.S. since 1985. In how many of those calendar years were you on an F, J, M, or Q visa?

Subtract that number of years from the 5 years in the ‘student’ look back period. The result is the remaining number of calendar years during which you are eXempt/eXcluded from counting days to meet the SPT.

Example:  8 years ago you were in the U.S. as a J visa high school exchange student, for an entire academic year. Now you are in the U.S. on a student F visa for a multi-year combined Master’s degree and Ph.D. program. The eXempt period on an F visa is 5 years. During your lookback period you were in the U.S. on a J visa for parts of two calendar years. 5-2=3. You have three years remaining in your eXempt period. You will start counting days of presence for the SPT on your first day in the U.S. of your fourth year in the U.S. on this student visa

Example: You accompanied your parents to the U.S. when you were a child. They left your twin sister back home with Grandmother. You were in the U.S. for all or part of three calendar years. That visit took place sometime between 1985 and last year. Your parents were on J visas. You had a J2 visa, as a dependent. Now you and your twin sister are students in the U.S. on F1 visas.

The student eXempt period lasts five years. You have already spent 3 years in the U.S.  on an F, J, M, or Q visa. Only two years remain in your eXempt period. You will start counting days for the SPT on your first day in the U.S. in the third year of this visit. Your sister will not begin counting days until after her fifth year is past. She will begin counting days on her first day in the U.S. in her 6th year on this visit.

If you have income – whether U.S. source or foreign source, you might file on Form 1040 as a tax resident as soon as your third year as a student in the U.S. Your sister would file a U.S. tax return only if she has U.S. source income, until at least her sixth year. Until then, if she needs to file a U.S. tax return, she will use form 1040NR.

Q: Is your current visa a J or Q exchange visitor visa as a teacher, trainee, researcher, etc? Look back at the six previous years to see in how many of them you were in the U.S. on an F, J, M, or Q visa. If that number is two years or more, you have exhausted the eXempt period.

Subtract that number of years from the two years available as eXempt status in the “teacher or trainee” J visa look back period. If you counted one (1) year, you have one eXempt year left before you start counting days for the SPT. If you counted two (2) or more years, you begin counting days for the SPT on your first day in the U.S. on this visit. If you counted zero (0) years on an F, J, M, or Q visa, you have the full two-year eXempt period remaining.

Example: You left the U.S. two years ago this August, after a twenty-four month stay as a J visa researcher. You returned to the U.S. on the two-year anniversary of your departure, again as a J visa researcher.

You had been in the U.S. during parts of three calendar years during the six-year lookback window. You began counting days for the SPT on the day in August that you arrived in the U.S. on this visit.  The count did not reach 183 days before December 31st. You file on form 1040NR.

You had been out of the U.S. for a full calendar year, plus some months before and after that full year. Thus, your prior status as a tax resident, during the January through August of your third calendar year in the U.S. during your previous visit, was extinguished during that full year outside the U.S.  Your previous visit was within the six-year look back period. It exhausted the two-year eXemption period potentially available for this visit.

 

This Series

FIRST VISIT / NO VISIT: If you have U.S. source income, how do you choose between form 1040NR or form 1040?. What are the tax and tax residency effects?

See Part I

 

VISA TYPE CHANGE:  What are the tax and tax residency effects when you change visa types?

See Part II

 

SECOND VISIT/MULTIPLE VISITS: If this is not your first visit to the U.S., how do you determine your tax status?

Part III, above

 

 

First Visit /No Visit to the U.S.: Changing Status, Visa, U.S. Tax Obligation, by Jean Mammen, EA

  , , , ,
Comments Off on First Visit /No Visit to the U.S.: Changing Status, Visa, U.S. Tax Obligation, by Jean Mammen, EA

Changing Status, Changing Visa, Changing U.S. Tax Obligation

Part I of III

For a first-time visitor to the U.S., determining U.S. tax obligations can follow a straight path. And the same is true if you have never visited the U.S.

If you have changed visa status, or if this is your second visit, more possibilities exist, and more analysis is needed.

FIRST VISIT/NO VISIT: If you have US source income to report, choosing between form 1040 and form 1040NR is relatively simple. Determine if any days you were physically in the US may be counted towards meeting the substantial presence test (SPT).

If you have no visa, or any visa except F, J, M, or Q, or A1, A2, G1, G2, G3, G4, you usually immediately begin to count all days where you spent any time at all in the US.

A common exception to counting days is for people who live in Mexico or Canada and cross the border regularly to work in the US during some period of the tax year. These “commuters” do not count as days present in the U.S. any day they commuted to or from their U.S. workplace, no matter what their visa type. IRC 7701(b)(7)(B); 301.7701(b)(3)

If you are not in the U.S., there are no days to count.

And A1, A2, and G1, G2, G3, and G4 visa holders are never going to count days.

Counting: Count the days that may be counted to see if they add up to 183 days in the tax year and meet the SPT.

Filing requirement if SPT is not met: If you have any US source income at all you will file form 1040NR. If you were not in the U.S. or this is your first visit to the US and you spent fewer than 183 countable days in the U.S., then 0+ is the threshold even if the income is not taxable. An exception is if the only US source income is from wages, and the wages are less than the amount of one personal exemption. ($4,000 for 2015)

Filing requirement if SPT is met: You will file on form 1040 as a tax resident if you meet the SPT by December 31st, and your income exceeds the form 1040 filing threshold. If you began counting days July 2, you could meet the SPT in your first year in the US.

Taxable income for form 1040 is total worldwide income from any source derived that is not specifically exempt from US income tax.  The threshold for filing is when taxable income exceeds the sum of the personal exemption and the standard deduction appropriate to your filing status (single, married filing jointly, married filing separately, etc.).  You will also pay FICA tax (Medicare and social security) on wage income if your employer and job are part of the US economy, unless you are a student in an on-campus job.

FIRST VISIT, second year: If you have any visa other than F, J, M, or Q, or A1, A2, G1, G2, G3, G4, you could meet the SPT in your second year in the US and change from tax non-resident to tax resident.

FIRST VISIT, third and sixth year: In the third year of your first visit to the US, J visa exchange visitors usually start counting days for the SPT on their first day in the US after January 1st.  Students usually do so in their sixth year in the US. You could meet the SPT by December 31st and become a tax resident for the year if you spend most of your days in the U.S.

Substantial Presence Test (SPT):

When day counting is allowed, and you spent at least 31 countable days in the U.S. in the tax year, then:

Count all countable days present in the U.S. in the tax year, and add:

1/3 of all countable days present in the first prior year, plus

1/6 of all countable days present in the second prior year.

Add any fractions to the whole numbers.

If the total reaches 183 by December 31st, you have met the SPT. You are a U.S. tax resident.

 

LET ME COUNT!

G or A, No Way!

F, J, M, or Q, There’s a Delay Waiting for you!

All the rest, Count your best!*

*includes A3, G5

 

This Series

FIRST VISIT/NO VISIT: If you have U.S. source income, how do you choose between form 1040NR and Form 1040? What are the tax and tax residency effects?

See above

VISA TYPE CHANGE:  What are the tax and tax residency effects when you change visa types?

See Part II

SECOND VISIT/MULTIPLE VISITS: If this is not your first visit to the U.S., how do you determine your tax status?

See Part III

 

 

Some child dependents don’t qualify filers for credits, by Jean Mammen, EA

 
Comments Off on Some child dependents don’t qualify filers for credits, by Jean Mammen, EA

Some child dependents don’t qualify filers for credits on Form 1040 or 1040NR. Some children who are not US citizens or residents may qualify as dependents on Form 1040, and even on Form 1040NR for residents of certain countries, without the taxpayer being able to claim certain credits for them.

Dependent exemptions may be claimed for children who meet the dependent taxpayer test either as qualifying child or qualifying relative. The children also either meet or qualify for an exception for other tests: Citizen or resident, joint return, relationship, age, not the qualifying child of someone with a better claim.

The most common barriers to claiming the child tax credit or the earned income credit for dependent children are that the child did not live in the U.S., or was not a U.S. citizen or resident.

Taxpayer Identification Number (TIN) may be another barrier. A child who does not qualify for a social security number may not have adequate documentation to obtain an ITIN.

The criteria for claiming the child tax credit and for claiming the earned income tax credit (EIC) are more restrictive than for claiming a personal exemption for a dependent child. The child and dependent care credit may be difficult for some taxpayers to qualify for.

Even taxpayers who are filing on form 1040NR and are residents of Canada or Mexico, may claim a child as a dependent for the personal exemption if the child is a resident of Canada, Mexico or the US and meets all the other criteria to be claimed as a dependent

A South Korea resident may be able to claim a pro-rated dependent exemption for a child who lives with the filer at some time during the year.

An India resident who is a student or business apprentice may also be able to claim child dependents if the children did not enter the US on dependent visas. They likely would have been born in the US.

Additional Criteria to claim a Child Dependent Exemption

The child generally lives with the taxpayer for at least half the year.

Exceptions apply:

If the parents are divorced, separated, never married, or live apart and they agree on which parent shall claim the dependent exemption, and they fulfill the conditions, the non-custodial parent may claim the child as a dependent.

Your child in Canada or Mexico may meet the ‘qualifying relative’ standard. If the person the child lives with is not a U.S. citizen and has no U.S. gross income, that person is not a U.S. taxpayer and so the child is not the qualifying child of another U.S. taxpayer.

Child Tax Credit – Child-related Criteria for Claiming Child Tax Credit for a Dependent Child

The child must be a U.S. citizen, national, or resident alien, including by meeting the Substantial Presence Test (SPT).

Thus the dependent child cannot be living in Canada or Mexico.

If the child is in the U.S. on a visa, not a citizen or green card holder, the child must be able to count days and the child must have 183 days of presence in the U.S. to meet the SPT test.

The child must be under age 17 on December 31.

Resident of the U.S. may mean tax resident by meeting the substantial presence test (SPT), rather than by being a resident alien (green card holder).  The substantial presence test is met when a child has 183 countable days of presence in the US in the most recent three-year period, and at least 31 of those days are in the tax year. Most foreigners in the U.S. may count days of presence. But,

A and G visa holder dependents may not count days of presence.

Dependents of students on F and J visas may not count days during their first five calendar years in the U.S.

Dependents of J visa exchange visitors may not count days during their first two calendar years in the U.S. within the most recent six year period.

EIC – Child-related and other Criteria for Claiming EIC

The child must have lived with you in the U.S. for more than half the year.

If married, the taxpayer must file Married Filing Jointly, or Head of Household status, not Married Filing Separately.

The taxpayer (and spouse, if married) must not be a non-resident alien during any part of the tax year.

Child and Dependent Care Credit Criteria

The child must live with the taxpayer(s) more than half the year.  Only expenses incurred while the child is below age 13 qualify.

This credit is unlikely to be workable if the taxpayer is married and filing on form 1040NR.  Head of Household is not a status available on form 1040NR. Canadians and Mexicans, South Koreans and Indian students may file ‘married’ on form 1040NR, but only one spouse may have taxable U.S. income on that form, and the credit requires that both spouses have earned income unless one is a full-time student or disabled.  Single taxpayers or Qualifying Widowers might qualify for the child and dependent care credit on form 1040NR.

For form 1040 filers, the child and dependent care credit cannot be claimed if one spouse, likely on an A or G visa,  is exempt from paying U.S. income tax on earned income.

Claiming a Dependent Exemption or Credits During Adoption of Children who are not US Citizens or Residents

An adopted child of a U.S. citizen or national who is a non-resident alien will meet an exception to the ‘citizen or resident’ test if the child is a member of the household for a full year, or, was lawfully placed in it for adoption.

Review of Dependency Rules.

Child as dependent: The simplest situation to claim a child as a dependent (qualifying child/qualifying relative) on form 1040 is when your child is:

Under 19 years old, and younger than the taxpayer

Under 24, a full time student, and younger than the taxpayer

Permanently and totally disabled, and of any age

Is a U.S. citizen or a resident of the U.S., Canada, or Mexico

Does not file a joint return with a spouse, except to obtain a refund of withholding

Does not provide more than half of the child’s own support

Click here to go to book website