Tips for Green Card Holders and Immigrants Filing U.S. Tax Returns
Paying U.S. Taxes When You Have a Green Card
You must be a U.S. citizen, a lawful permanent resident—that is, a green card holder—or meet the "substantial presence" test to be considered a resident of the United States for tax purposes. Some holders of nonimmigrant visas are considered residents for tax purposes as well.
Being a resident doesn't necessarily mean you actually live here full time.
You're considered to be a tax resident of the U.S. beginning in the year in which you receive your green card.
You're responsible for reporting and paying tax on your worldwide income if you fall into any one of these categories.
What Is the Substantial Presence Test?
The Internal Revenue Service defines "substantial presence" as being physically present in the U.S. for at least 31 days out of the year and for at least 183 days during the last three years, including the current year.
But here's where it gets tricky: Each day in the current year counts as one day, but days in the previous year count as only 1/3 of a day. Days in the first year count as only 1/6 of a day.
You're considered a tax resident if you lived in the country for at least 31 days this year and a total of 183 days or more during the current and past two years. You need only count 1/3 of the days you lived here last year, 1/6 of the days you were present in the first year, plus all the days in the present year.
The math is admittedly complicated, and this rule applies only to those who hold nonimmigrant visas. Check with a tax professional if you're unsure if you fall into these perimeters or if you think you might.
These rules don't apply to government workers, or to certain professionals or students. They're waived if you commute into the U.S. as a resident of Mexico or Canada, or if you're unable to leave the U.S. due to a medical condition that began and was diagnosed here.
U.S. Residents Pay Tax on Their Worldwide Income
The United States is one of just a few countries that taxes its citizens and residents on their worldwide income, and this might be different from how things worked in your native land.
You must include the income on your U.S. tax return if you generate it back home, such as rental income, income from investments, or interest on savings.
But this only applies to those who are U.S. residents. You'd pay U.S. tax only on your U.S. income if you qualify as a nonresident.
An Overview of the U.S. Federal Income Tax System
United States citizens and residents pay income taxes to different levels of government. The federal income tax is paid to the U.S. federal government. It's administered by the Internal Revenue Service (IRS), which is a division of the U.S. Treasury Department.
Federal income tax is calculated by measuring income earned during the calendar year. The tax year in the U.S. is normally the same as the calendar year, but taxpayers can adopt a fiscal year other than the calendar year if they want to.
Citizens and residents must also pay income tax to the state or states where they reside or earn income. Most states levy an income tax, although seven states do not as of 2019: Washington, Nevada, Wyoming, South Dakota, Texas, Alaska, and Florida.
Tax Deductions and Credits
Certain types of expenses can be deducted from your income, resulting in less net income that's subject to tax. Other expenses can be used to generate tax credits which can further reduce any tax owed.
The federal income tax works like a math formula that looks something like this:
Total income minus deductions = taxable income
Taxable income multiplied by the relevant tax rates = the federal income tax
Federal income tax minus tax credits = net federal income tax
Taxpayers are responsible for calculating how much federal income tax and state and local income taxes they owe. This is accomplished by preparing the appropriate tax returns, which you can either do yourself or use tax preparation software, or you can hire a professional to do it for you.
Forms 1040 is the tax return filed by individuals. It might have to be supplemented with any number of supporting schedules and forms to report specific types of income, deductions, or credits.
Simpler versions of the 1040 known as Forms 1040A and 1040EZ were available before the 2018 tax year. Then the IRS and the Department of the Treasury totally redesigned the standard Form 1040 and it replaces the 1040A and 1040EZ. The easier forms are obsolete.
Nonresident aliens file Form 1040NR or 1040NR-EZ.
Social Security and Medicare Taxes
The U.S. also has two social insurance programs: Social Security and Medicare. These are often referred to as payroll taxes or as the Federal Insurance Contributions Act (FICA) tax.
The Social Security tax funds the retirement and disability benefits administered by the Social Security Administration. It's a flat 12.4% on the first $137,700 of wages, salary, and self-employment earnings you earn annually as of 2020. You would pay half or 6.2% and your employer would match that if you're not self-employed.
The Medicare tax is a flat 2.9% on all wages, salaries, and self-employment earnings. This is also shared by your employer if you're not self-employed. There's no cap on Medicare tax earnings.
Some taxpayers have to pay an Additional Medicare Tax of 0.9%—those who earn more than $250,000 if they're married and file a joint return with their spouses, or more than $200,000 if they're not married.
Married taxpayers who file separate returns must pay the Additional Medicare Tax on earnings over $125,000.
Eventually, you can become eligible to receive benefits from Social Security, either when you reach retirement age or when you become disabled. You might also become eligible for government-subsidized health insurance through the Medicare program.
Paying U.S. Taxes
Americans pay their federal income taxes through withholding, estimated taxes, or sometimes both.
"Withholding" means that the person or business who's paying you subtracts an amount for federal taxes, Social Security, and Medicare from your earnings each pay period. You receive the balance as your take-home pay. The withheld money is then forwarded to the government on your behalf.
Withheld amounts are rarely exact. The amount withheld from your income could end up being more or less than the amount of tax you actually owe at year's end when you prepare your tax return. The IRS will issue you a refund if you overpaid. You must pay any balance due at the time you file your return if you underpaid, or you can sometimes arrange for an installment agreement with the IRS.
Self-employed persons and others with income that's not subject to withholding, such as investments and rental income, should send estimated payments to the IRS every three months based on what they expect to owe. The due dates for these estimated payments are April 15, June 15, September 15, and January 15 (of the following year). Taxpayers can be penalized if they don't make the required estimated payments by these dates.
Tally up all the withholdings and estimated tax payments you've made when the year is over. Your withholdings will appear on the W-2 form your employer gives you at year's end.
Federal tax returns are usually due by April 15 each year. This date can be bumped a day or two if it falls on a weekend or holiday.
Having to file a tax return isn't necessarily a negative thing. It's the only way you can get your money back if you overpaid through withholding or estimated tax payments and the IRS owes you a refund. You might additionally qualify for a refundable tax credit that you wouldn't be able to claim if you didn't file a return.
Income and Assets from Other Countries
You might have investments, property, or financial accounts in countries outside the U.S., so you receive income including interest, rents, government pensions, or gains or losses on those investments. This income must usually be reported on your U.S. tax return as well.
You might also have to report the details of all your financial assets held outside the U.S., filing a Statement of Foreign Financial Assets (IRS Form 8938) with your tax return and a Foreign Bank Account Report (FinCen Form 114). Form 114 is filed separately from your tax return.
These two forms ask for a lot of information. There's no tax or fee associated with filing them, but there are stiff penalties for not doing so.
Tax-free or tax-deferred savings plans that you have in your home country might not be tax-free or tax-deferred here in the U.S. For example, UK individual savings accounts (ISAs) and Canadian tax-free savings accounts (TFSAs) are not tax-exempt here. Income generated inside these accounts is taxable in the U.S.
If you have assets sitting in a pooled investment fund or unit trust, these are passive foreign investment companies. There are special rules for how this type of investment income is taxed and you'll need good documentation to fill out the tax form properly. You might need the help of a professional tax preparer.
Keep Up to Date on Tax Treaties
The U.S. has negotiated tax treaties with many countries. These treaties sometimes provide that certain types of income are taxed in one country or the other, but not by both, or they might provide for a lower rate of tax or provide special rules for determining residency status.
You might find that a tax treaty provides special rules for how to deal with particular situations if you have income or assets in other countries. This is another good reason to check with a tax professional.
Before You Leave the U.S.
You might have to request a "sailing permit" from the IRS before leaving the U.S. if you're a green card holder, a resident alien, or a nonresident alien. You could be subject to an exit tax if you're leaving the U.S. permanently and plan to give up your green card.
This is a special tax just for the privilege of permanently leaving the U.S. tax system. It applies to U.S. citizens and individuals who have had their green cards for at least eight years.
Decide whether you want to give up your green card and leave the U.S. well before your eight years are up. You can avoid the exit tax, which is essentially a tax on your net worth, if you give up your green card before you reach its eighth anniversary. You'll still have to fill out the exit tax paperwork, but the tax itself doesn't apply until you reach the eighth year of having your green card.
You'll need to know the market value of all your assets on the date you became a U.S. resident. Take a full inventory of your assets and net worth as of that date. The information can become useful if you ultimately decide to give up your green card.
A Final Word
Everything you need to remember is summed up nicely by Charlie Mitchell, an enrolled agent in Plano, Texas: "Report all your income, file your returns on time, pay any tax due when you file, or make a payment arrangement (and then make the payments). Open and read every letter you receive from the IRS, and, if the letter asks for a response, respond within the time requested."
IRS. “The Green Card Test and the Substantial Presence Test.” Accessed July 31, 2020.
IRS. “U.S. Citizens and Resident Aliens Abroad.” Accessed July 31, 2020.
Tax Foundation. ”State Individual Income Tax Rates and Brackets for 2019.” Accessed July 31, 2020.
IRS. “Here Are Five Facts About the New Form 1040.” Accessed July 31, 2020.
IRS. “Aliens - Which Form to File.” Accessed July 31, 2020.
Social Security. “Contribution and Benefit Base.” Accessed July 31, 2020.
IRS. “Topic No. 751 Social Security and Medicare Withholding Rates.” Accessed July 31, 2020.
IRS. “What Is the Additional Medicare Tax?” Accessed July 31, 2020.
IRS. "When Are Quarterly Estimated Tax Payments Due?" Accessed July 31, 2020.
IRS. “Alien Taxation - Certain Essential Concepts.” Accessed July 31, 2020.
IRS. “Comparison of Form 8938 and FBAR Requirements.” Accessed July 31, 2020.
IRS. “Report of Foreign Bank and Financial Accounts (FBAR).” Accessed July 26, 2020.
IRS. “Departing Alien Clearance (Sailing Permit).” Accessed July 31, 2020.