Coming to America – The Income Challenge

The individual moving to the United States from another country faces several challenges and choices in the year in which he or she arrives in the United States. This paper will be an overview of some of those challenges.

Those who are not Citizens of the United States are referred to as aliens in the tax code. One can be either a “Resident Alien” or a “Non-Resident Alien.”  The difference can be significant.  A resident alien is subject to tax by the US on his income earned worldwide during the period of US residency, while a non-resident alien is subject to tax by the US only on his US source income.  There are also differences in the deductions and exemptions available to the non-resident compared with those available to the resident. Note that the term “resident” as used for tax purposes is usually different from the term as used for immigration purposes.

US residency is a question of fact, based on the number of days present in the US (the Substantial Presence Test).  If the individual days present for the tax year is 183 days or more, he is considered a resident.  In determining the 183 days, one counts all of the days present in the US in the current tax year, one-third of the days present in the US in the immediately preceding tax year, and one-sixth of the days present in the US in the second preceding tax year. There are technical rules for defining what is considered a “day present” in the US.

If one is resident of both his home country and the US, there are rules that define which country for which he has a “closer connection,” and if there is an Income Tax Treaty between the country of citizenship and the US, there will be tie-breaker provisions in the Treaty to determine of which country the individual is a tax resident.

If an individual is a non-resident in the year of arrival in the US because of the Substantial Presence Test but is a resident in the next year, an election may be made to be treated as a resident in the year of arrival.  This election can only be made after meeting the Substantial Presence test in the next year, so an extension of time for filing the tax return for the year of arrival is necessary in this circumstance.

If the individual is a resident on the last day of the year and is married, an election is available to be treated as a resident for the entire year and to file a joint income tax return with his or her spouse.  While this election will mean including the worldwide income of both spouses for the entire year in the tax return, the availability of the foreign taxes paid as a credit coupled with the income tax rates available in the joint income tax return may make this election beneficial.

Including a spouse or dependent in a US income tax return, either for joint filing status or to claim a dependency exemption requires the individual to have Individual Tax Identification Number (ITIN) if the individual does not qualify for a US Social Security Number. Obtaining an ITIN is an additional step in the tax return preparation process.

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