You must be a U.S. citizen or a lawful permanent resident (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 non-immigrant visas are considered residents for tax purposes as well. You must report and pay tax on your worldwide income if you fall into any of these categories.
Being a resident doesn't mean you have to live in the U.S. 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.
- Green card holders must pay federal taxes on their worldwide income, including that earned in the U.S. and in other countries.
- The U.S. has tax treaties with some countries. You may not have to pay taxes to both governments in this case.
- You might also have to pay tax to the state or states in which you reside or work. All but seven U.S. states have some sort of income tax.
- You must also pay Social Security and Medicare taxes, just as U.S. citizens must.
What Is the Substantial Presence Test?
The Internal Revenue Service (IRS) 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.
The calculation for the 183 days during the last three years isn't clear-cut. Each day in the current year counts as one day. But days in the previous year count as only one-third of a day. Days in the year before that count as only one-sixth of a day.
This rule applies only to those who hold non-immigrant visas. Check with a tax professional if you're unsure whether you meet that test 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 Incomes
Unlike many other countries, the United States taxes its citizens and residents on their worldwide income. But this only applies to those who are U.S. residents. You'd pay U.S. tax on only your U.S. income if you aren't a resident.
Examples of income that must be reported on your U.S. tax return include rental income, income from investments, or interest on savings back in the country you lived in before coming to the U.S.
An Overview of the U.S. Federal Income Tax System
U.S. citizens and residents pay income taxes to different levels of government. The federal income tax is paid to the U.S. federal government. The federal tax system is administered by the IRS, which is a division of the 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. 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. Seven states do not collect state income tax as of tax year 2022: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming. Washington taxes only the capital gains of high earners.
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. This can directly reduce any tax owed.
The federal income tax works like a math formula:
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 they owe in federal income tax and state and local income taxes. This is accomplished by preparing the appropriate tax returns. You can often do it yourself using tax preparation software, or you can enlist the help of a tax professional.
It was once more common to itemize deductions during tax time. That changed when the Tax Cuts and Jobs Act went into effect in 2018. This law nearly doubled the standard deduction. Many taxpayers now choose to use the standard deduction rather than itemizing.
Form 1040 is the tax return filed by individuals. You might also have to file 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 redesigned the standard Form 1040. This version replaced the 1040A and 1040EZ, which are now obsolete. Most filers will use the redesigned Form 1040.
One notable exception is the tax return for nonresident aliens. They file Form 1040-NR.
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 $147,000 of wages, salary, and self-employment earnings in tax year 2022. You pay half, or 6.2%. Your employer matches that amount. You're responsible for paying the whole tax if you're self-employed.
The tax rate for Social Security doesn't increase in 2022, but the amount of income that's taxable for Social Security increases from $142,800 in 2021 to $147,000.
The Medicare tax is a flat 2.9% on all wages, salaries, and self-employment earnings. This is also split between you and 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% if they earn more than $250,000 (for those who are married and filing jointly) or more than $200,000 (for single filers). Married taxpayers who file separate returns must pay the Additional Medicare Tax on earnings over $125,000.
You can become eligible to receive benefits from Social Security, either when you reach retirement age or if 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 from their paychecks, estimated taxes, or a mix of both.
"Withholding" means that the person or business who's paying you a wage subtracts an amount from each of your paychecks for federal taxes, Social Security, and Medicare. The withheld money is forwarded to the government on your behalf. You receive the rest as your "take-home pay."
Self-employed persons and others with income that's not subject to withholding (this would include investments and rental income) should send four estimated payments to the IRS based on what they expect to owe for the tax year. The due dates for these estimated payments are usually 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.
You must file a tax return once per year to ensure that you haven't underpaid or overpaid the government throughout the tax year. This will involve tallying up all the withholding and estimated tax payments you've made.
Having to file a tax return isn't a bad thing. It's the only way you can get your money back if you've overpaid through withholding or estimated tax payments so the IRS owes you a refund. You may even qualify for tax credits that you wouldn't be able to claim if you didn't file a return.
Your withholdings will appear on the W-2 form your employer gives you at year's end. Withheld amounts are rarely exactly what you owe to the government. The amount withheld from your income could end up being more or less than the amount of tax you actually owe when you prepare your tax return.
The IRS will issue you a refund if you've overpaid. You'll be responsible for paying the remaining balance due if you've underpaid. You may be able to establish an installment agreement with the IRS.
Federal tax returns are usually due by April 15 each year. This date can be bumped up to the next business day if it's on a weekend or holiday. This happens in 2022. Tax returns for the 2021 tax year are due by April 18 in 2022.
Income and Assets Abroad
You might have investments, property, or financial accounts in countries outside the U.S. Income must often be reported on your U.S. tax return as well If you make any income through those sources, including government pensions, interest, or investment gains.
You might also have to report the details of all your financial assets held outside the U.S. by filing a Statement of Foreign Financial Assets (IRS Form 8938) with your tax return. You must also file a Foreign Bank Account Report (FinCen Form 114), which 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 filing them.
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. British 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.
Passive foreign investment companies are assets sitting in a pooled investment fund or unit trust. There are special rules for how this type of income is taxed. You'll need good documentation to fill out the tax form properly. You might need the help of a professional.
Keep Up to Date on Tax Treaties
The U.S. has 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. They might provide for a lower rate of tax or provide special rules for residency status.
You might find that a tax treaty provides rules for certain 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 non-resident 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 to those who have been lawful permanent residents in at least eight of the past 15 years.
Decide whether you want to give up your green card and leave the U.S. well before your eight years are up, if possible. You can avoid the exit tax, which is essentially a tax on your net worth, if you give up your green card before you hit the eight-year mark. You'll still have to fill out the exit tax paperwork. The tax itself doesn't apply until you reach your eighth year of residence.
You'll have 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.