In legal terms, the term international tax law refers to the set of tax laws that govern how much taxes must be paid by:
- United States citizens that receive income from foreign countries; and
- Foreign nationals and foreign corporations that receive income from within the United States.
International tax attorneys are attorneys that specialize in international tax laws and assisting foreign nationals and corporations, or United States citizens that receive income from outside the United States. Tax attorneys can also assist anyone being audited on their income sources.
How Is My Foreign Income Taxed If I Am a U.S. Citizen?
It is important to note that if a non-citizen is classified as a United States tax resident, that individual is then required to report all of their worldwide income to the IRS. As such, if the tax resident is generating income outside the United States, that income will need to be declared when they file their annual required tax reports. This is also true for foreign income received by a United States citizen.
It is important to note that not all of an individual’s reported income will be subject to taxation. Although the income must be disclosed to the IRS, whether or not their income will be actually taxed will be determined based on international treaties and United States laws on double taxation. The individual may also be subject to taxation based on whether or not they are an owner of a corporation.
Thus, it is also important to understand all of the tax credits and deductions available based on the individual’s state of incorporation. Further, that individual must also understand whether or not their home country of operations, if it is not the United States, is going to tax the corporation based on United States based income, or their worldwide income.
A United States citizen, or United States tax resident, must file additional documents with the Internal Revenue Service (“IRS”) if any of the following is true:
- They are a shareholder of an international corporation;
- They receive large monetary gifts from a foreign person or corporation;
- They own part of a foreign trust or receive disbursements from a foreign trust; and/or
- They are receiving interest on their foreign bank accounts.
Essentially, any foreign income received by a United States citizen must be reported to the IRS.
How Is My U.S. Income Taxed If I am a Foreign National?
There are numerous people who are under the impression that foreign nationals don’t have to pay taxes. Although in some instances the impression may be true, there are many situations in which a non-citizen may be required to pay taxes.
Importantly, a failure to pay required taxes can result in legal penalties for the non-citizen, which can even result in their deportation or removal. Removal, formerly known as deportation, is the legal process in which a non-citizen is removed from the United States and transported back to their country of origin.
It is important to understand that the laws governing taxes for non-citizens are different depending on whether or not the person holds a non-immigrant visa or whether they hold a green card. The distinction between the two is that green card holders are automatically considered to be a “tax resident,” as discussed above, while non-immigrant visa holders are not considered to be a tax resident.
If an individual is a nonimmigrant visa holder, the tax rules are as follows:
- Depending on the amount of time spent in the United States in a given tax year, a non-immigrant visa holder may be classified as a tax resident. A non-immigrant visa holder must have been in the United states for at least half the tax year.
- In other words they must have remained in the United States for at least 183 days to be considered a tax resident;
- For non-immigrants who have spent less than 30 days of the current tax year in the United States, they may still be considered to be taxable residents if they have been in the United States for a “weighted” total of at least 183 days in the past 3 years.
- Determining whether or not days count toward the weighted total can be complicated.
- The formula for determining weighted days is that one day in the current year counts as one day, one day in the previous year counts as one-third of a day, and one day in the year before that counts as one-sixth of a day;
- A non-tax resident may also still be required to file taxes if they are not paying taxes in a different country. This is known as not having a “tax home” in another country.
- In such cases, the IRS may list the United States as the nonimmigrant visa holder’s tax home.
- If the IRS makes the determination that the United States is their tax home, the nonimmigrant would be responsible for filing and taxes; and
- Many tax rules may not apply to nonimmigrant visa holders. For example, if the nonimmigrant visa falls into one of the following occupations, the tax rules may not apply:
- Nonimmigrants who are working as teachers;
- Nonimmigrants who are in the United States as students;
- Nonimmigrants who are working as foreign government employees; or
- Nonimmigrants who are professional athletes.
For permanent visa holders, otherwise known as green card holders, the tax rules are as follows:
- A green card holder is automatically declared a United States tax resident;
- Green card holders must declare their tax information and income to the appropriate tax agencies and IRS; and
- Failure to furnish tax information to the IRS and appropriate agencies can result in negative consequences down the road should the green card holder choose to file for full United States citizenship. Additionally, a removal or
- deportation action may happen in extreme cases of tax fraud.
As far as taxation for dual-status aliens, i.e. an individual that has been both a resident alien and a nonresident alien in the same tax year, they must also follow the rules outlined above.
As mentioned above, foreign corporations must pay taxes on any income that they generated from within the United States for that tax year. Importantly, this includes any business income generated from sales within the United States, as well as any other sources of income generated within the United States, such as returns on their investments.
Do I Need an International Tax Attorney?
As can be seen, taxation for foreign nationals is very complex and requires a thorough understanding of both United States tax laws, and international tax treaties. As such, if you are unsure of your current tax classifications, or have any questions regarding whether or not you must disclose and pay taxes in the United States, it may be in your best interests to consult with an experienced tax attorney.
An experienced tax attorney can help you determine your tax status and obligations, as well as provide you with guidance on fulfilling those obligations, if any. Additionally, an experienced tax attorney can help you understand how international tax law may affect you or your business. Finally, if you ever face an audit because of international taxes, a lawyer can help you get through the process.