In the United States, individuals who are not citizens or permanent residents, known as non-resident aliens, are generally required to pay taxes on income earned within the US borders. The tax liability for non-resident aliens depends on their specific circumstances, such as the type of income earned, the duration of their stay, and whether they have a tax treaty in place with their home country. Non-resident aliens may be subject to a flat withholding tax on certain types of income, such as dividends, interest, and royalties. However, they can also file a tax return to claim deductions and credits that may reduce their tax liability. It’s important to note that tax laws and regulations can change frequently, so non-resident aliens should consult with a tax professional to determine their specific tax obligations.
Tax Residency for Foreigners
Determining whether you are a tax resident in the United States is crucial for understanding your tax obligations. The Internal Revenue Service (IRS) uses two primary tests to establish tax residency:
- Green Card Test: If you hold a valid U.S. green card, you are automatically considered a tax resident, regardless of your physical presence in the country.
- Substantial Presence Test: You are considered a tax resident if you are physically present in the U.S. for at least 183 days during a calendar year. This test considers all days of presence, including weekends and holidays.
If you meet either of these tests, you are considered a U.S. tax resident and are subject to pay taxes on your worldwide income. However, there are exceptions and exemptions available for certain types of income and for individuals who have dual residency.
To avoid double taxation, the U.S. has tax treaties with many countries. These treaties allow foreign residents to reduce or eliminate U.S. tax liability on certain types of income earned in the U.S.
Tax Obligations for Foreign Residents
- Filing Tax Returns: Foreign residents who are tax residents in the U.S. must file an annual federal income tax return, Form 1040-NR.
- Paying Taxes: Foreign residents are subject to pay income tax on their worldwide income, regardless of their source. They may also be liable for other taxes, such as self-employment tax or capital gains tax.
- Withholding Taxes: U.S. employers are required to withhold taxes from the income of foreign residents who are not exempt from withholding under a tax treaty.
Exemptions and Exclusions
Foreign residents may be eligible for certain exemptions and exclusions that reduce their U.S. tax liability:
| Exemption | Description |
|---|---|
| Foreign Earned Income Exclusion | Excludes a portion of foreign earned income from U.S. taxation. |
| Foreign Tax Credit | Allows a dollar-for-dollar credit against U.S. tax for taxes paid to a foreign country. |
| Treaty Exemptions | Certain treaties allow foreign residents to exempt specific types of income from U.S. taxation. |
It is important for foreign residents to understand their tax obligations and to seek professional advice if needed to ensure compliance and minimize tax liability.
Types of Income Taxed for Foreigners
Foreigners who live or work in the United States are subject to income taxes on their U.S. income, regardless of their nationality or residency status.
Types of Income
- Wages and salaries
- Self-employment income
- Investment income (e.g., dividends, interest)
- Rental income
- Retirement income (e.g., pensions, annuities)
- Prizes and winnings
Tax Rates
The tax rates for foreigners are the same as those for U.S. citizens and residents. The tax rates are progressive, meaning that the higher your income, the higher your tax rate.
| Filing Status | Taxable Income | Tax Rate |
|---|---|---|
| Single | $0 – $9,950 | 10% |
| Single | $9,951 – $40,525 | 12% |
| Single | $40,526 – $86,375 | 22% |
| Single | $86,376 – $164,925 | 24% |
| Single | $164,926 – $209,425 | 32% |
| Single | $209,426 – $523,600 | 35% |
| Single | $523,601+ | 37% |
Tax Treaties and Double Taxation Avoidance
The United States has entered into tax treaties with over 60 countries to avoid double taxation. These treaties generally provide that the income of a resident of one country from sources in the other country will be taxed only in the country of residence. However, there are some exceptions to this rule.
- The first exception is for business income. Business income is generally taxed in the country where the business is carried on.
- The second exception is for investment income. Investment income is generally taxed in the country where the investment is made.
- The third exception is for real estate income. Real estate income is generally taxed in the country where the real estate is located.
In addition to the exceptions listed above, there are also a number of other provisions in tax treaties that can affect the taxation of foreigners in the United States.
| Country | Tax Treaty | Double Taxation Avoidance |
|---|---|---|
| Canada | Yes | Yes |
| Mexico | Yes | Yes |
| United Kingdom | Yes | Yes |
| France | Yes | Yes |
| Germany | Yes | Yes |
Filing and Reporting Obligations for Foreigners
Foreigners living or working in the United States are subject to specific tax filing and reporting obligations. These obligations vary depending on their visa status, income level, and whether they are considered resident or non-resident aliens.
- Resident Aliens: Foreigners who meet the Substantial Presence Test (spending 183 days or more in the US during a calendar year) are considered resident aliens and must file an annual tax return (Form 1040) and pay taxes on their worldwide income.
- Non-Resident Aliens: Foreigners who do not meet the Substantial Presence Test are considered non-resident aliens. They must file a tax return (Form 1040NR) and pay taxes only on their US-sourced income.
Foreigners with US-sourced income, regardless of their visa status, must file a tax return if their gross income meets certain thresholds:
| Filing Status | Gross Income Threshold |
|---|---|
| Single | $12,950 |
| Married filing jointly | $25,900 |
| Married filing separately | $5 |
| Head of household | $19,400 |
Foreigners can also be subject to other reporting and withholding obligations, such as:
- Form W-8BEN or W-8ECI to certify their non-resident status and claim reduced withholding rates.
- Form 8843 to report foreign bank account balances and avoid penalties under the Foreign Account Tax Compliance Act (FATCA).
- Form 3520 or 3520-A to report the sale or exchange of US real property interests.
It’s important for foreigners to consult with a tax professional to determine their specific filing and reporting obligations and ensure compliance with US tax laws.
Thanks so much for taking the time to read my article about whether foreigners pay taxes in the US. I tried to cover all the bases, but if you have any other questions, please don’t hesitate to ask. In the meantime, be sure to check out my other articles on taxes and other financial topics. And thanks again for reading!