Filing and Paying Taxes in the United States: Resident or Non-resident?


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If you plan on working in the United States, here are some things you need to know about the US federal income tax system.

The United States taxes residents differently from non-residents, so the first thing you need to do is determine if you’re considered to be a resident or not. Generally, if you’re in the US temporarily because you’re a student, teacher, trainee, foreign government employee or a relative of one of those, then you’re considered to be a non-resident. These Visas are usually F, J, M, or Q. If you fall into this category, you’re considered to be a “non-resident”. You will file a tax form called 1040NR. I’ll be doing another post about 1040NR soon.

If you are in the US on a regular working Visa (such as an H1) there are two ways to be considered a resident for income tax purposes. One is to have a green card—this form shows that you are a lawful, permanent resident of the United States. The other way to be considered a resident is to meet what’s known as the substantial presence test.  The quick and dirty way to figure that out is to ask yourself if you were here for over 183 days this year.  If the answer is, “yes” then you can be considered a resident.  I’ve attached a substantial presence test questionnaire at the bottom of this post for anyone who needs a more accurate determination, especially if your time here crosses over two or more calendar years.

Qualifying as a US resident usually reduces your American income taxes. The biggest benefit is being able to claim the same “standard deduction” that US citizens claim. The standard deduction is a portion of your income that the government doesn’t tax. Also, as a resident, if you are married, you can file your tax return as “married filing jointly” which gives you a larger standard deduction and a lower general tax rate. For many people, being able to claim “resident” will reduce your taxes.

The downside of being a “resident”: The United States taxes the world wide income of its citizens and residents. Let’s say you move to America from France where you earned an income equal to $50,000 USD. You move to the US in June and work for 7 months, easily qualifying you to be a US resident. While in the US you earn an additional $50,000. You do not want to pay US taxes on the $50,000 USD that you earned in France.

You have two options in this situation: One, you could file a “dual status alien” return— this would make you a US resident for the 7 months that you were here and a non-resident for the 5 months that you were in France. You would not get the full benefit of the resident deductions, but it would save you from being taxed on your French income. The other option would be to claim a credit for foreign taxes paid. If you come from a country where your taxes are equal to or higher than in the US, this is a good option for you. If you come from a country with lower taxes, you might be better off claiming the dual status alien. You do not have to decide this now, you can have your tax preparer work out the numbers for you both ways.

A note about hiring a tax preparer: In the US, there are many companies that have shops where you can pay someone to prepare your income tax return for you. These are for profit companies, not government agencies, and they expect you to pay them for the service. Most of them do not prepare 1040NR returns at all. If they see that you qualify to be treated as a resident, they will want to proceed with filing your return. If you had no income in your home country, this is not a problem, and you can feel comfortable filing a US resident return. If you had income in your home country, make sure that the person you are dealing with understands “dual status alien” and “foreign tax credits”. Many tax preparers have not been trained in these areas, and it’s essential to you that you hire someone knowledgeable about tax issues for foreign persons.

A common question is: what if I just don’t report my foreign income? How will the IRS know? The IRS has treaties with several countries and there is a great deal of information sharing. Although it seems impossible that the IRS could find out about someone’s foreign wages, when they do have that information, the fines and penalties for not reporting your income are severe. I recommend filing an honest and accurate return, then you’ll never lose sleep worrying about it.

Substantial Presence Test (You can also find this on the IRS website)
You must pass both the 31-day and 183-day tests.

31 day test: Were you present in United States 31 days during current year?

183 day test: [If you weren’t here for the full 183 days during the current year, the time you spent here in prior years counts towards your being deemed a resident.]

Current year days in United States x 1 =_____days [the days you spent here during this year count as full days]

B. First preceding year days in United States x 1/3 =_____days  [the days you spent here last year only count as 1/3 days.  So if you were here last year for one month (30 days) then it only counts as 10 days]

C. Second preceding year days in United States x 1/6 =_____days    [the farther back the time, the less it counts.  Two years ago only count as 1/6 of the days, so a month then counts for 5 days.]

D. Total Days in United States =_____days (add lines A, B, and C)

If line D equals or exceeds 183 days, you have passed the183-day test.

Exceptions: Do not count days of presence in the U.S. during which:
you are a commuter from a residence in Canada or Mexico;
you are in the U.S. less than 24 hours in transit;
you are unable to leave the U.S. due to a medical condition that developed in the U.S.;
you are an exempt individual; [basically that’s an F, J, M, or Q visa]
you are a regular member of the crew of a foreign vessel traveling between the U.S. and a foreign country or a possession of the U.S. (unless you are otherwise engaged in conducting a trade or business in the U.S.)