Your day is made if you meet a close friend of yours in a garden and happen to discuss some useful US Tax topics to enhance your knowledge and naturally enrich in this process.
I was not surprised when Ji Chang Wok (assumed name) enquired various questions about American taxation. As CPAs, we charge consultation fees from the clients for their specific problems but, as responsible professionals, spread as much knowledge as possible so that the society respects the tax laws and obey them.
The following questions arose in this context and are answered on the basis of Internal Revenue Service guidelines. These are not citable as legal authority.
Questions (Topic wise)
Green Card holders
1. What are my responsibilities as a green card holder if I have been absent from the United States for a long period of time?
2. I was a long-term resident of the United States prior to surrendering my green card. What is my U.S. tax filing obligation?
3. I am a green card holder. May I claim residence in a foreign country under a tax treaty and obtain benefits under the tax treaty?
1. It has been my experience that many Green Card Holders are nowadays regularly asked this question by U S authorities and the answer is expected. The simple answer is that if one is a U.S. citizen or a resident alien living outside the United States, his/her worldwide income is subject to U.S. income tax, regardless of where he/she lives. However, one may qualify for certain foreign earned income exclusions and/or foreign income tax credits. My earlier articles in Tax Guru have extensively covered this topic.
2. One is a long-term resident for U.S. federal income tax purposes if one was a lawful permanent resident of the United States (green card holder) in at least 8 of the last 15 tax years ending with the year one’s residency ends. In determining if one meets the 8-year requirement, one does not count any year that one was treated as a resident of a foreign country under a tax treaty and did not waive treaty benefits.
If one was a long-term resident who has surrendered the green card, he/she may be subject to the expatriation tax. Expatriation tax provisions apply to U.S. citizens who have renounced their citizenship and long-term residents who have ended their residency. The rules that apply are based on the dates of expatriation.
3. As a green card holder, one is a U.S. tax resident. However, the definition of residency under U.S. tax laws does not override tax treaty definitions of residency. If one is a dual-resident taxpayer (a resident of both the United States and another country under each country’s tax laws), one can still claim the benefits under an income tax treaty.
The income tax treaty between the two countries must contain a provision that provides for resolution of conflicting claims of residence (tie-breaker rule). If one would be treated as a resident of the other country under the tie-breaker rule and one can claim treaty benefits as a resident of that country, he/she is treated as a nonresident alien in figuring his/her U.S. income tax. For purposes other than figuring his/her tax, he/she will be treated as a U.S. resident.
If one is a dual-resident taxpayer and can claim treaty benefits as a resident of the other country, he/she must file a return by the due date (including extensions) using Form 1040NR or Form 1040NR-EZ, and compute the tax as a nonresident alien. He/she must also attach a fully completed Form 8833 if he/she determines the residency under a tax treaty and receives payments or income items totaling more than $100,000. He/she may also have to attach Form 8938. Ideally, for a serious interpretation based on individual basis, the help of a CPA may solve the problem.
Filing Status and dependents
1. I am a S. citizen married to a nonresident alien. What is my filing status and can I claim an exemption for my foreign spouse?
2. I am a U.S. taxpayer residing abroad and I have a child who was born abroad. Can I claim my child as a dependent on my tax return?
1. This is a routine feature in India where Indians after getting their U S Citizenship, do marry Indian brides/bridegrooms and what about the exemption for the other foreign spouse? In general, if one is a U.S. citizen or resident alien married to a nonresident alien, he/she is considered “Married Filing Separately” unless he/she qualifies for a different filing status. If he/she pays more than half the cost of keeping up a home for himself/herself and a qualifying child or other relative, one may qualify for the head of household filing status.
If one is a U.S. citizen or resident alien married to a nonresident alien, he/she and his/her spouse can choose to have the spouse treated as a U.S. resident for all U.S. federal income tax purposes. This allows one to file a joint return, but also subjects the nonresident alien spouse’s worldwide income to U.S. income tax.
2. In general, one can claim exemptions for individuals who qualify as his/her dependents. To be one’s dependent, the individual must be a U.S. citizen, U.S. national, U.S. resident alien, or a resident of Canada or Mexico for some part of the calendar year in which the tax year begins.
Children usually are citizens or residents of the same country as their parents. If you were a U.S. citizen when your child was born, your child generally is a U.S. citizen. This is true even if the child’s other parent is a nonresident alien, the child was born in a foreign country, and the child lives abroad with the other parent.
You must include on your return the social security number (SSN) of each dependent for whom you claim an exemption. If your dependent is a nonresident alien who is not eligible to get a social security number, you must list the dependent’s individual taxpayer identification number (ITIN) instead of an SSN.
Internal Revenue Service, part of Federal Government of USA recently reminded U S Citizens and resident aliens (popularly known as Green card holders) and also including those with dual citizenship to check if they had any tax liability for the tax year 2016 and also the necessity to report for filing bank accounts often referred under FBARS. Some paras from their communication dated from 13th April 2017 are reproduced below:
“New Deadline for Reporting Foreign Accounts
Starting this year, the deadline for filing the annual Report of Foreign Bank and Financial Accounts (FBAR) is now the same as for a federal income tax return. This means that the 2016 FBAR, Form 114, must be filed electronically with the Financial Crimes Enforcement Network (FinCEN) by April 18, 2017. FinCEN will now grant filers missing the April 18 deadline an automatic extension until Oct. 16, 2017 to file the FBAR. Specific extension requests are not required. In the past, the FBAR deadline was June 30 and no extensions were available.
In general, the filing requirement applies to anyone who had an interest in, or signature or other authority, over foreign financial accounts whose aggregate value exceeded $10,000 at any time during 2016. Because of this threshold, the IRS encourages taxpayers with foreign assets, even relatively small ones, to check if this filing requirement applies to them. The form is only available through the BSA E-Filing System website.
Most People Abroad Need to File
An income tax filing requirement generally applies even if a taxpayer qualifies for tax benefits, such as the Foreign Earned Income exclusion or the Foreign Tax credit, which substantially reduce or eliminate U.S. tax liability. These tax benefits are only available if an eligible taxpayer files a U.S. income tax return.
A special extended filing deadline applies to U.S. citizens and resident aliens who live and work abroad. For U.S. citizens and resident aliens whose tax home and abode are outside the United States and Puerto Rico, the income tax filing deadline is June15, 2017. The same applies for those serving in the military outside the U.S. and Puerto Rico. Tax payments are still due on April 18, and interest will apply to any payment received after that date. See U.S. Citizens and Resident Aliens Abroad for details.
Nonresident aliens who received income from U.S. sources in 2016 also must determine whether they have a U.S. tax obligation. The filing deadline for nonresident aliens is April 18. See Taxation of Nonresident Aliens on IRS.gov.
Special Income Tax Return Reporting for Foreign Accounts and Assets
Federal law requires U.S. citizens and resident aliens to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts. In most cases, affected taxpayers need to complete and attach Schedule B to their tax return. Part III of Schedule B asks about the existence of foreign accounts, such as bank and securities accounts, and usually requires U.S. citizens to report the country in which each account is located.
In addition, certain taxpayers may also have to complete and attach to their return Form 8938, Statement of Foreign Financial Assets. Generally, U.S. citizens, resident aliens and certain nonresident aliens must report specified foreign financial assets on this form if the aggregate value of those assets exceeds certain thresholds. See the instructions for this form for details.
IRS Reporting for Canadian Retirement Accounts
The IRS eliminated a special annual reporting requirement that applied to taxpayers who hold interests in either of two popular Canadian retirement plans. This was part of an IRS change announced in October 2014 making it easier for taxpayers with these plans to get favorable U.S. tax treatment. As a result, many Americans and Canadians with registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs) don’t need to file Form 8891 to report details on these plans. This does not affect any other reporting requirements that may apply, such as FinCEN Form 114 and Form 8938.
Specified Domestic Entity Reporting
For tax year 2016, certain domestic corporations, partnerships and trusts that are considered formed for the purpose of holding (directly or indirectly) specified foreign financial assets must file Form 8938 if the total value of those assets exceeds $50,000 on the last day of the tax year or $75,000 at any time during the tax year.
For more information on domestic corporations, partnerships and trusts that are specified domestic entities and must file Form 8938, as well as the types of specified foreign financial assets that must be reported, see Who Must File, Specified Domestic Entity, Specified Foreign Financial Assets, Interests in Specified Foreign Financial Assets, and Assets Not Required To Be Reported.
Report in U.S. Dollars
Any income received or deductible expenses paid in foreign currency must be reported on a U.S. tax return in U.S. dollars. Likewise, any tax payments must be made in U.S. dollars.
Both Forms 114 and 8938 require the use of a Dec. 31 exchange rate for all transactions, regardless of the actual exchange rate on the date of the transaction. Generally, the IRS accepts any posted exchange rate that is used consistently. For more information on exchange rates, see Foreign Currency and Currency Exchange Rates.
Taxpayers who relinquished their U.S. citizenship or ceased to be lawful permanent residents of the United States during 2016 must file a dual-status alien return, attaching Form 8854, Initial and Annual Expatriation Statement. A copy of the Form 8854 must also be filed with Internal Revenue Service Philadelphia, PA 19255-0049, by the due date of the tax return (including extensions). See the instructions for this form and Notice 2009-85, Guidance for Expatriates Under Section 877A, for further details.”
In simple terms, U S Citizens and Resident aliens were reminded of their responsibility to file tax returns by April 18, 2017 and also FBARS whose date of filing coincided with the same date though automatic extension would available up to October 16, 2017. Most of the Indians who fall under above categories generally approach a CPA to fulfill their legal obligations. Now that the immigrant authorities are particular about legal obligations also, it is advisable to file the U S Tax returns on time.
The following situations actually arose for the clients of the undersigned which are worthy of reading:
One client approached me to solve his problem of getting a tax return for his son who is applying to various American universities with very high score of GRE. Yes, as an American citizen living in India for nearly 10 years, he filed only Indian tax return. His son again an American citizen, is brilliant and is sure of getting into the best universities provided the procedural hustles are solved. The local American embassy advised the client to file his pending tax returns for better prospects for his son’s admission and furthering his dreams. Yes, as CPA we solved his problem.
The moral of the instant is that even as an American citizen living in a foreign country, do consult a CPA to file the tax return for U S A. It is highly probable, in near future, someone may enquire about your tax return.
For an Indian citizen, who went to USA, some time ago, on a H1B visa, his son was born there and become a U S Citizen. Now, he has grown up and also got very good scores in Student Admission Test (SAT) which is a barometer for admission into the best university in USA. The university in USA wants the father to produce the income proof so that his son could be considered for scholarship while being admitted for under graduation courses. Her father did not claim him as a dependent which could have helped IRS while filing his tax return during his stay in U S A.
It has become a routine to hear about U S Citizens living in India for a very long time forgetting to file global come to U S Tax authorities and similarly, the parents who get Green card on account of their relatives just ignore their legal obligation to U S A. It is not unexpected that someone in U S immigrant counter enquire about the filing requirements for tax. To avoid hearing these types of stories, this article was written. It is my ardent desire that while enjoying the beautiful parks, grand rivers, brilliantly built roads and the best education standards of American universities, the legal obligations are met by all including U S Citizens and Green card holders who settle abroad.