Are Visa Holders Subject to U.S. Taxes on their Global Income?

Are Visa Holders Subject to U.S. Tax on Global Income?

Are Visa Holders Subject to U.S. Tax on All Their Income

It is very common for foreign persons who have no intention of becoming permanent residents or U.S. citizens to travel and live in the United States for an extended time on a U.S. visa. And, the United States offers many different types of visas that taxpayers can utilize depending on the nature of their travels. For example:

• • • Foreigners employed in the United States may travel on an H-1B visa;

    • Foreign Employees who were transferred from a foreign company to the United States may travel on an L-1 visa;

    • Foreign Travelers may visit the United States on a B1/B2 visa; and

    • Foreign Investors may travel to the United States on an EB-5 investment visa.

These are just a few of the several types of visas available to taxpayers across the globe. The question then becomes are taxpayers who are on a visa subject to U.S. tax on their worldwide income?

Resident or Non-Resident and Substantial Presence

The first thing to determine is whether the taxpayer is a resident or non-resident for U.S. tax purposes. If the taxpayer is a resident for US tax purposes, then they are taxed on their worldwide income, which includes both domestic and foreign income. The way that most taxpayers become residents for U.S. tax purposes when they are on a visa is if they meet the Substantial Presence Test. The Substantial Presence Test is essentially a ‘counting days’ test based on the current tax year, along with the two prior years. If instead, the taxpayer is a non-us person for tax purposes, they are required to report only their U.S. sourced income for tax purposes.

1040 vs 1040-NR

For taxpayers who are considered US persons, they will file a Form 1040 to report their worldwide income. For taxpayers who are considered non-us persons for tax purposes, they will file a form 1040-NR to report their US-sourced income. With a Form 1040-NR, the taxpayer may be entitled to have reduced withholding depending on whether certain treaty provisions may apply. Also, the sourcing rules may apply as well which could otherwise reduce U.S. tax liability.

How to Avoid Worldwide Income Taxation

Even if a taxpayer meets the substantial presence test, then they may be able to avoid paying tax on their worldwide income. Here are three common scenarios to consider:

Avoid Substantial Presence

Taxpayers can plan to avoid the substantial presence test pretty easily if they are not required to be in the United States. For example, they can preplan the number of days that they are in the United States for each year to determine how to avoid the 183-day rule. Conversely, they may simply not travel to the United States in the current year — for at least 31 days — and when that is the case then they are not considered a US person for tax purposes because they will not have met the substantial presence test.

Closer Connection or Other Exception

Even if the taxpayer does meet the substantial presence test, they may be able to avoid paying tax on their worldwide income if they qualify for certain exceptions to substantial presence. One of the most common types of exceptions is having a closer connection with a foreign country or countries. There are some limitations to using this exception, such as taxpayers who may have already applied to be a green card holder. In addition, there are other exceptions such as being in the United States on an F-1 visa for the first five years, which is another common exception for students.

Treaty Election

In addition, taxpayers may also qualify for a treaty exception to various categories of income as well as U.S. person status. It will depend on the specific treaty that the taxpayer relies upon and while many of the treaties are similar, they are not identical to one another. Thus, any taxpayer who may qualify for a treaty exception will want to carefully examine the treaty that they are relying on to determine whether the specific provisions apply.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.