Tax Residence vs. Tax Non-Resident
The United States taxes the worldwide income of its citizens and resident foreign nationals (resident aliens) regardless of whether the individual lives and works in the United States or abroad. This rule also applies to US citizens who hold dual citizenship.
Under the US Internal Revenue Code, foreign nationals are tax residents if 1) they are Lawful Permanent Residents (LPRs, called Green Card holders); or 2) pass the “substantial presence test,” which is defined as being physically present in the United States for 31 or more countable days with respect to any calendar year. For purposes of this article, foreign nationals who fall into either of these categories are referred to as tax resident. Tax residents do receive credit for certain taxes paid abroad; however, failure to pay US taxes may result in a finding, in the case of LPRs, that they have abandoned their green card status.
The income of tax resident is generally subject to both federal and state taxes in the same manner as US citizens. Tax residents must report all interest, dividends, wages, and other compensation for services, income from rental property or royalties, and other types of income on his/her US tax return, whether earned within or outside the United States. Additionally, the estates of tax residents are subject to US estate tax.
Tax nonresidents are foreign nationals who do not hold a green card or who have not passed the substantial presence test according to the IRS Code. Tax nonresidents are subject to US income tax only on US source income and income effectively connected with the conduct of a US trade or business. Under the Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART Act), however, foreign individuals are subject to tax laws if they have abandoned their LPR status after June 17, 2008, and meet one of the following conditions: a) an average annual income of $145,000 for the five years prior to expatriation from the United States; (b) a net worth of $2 million or more; or (c) failure to comply with expatriation filing requirements for the five years prior to leaving the United States.
Foreign nationals of a country with a totalization treaty with the United States may claim an exemption from US Social Security taxes and claim a refund of Social Security taxes if they are working in the United States for their foreign employer abroad. Most European countries have a totalization treaty with the US, including Belgium, Canada, France, Germany, Italy, the Netherlands, Norway, Spain, Sweden, Switzerland, and the United Kingdom. In addition, foreign nationals of a country with a totalization treaty with the US may be able to claim coverage under their home country’s Social Security system even after becoming US permanent residents.
Noncitizen foreign workers with Social Security-covered employment must pay Social Security payroll taxes regardless of whether or not they are authorized to work in the US.
To be eligible for Social Security retirement benefits, noncitizen foreign workers must have 10 years of Social Security-covered employment with some exceptions. H-2A agricultural workers, and F and M students are not covered by Social Security.
The Social Security Act requires noncitizen foreign workers in the US to have lawful status in order to receive benefits. If they do not meet the lawful presence requirement, their benefits are suspended. However, they may receive benefits outside the US if they satisfy an “alien nonpayment provision” of the Social Security Act.
The Provision refers to aliens who are outside the US and defines alien as a person who is a citizen of a foreign country.
Aliens who reside outside the US for six consecutive calendar months cannot receive benefits starting with the seventh month of their absence and payments will be suspended. In addition, the benefits may not be resumed until aliens return to the US for one calendar month. See RS 02610.041, RS 00204.010, and RS 02650.001
Foreign nationals who fall into certain visa categories granted by the US Citizenship and Immigration Service, Department of Homeland Security, may be eligible for SSI if they:
- Lawfully resided in the United States on Aug. 22, 1996, and are blind or disabled; or
- Received SSI on Aug. 22, 1996, and are lawfully residing in the United States; or
- Lawfully admitted for permanent residence (Green Card) and have a total of 40 credits of work in the United States.
Foreign nationals may be eligible for SSI if they are:
- Active duty members of the U.S. armed forces;
- Noncitizen members of federally recognized Indian tribes;
- Certain noncitizens admitted as Amerasian immigrants;
- Cuban/Haitian entrants admitted under the Refugee Education Assistance Act;
- Certain victims of severe forms of human trafficking; and
- Certain Iraqi or Afghan special immigrants who are admitted as lawful permanent residents.
For further information visit your local Social Security office, or the website at www.ssa.gov.
Foreign nationals who are US tax residents may wish to consider consulting a professional with regard to issues related to taxation and social security benefits. Please contact my office for a referral if you do not know of an appropriate professional.