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!