- 1 F-1 Visa and Worldwide Income Rules
- 2 F-1 Visa to OPT & U.S. Taxes
- 3 OPT Worldwide Income Reporting
- 4 OPT Foreign and Offshore Asset Reporting Forms
- 5 FBAR (FinCEN 114)
- 6 Form 8938
- 7 Form 3520
- 8 Form 5471
- 9 Form 8621
- 10 Out of IRS Offshore/Foreign Income and Asset Compliance?
- 11 Golding & Golding, Board Certified Tax Law Specialist
F-1 Visa to OPT – IRS Foreign Income, Tax, Gift & Reporting Rules
The global tax and U.S. offshore reporting ramifications resulting from the move from F-1 (Student Visa) to OPT (Optional Practical Training) is a very common issue that we deal with often — since it has a significant impact on IRS tax and reporting rules.
F-1 Visa and Worldwide Income Rules
When a person is on an F1 visa (at least during the first five years of the visa), they are not considered a U.S. person for tax purposes (even if they would have otherwise met the Substantial Presence Test).
This eliminates the worldwide income tax responsibility and reporting requirements, which is otherwise required for U.S. Persons — and can be very onerous.
In other words, the F-1 Visa holder is not required to report foreign accounts, assets or investments on forms such as FBAR, Form 8938, Form 5471 and Form 3520 and 3520-A.
F-1 Visa to OPT & U.S. Taxes
Once a person moves away from the F-1 Visa and onto OPT, the rules change. The person no longer receives the same tax and reporting benefits that he or she received under the F-1 visa.
Rather, the OPT is similar to other Visas, in that the person has to determine whether they meet the Substantial Presence Test.
Substantial Presence Test
As a non-US citizen and non-US green card holder, you are generally only required to pay tax on your “US Effectively Connected Income” (money you earn while working in the United States). However, if you qualify for the Substantial Presence Test, then the IRS will tax you on your WORLDWIDE income.
IRS Substantial Presence Test generally means that you were present in the United States for at least 30 days in the current year and a minimum total of 183 days over 3 years, using the following equation:
- 1 day = 1 day in the current year
- 1 day = 1/3 day in the prior year
- 1 day = 1/6 day two years prior
Example A: If you were here 100 days in 2016, 30 days in 2015, and 120 days in 2014, the calculation is as follows:
- 2016 = 100 days
- 2015 = 30 days/3= 10 days
- 2014 = 120 days/6 = 20 days
- Total = 130 days, so you would not qualify under the substantial presence test and NOT be subject to U.S. Income tax on your worldwide income (and you will only pay tax on money earned while working in the US).
Example B: If you were here 180 days in 2016, 180 days in 2015, and 180 days in 2014, the calculation is as follows:
- 2016 = 180 days
- 2015 = 180 days/3= 60 days
- 2014 = 180 days/6 = 30 days
- Total = 270 days, so you would qualify under the substantial presence test and will be subject to U.S. Income tax on your worldwide income, unless another exception applies.
OPT Worldwide Income Reporting
Unlike almost every other country in the world, the United States utilizes a CBT model, otherwise known as Citizen-Based Taxation. Unfortunately, CBT is way more encompassing than the name implies. CBT goes far beyond taxing just U.S. Citizens; it also includes Legal Permanent Residents (Green-Card Holders) and even non-permanent residents who meet the Substantial Presence Test.
Under a Citizen-Based Taxation model, the United States taxes you on your worldwide income. It does not matter whether you reside in the United States or outside of the United States, and it does not matter if your income was earned from a U.S. source or foreign source – all of the income is reported on your US tax return.
OPT Foreign and Offshore Asset Reporting Forms
The following is a list of the more common forms you may have missed:
FBAR (FinCEN 114)
The FBAR is used to report “Foreign Financial Accounts.” This includes investments funds, and certain foreign life insurance policies.
The threshold requirements are relatively simple. On any day of the year, if you aggregated (totaled) the maximum balances of all of your foreign accounts, does the total amount exceed $10,000 (USD)?
If it does, then you most likely have to file the form. The most important thing to remember is you do not need to have more than $10,000 in each account; rather, it is an annual aggregate total of the maximum balances of all the accounts.
This form is used to report “Specified Foreign Financial Assets.”
There are four main thresholds for individuals is as follows:.
- Single or Filing Separate (in the U.S.): $50,000/$75,000
- Married with a Joint Returns (In the U.S): $100,000/$150,000
- Single or Filing Separate (Outside the U.S.): $200,000/$300,000
- Married with a Joint Returns (Outside the U.S.): $400,000/$600,000
Form 3520 is filed when a person receives a Gift, Inheritance or Trust Distribution from a foreign person, business or trust. There are three (3) main different thresholds:
- Gift from a Foreign Person: More than $100,000.
- Gift from a Foreign Business: More than $16,076.
- Foreign Trust: Various threshold requirements involving foreign Trusts
Form 5471 is filed in any year that you have ownership interest in a foreign corporation, and meet one of the threshold requirements for filling (Categories 1-5). These are general thresholds:
- Category 1: U.S. shareholders of specified foreign corporations (SFCs) subject to the provisions of section 965.
- Category 2: Officer or Director of a foreign corporation, with a U.S. Shareholder of at least 10% ownership.
- Category 3: A person acquires stock (or additional stock) that bumps them up to 10% Shareholder.
- Category 4: Control of a foreign corporation for at least 30 days during the accounting period.
- Category 5: 10% ownership of a Controlled Foreign Corporation (CFC).
Form 8621 requires a complex analysis, beyond the scope of this article. It is required by any person with a PFIC (Passive Foreign Investment Company).
The analysis gets infinitely more complicated if a person has excess distributions. The failure to file the return may result in the statute of limitations remaining open indefinitely.
*There are some exceptions, exclusions, and limitations to filing.
Out of IRS Offshore/Foreign Income and Asset Compliance?
It is human nature to want to avoid making a proactive submission to a government agency such as the IRS before the IRS ever discovers the non-compliance. But, typically that is best path forward.
Moreover, if you realize you are out of compliance and begin researching online, you may begin to feel as though it is hopeless. Some of these attorneys and CPAs make it appear that everyone with unreported assets or income is going to be severely penalized and shipped off to prison.
That is simply not the case.
You have options, and depending on the facts and circumstances of your situation, your options may include the streamlined program, reasonable cause, or the delinquency procedures – which may result in significantly reduced fines and penalties (and may even receive a penalty waiver).
Golding & Golding, Board Certified Tax Law Specialist
We have successfully represented clients in more than 1,000 streamlined and voluntary disclosure submissions nationwide and in over 70-different countries.
Golding & Golding is the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe.
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Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver. He has also earned the prestigious IRS Enrolled Agent credential. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo, and various Law Journals nationwide.