Do Foreign Nationals Living in the US Pay Income Taxes?

Do Foreigners Living in the United States Pay Income Taxes?

Do Foreigners Living in the U.S. Pay Income Taxes?

The United States tax system is different than most other tax systems across the globe, in that the United States taxes individuals on their worldwide income when they are considered to be US persons for tax purposes. Technically, the phraseology that is often used is Citizenship-Based-Taxation — but this is actually a misnomer because the tax system is not limited to just U.S. citizens. Rather, all US persons who are considered US persons for tax purposes are subject to US tax on their worldwide income. This typically includes US Citizens, Lawful Permanent Residents, and foreign nationals who meet the Substantial Presence Test. While the US tax system can be very complicated, especially for foreigners – it can be learned. Let’s take a look at five important facts foreigners should know about filing taxes in the US.

Foreigners who are US Residents for Tax

When a person is not a US citizen but instead a resident of the United States, there are two main classifications of residents: permanent residents and foreign nationals who are only residents for US tax purposes in a year that they meet the Substantial Presence Test. When a person is either a permanent resident or meets the substantial presence test, then they are subject to US tax on their worldwide income unless they qualify for an exception or exclusion.

Worldwide Income

Taxpayers who are considered US persons for tax purposes are subject to US tax on their worldwide income. This is very important to note because it means taxpayers who are considered residents for tax purposes — even if they do not reside in the United States for the full year are still required to report their annual global income. This is true, even if the income is generated from overseas and even if the income is possibly tax-exempt in a foreign country — unless there is an exception, exclusion, or limitation to having to report the income, such as if a treaty election eliminates the particular category of income for US tax purposes.

Global Asset Reporting

In addition to reporting worldwide income, foreigners who are US persons for tax purposes are also required to report their global assets, accounts, and investments to the US government. There is some confusion online as to what has to be reported and if it is limited only to bank accounts — and then only to accounts that are opened after a person becomes a US person. In fact, foreign asset reporting includes more than just bank accounts and also includes investment accounts, life insurance policies, and pension plans amongst others. Moreover, it is not limited to just accounts or assets that were acquired after becoming a US person but rather includes all assets and accounts owned at the time of reporting. So, if the form is being filed for the tax year 2022, it would include all accounts in assets that were owned in 2022.

Foreign Businesses and Trusts

International reporting can get much more complicated in situations in which a person has more than just foreign accounts. For example, when a person has ownership in a foreign business or partnership and/or is the owner or beneficiary of a foreign trust, there are additional international information reporting forms they must file — and these types of international tax forms tend to be much more complicated than other forms used to report foreign accounts and assets, such as the FBAR and Form 8938.

Late Tax Filings and Amnesty

For taxpayers who are out of compliance for not reporting foreign income, accounts, and assets in prior years, there is the potential to become subject to hefty IRS fines and penalties. But, to safely assist Taxpayers with getting into compliance, the IRS offers various international tax and amnesty procedures that they may qualify for.

Current Year vs Prior Year Non-Compliance

Once a taxpayer has missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.