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Inpatriate / Nonresident Alien

Inpatriate / Nonresident Alien. Classification of Taxpayers for U.S. Tax Purposes. U.S. law treats U.S. persons and foreign persons differently for tax purposes. U.S. citizens and resident aliens are taxed on the worldwide income Nonresident alien is taxed on the US-source income only.

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Inpatriate / Nonresident Alien

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  1. Inpatriate/ Nonresident Alien L.Dukhovnaya, MST, CPP 2013

  2. Classification of Taxpayers for U.S. Tax Purposes U.S. law treats U.S. persons and foreign persons differently for tax purposes. U.S. citizens and resident aliens are taxed on the worldwide income Nonresident alien is taxed on the US-source income only . L.Dukhovnaya, MST, CPP 2013

  3. Classify the Payee US citizen US lawful permanent resident Alien authorized to work L.Dukhovnaya, MST, CPP 2013

  4. Classify the Payee An alien is any individual who is not a U.S. citizen or U.S. national. A nonresident alien is an alien who has not passed the green card test or the substantial presence test. L.Dukhovnaya, MST, CPP 2013

  5. Alien Residency - Green Card Test A Lawful Permanent Resident of US. is a resident for tax purposes based on the U.S. Citizenship and Immigration Services (USCIS) alien registration card, Form I-551, also known as a "green card.“ Taxed on worldwide income as US citizens L.Dukhovnaya, MST, CPP 2013

  6. Substantial Presence Test • If the individual didn’t pass the green card test, he or she is still considered a permanent resident for the tax purposes if: • The alien is present in the U.S. for at least 31 days during the current calendar year, and L.Dukhovnaya, MST, CPP 2013

  7. Substantial Presence Test 2. 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting: • All the days present in the current year, • And 1/3 of the days present in the 1st year before the current year, • And 1/6 of the days present in the 2nd year before the current year. L.Dukhovnaya, MST, CPP 2013

  8. Substantial Presence Test - example The person was present in US 120 days in each of the years: 2010, 2011, 2012. 120 + 40 (1/3 in 2011) + 20 (1/6 in 2010) = 180 This individual is not considered a resident under the substantial presence test for 2012 L.Dukhovnaya, MST, CPP 2013

  9. Substantial Presence Test - exemption Days excluded from substantial presence test when individual qualifies as exempt: • Foreing government individuals (A visa) • Teacher or trainee with J or Q visa L.Dukhovnaya, MST, CPP 2013

  10. Substantial Presence Test - exemption L.Dukhovnaya, MST, CPP 2013

  11. Substantial Presence Test – exemption example L.Dukhovnaya, MST, CPP 2013

  12. Substantial Presence Test – exemption example Wei Wu was a citizen and resident of China immediately prior to his entry into the US. He is temporarily present in the United States as a graduate student at a university in Cleveland on an F-1 visa (student visa). He arrived in the United States on 08-15-2007. Assume that Wei Wu has not changed his immigration status since his arrival in the United States. Determine his residency starting date. L.Dukhovnaya, MST, CPP 2013

  13. Substantial Presence Test – exemption example Date of entry into US: 08-15-2007. Exempt for 5 calendar years (2007 through 2011). Then, begin counting 183 days at this date: 01-01-2012. Number of nonexempt days in United States during 2012: 366 days – current yearPrior year (2011) days in US × 1/3 = 0 daysSecond Prior year (2010) days in US (0) × 1/6 = 0Total = 366 days L.Dukhovnaya, MST, CPP 2013

  14. Substantial Presence Test – exemption example Wei Wu passed the substantial presence test on 07-01-2012 (the 183rd day of 2012). Wei Wu's residency starting date under I.R.C. § 7701(b) is 01-01-2012 (the first day he was present in United States during the calendar year in which he passed the substantial presence test). L.Dukhovnaya, MST, CPP 2013

  15. Payroll Delivery Methods Home country payroll Host country payroll Shadow payroll L.Dukhovnaya, MST, CPP 2013

  16. Taxes for Resident Aliens Wages paid to resident aliens are subject to the federal income tax withholding and the employee and employer share of social security, Medicare, and FUTA taxes. Employers must obtain Forms W-4 and I-9 from resident aliens. L.Dukhovnaya, MST, CPP 2013

  17. Taxes for Nonresident Aliens, special instruction for the form W-4 Nonresident aliens: • can only check “Single” on Line 3. • can claim only one withholding allowance on Line 5, unless residents of Canada, Mexico, Japan, or South Korea, or are U.S. nationals. • must indicate nonresident alien status above Line 6. • cannot claim “Exempt” withholding status on Line 7. L.Dukhovnaya, MST, CPP 2013

  18. Withholding procedure for NR alien employees 1. Add to the wages paid to NRA the amounts shown below (Pub.15, p.21) L.Dukhovnaya, MST, CPP 2013

  19. Withholding procedure for NR alien employees 2. Use the amount calculated in the step 1 and the number of withholding allowances claimed (usually not more than one) to figure income tax withholding with the Wage Bracket Method or Percentage Method. The amounts added under the chart (“Phantom gross-up”) are to remove effect of the standard deduction from the wage-withholding table & added to wages just for calculating income tax withholding, but they are not included on the W-2. L.Dukhovnaya, MST, CPP 2013

  20. Tax Treaties • Treaties between the US and other countries provide relief from the double –taxation. • Tax treaties may allow residents of foreign countries to be taxed at a reduced rate, or to be exempt from U.S. income taxes on certain items of income they receive from sources within the United States. L.Dukhovnaya, MST, CPP 2013

  21. Tax Treaties • The US has income tax treaties with a number of foreign countries. • These reduced rates and exemptions vary among countries and specific items of income • If there is no treaty between the home country and the US, the tax is withheld as described above. L.Dukhovnaya, MST, CPP 2013

  22. Tax Treaties • If the NRA pay is exempt from U.S. income tax under a tax treaty, the NRA needs to provide the employer with the Form 8233 for the tax year to claim the exemption. • The Form 8233 must report the Taxpayer Identification Number (TIN) or the U.S. Social Security Number. L.Dukhovnaya, MST, CPP 2013

  23. Tax Treaties and State IT • Some states honor the provisions of U.S. tax treaties and some states do not. • Therefore, you should consult the tax authorities of the state to find out if the income tax treaty applies in the state in which the NRA resides. L.Dukhovnaya, MST, CPP 2013

  24. Exceptions to NRA withholding L.Dukhovnaya, MST, CPP 2013

  25. Exceptions to NRA withholding L.Dukhovnaya, MST, CPP 2013

  26. Aliens Employed in the U.S. - FUTA Wages paid to aliens employed in the US are subject to FUTA tax under the same conditions that would apply to U.S. citizens. However, certain types of services are exempt from FUTA taxes. Some examples of exempt services include (Publication 15, Circular E, Employer's Tax Guide): • Compensation paid to agricultural workers, including foreign agricultural workers in H-2A nonimmigrant status; • Compensation paid to employees of religious, charitable, educational, or certain other tax-exempt organizations; • Compensation paid to nonresident aliens temporarily present in the United States in F-1, J-1, M-1, Q-1, or Q-2 nonimmigrant status. L.Dukhovnaya, MST, CPP 2013

  27. Social Security & Medicare Tax In general, U.S. social security and Medicare taxes apply to payments of wages for services performed as an employee in the United States, regardless of the citizenship or residence of either the employee or the employer. The US has entered into social security agreements with foreign countries to coordinate social security coverage and taxation of workers employed for part or all of their working careers in two countries to make sure that social security taxes are paid only to one country. L.Dukhovnaya, MST, CPP 2013

  28. Totalization Agreements Purpose • Since the late 1970's, the US has established a network of Social Security agreements that coordinate the U.S. Social Security program with the comparable programs of other countries. L.Dukhovnaya, MST, CPP 2013

  29. Totalization Agreements Purpose • International Social Security agreements, often called "Totalization agreements," have two main purposes. • First, they eliminate dual Social Security taxation, the situation that occurs when a worker from one country works in another country and is required to pay Social Security taxes to both countries on the same earnings. • Second, the agreements help fill gaps in benefit protection for workers who have divided their careers between the United States and another country. L.Dukhovnaya, MST, CPP 2013

  30. Totalization Agreements • Administration • Workers who are exempt from U.S. or foreign Social Security taxes under an agreement must document their exemption by obtaining a certificate of coverage from the country that will continue to cover them. • For example, a U.K.-based employee working temporarily in the United States would need a certificate from the U.K. authorities as evidence of the exemption from U.S. Social Security tax. L.Dukhovnaya, MST, CPP 2013

  31. Totalization Agreements • Each agreement (except the one with Italy) includes an exception to the territoriality rule called "detached-worker" exception. • Under this exception, a person who is temporarily transferred to work for the same employer in another country remains covered only by the country from which he or she has been sent. • The detached-worker rule in U.S. agreements generally applies to employees whose assignments in the host country are expected to last 5 years or less. L.Dukhovnaya, MST, CPP 2013

  32. FICA Withholding Exceptions L.Dukhovnaya, MST, CPP 2013

  33. FICA Withholding Exceptions example • A NRA is issued a visa to teach for an University. He takes a PT job working for a chemical company while in the US. • The wages earned while teaching at the University y are exempt from FICA. • The wages earned at the chemical company are subject to FICA L.Dukhovnaya, MST, CPP 2013

  34. Publications & helpful links • Publication 519, U.S. Tax Guide for Aliens • Publication 901, U.S. Tax Treaties • Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities • http://www.socialsecurity.gov/international/agreements_overview.html • http://www.irs.gov/Individuals/International-Taxpayers/ L.Dukhovnaya, MST, CPP 2013

  35. Links to Social Security Web Pages of other Countries and International Organizationslisted on http://www.socialsecurity.gov/international/index.html L.Dukhovnaya, MST, CPP 2013

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