Foreign Taxpayers and Resident Status: Strategies to Minimize Your Tax Liability

Written By:

David A. Nash

International business men and women who work in the United States for some or all of the year have several choices when it comes to complying with U.S. and state tax laws. Whereas residents of the U.S. are taxed on their worldwide income, nonresidents are taxed only on their U.S.-sourced income. A foreign taxpayer can elect to be treated as a resident for the entire year and may find this to be favorable. A foreign taxpayer who plans to obtain a Green Card has the option to elect their taxation scheme for the time prior to receiving their Green Card. Marital status can also affect tax liability, depending on the state in which the couple lives for some or all of the year. There are three important questions a foreign national should consider and discuss with his or her tax advisor:

1. Do you wish to be taxed as a resident, a non resident or a dual status taxpayer?

If the taxpayer elects to be treated as a resident for the entire year, she can take advantage of several tax benefits that apply only to U.S. residents. Those advantages include the standard deduction, education credits, married-filing-jointly tax rates and several other benefits. On the other hand, nonresident individuals' U.S. bank interest is exempt from U.S. taxation. Interest they earned during the nonresident period would not be taxable. If a foreign national lives for part of the year in the U.S. and part of the year abroad, she can be considered a dual status taxpayer and will be taxed under the two different schemes.

2. Do you have a state income tax filing requirement?

A foreign national may become a resident in a state if she spends more than 183 days residing in that state. As a state resident, she would then be subject to that state's income tax filing requirements. Even nonresidents can have state tax filing requirements if they own real estate or have paid withholding taxes. Some states may also subject other types of income earned within the state to taxation. U.S. treaties generally do not apply at the state level, so each state's laws will need to be considered. Keep in mind that several states do not have a personal income tax, including Alaska, Florida, Texas, South Dakota, Wyoming, and Nevada. Tennessee, Washington and New Hampshire impose limited taxes on certain forms of personal income, such as income from stocks and bonds, business, interest and dividends and gambling income.

3. If you are legally married, what are your tax filing options?

The laws governing how legally married couples' property and income are treated vary from state to state. States recognize one of two broad categories of property: community or separate. In a separate property state, income earned and assets possessed by a person are their own. In a community property state, however, income earned and assets typically belong to each spouse equally, unless appropriate legal action has been taken. State law actually dictates Federal taxation in this situation. If either spouse carries on a trade or business, self-employment and income taxes also are likely to be affected by the way their home state treats property.

The following example illustrates the differing income tax implications for a married couple filing in a community or separate property state.

Example: Mr. and Mrs. A. split their time working and living in the U.S. and abroad. They wish to be treated as dual-status taxpayers for the 2013 tax year. Mr. A., a consultant, earned $150,000 which is subject to self-employment taxes as well as income tax. He earned $500 of U.S. bank interest and $1500 of foreign bank interest while residing in the U.S. During that time, Mrs. A. earned $100 of U.S. bank interest and $500 of foreign bank interest. There were no itemized deductions for the tax year. The following example provides aside-by-side comparison of federal and state taxes in Georgia (a separate property state) and in Texas (a community property state) for the couple's dual-status year.

tax table

The couple would save $8,247 in Federal taxes if they resided in Texas, a community property state.

The issues and calculations above outline only a few of the relevant tax questions an international full- or part-time resident of the U.S. must address when complying with federal and state tax laws. Seek advice from a tax professional regarding individual facts and circumstances. Generally, careful tax planning is necessary in the year(s) that you enter or leave the U.S. At Williams Benator & Libby, our tax advisors have extensive experience working with international businesses and individuals to develop tax strategies that preserve their assets while ensuring they are fully compliant. Contact us today to discuss your individual circumstances.

For more information about this article or to discuss your next transaction, contact David A. Nash.