The Connection Between Immigration and Taxes
Immigration and taxes have a lot to do with each other. In fact, taxation and immigration go hand in hand throughout the USCIS immigration process.
With over 11 million undocumented immigrants in the US (according to a recent study of the Migration Policy Institute), immigration tax services are in high demand nationwide. Our CPA firm, with headquarters in Atlanta, GA, handles a significant number of immigration tax questions every year. This is not surprising, considering that approximately 400,000 unauthorized immigrants reside in Georgia (according to a report of the Pew Research Center). And most of them will need some level of tax advice or tax assistance.
In this article we will outline the taxation issues that come into play when applying for immigration status as well as after the immigration process is over.
Tax Identification Numbers: SSN and ITIN
At various points in the immigration process you may need a tax identification number. A social security number (SSN) is ideal, but not everyone qualifies for a SNN. If you do not quality for a SSN, the next best thing is the Individual Taxpayer Identification Number (ITIN).
You can use an ITIN in the following situations:
A nonresident alien individual claiming reduced withholding under an applicable income tax treaty.
A nonresident alien individual not eligible for an SSN who is required to file a U.S. federal tax return, or who is filing a U.S. federal tax return only to claim a refund.
A nonresident alien individual not eligible for an SSN who elects to file a joint U.S. federal tax return with a spouse who is a U.S. citizen or resident alien.
A U.S. resident alien who files a U.S. federal tax return but who isn’t eligible for an SSN.
An ITIN can generally be used when opening a US bank account.
For additional details on taxation and the ITIN, check out our article on using a Certified Acceptance Agent to Obtain an ITIN.
Taxation and Applying for a Green Card for a Spouse
A US citizen applying for a green card for their spouse will need to prove that their marriage is valid. One of the best ways to do this is by presenting a copy of a jointly filed US tax return to USCIS.
USCIS also uses the tax return to prove that the US citizen spouse earns enough money to support the non-resident spouse. The key number to look at on the tax return is “adjusted gross income,” which should be above the poverty threshold. Adjusted gross income is reported on Form I-864, Affidavit of Support, which goes to USCIS. A copy of the US tax return should also be attached to Form I-864.
Green Cards are required to be renewed periodically. When doing so, the married couple should attach their jointly filed US tax return to the renewal application. The joint tax return is an important proof to USCIS that the marriage is continuing and legitimate.
USCIS and IRS: Paying Taxes and Filing Tax Returns on Time
USCIS does not want applicants who are applying for a green card or citizenship to owe taxes to the US government. Paying taxes and filing tax returns is evidence of good moral character which is required for the immigration and naturalization process. You cannot become a US citizen without it.
If you are an employee, taxes should be subtracted from your paychecks by your employer. This is called “withholding.” If you are an independent contractor or own your own business, then you should pay your taxes quarterly to the IRS and the state Department of Revenue.
Tax returns for individuals are required to be filed by April 15 of the following year. The due date may be extended six months upon request, to October 15.
Tax returns for businesses are due on March 15 or April 15, depending on the entity type. These may also be extended for six months upon request.
Any tax still owing at the tax return due date should be paid when the tax return is filed. If tax payments are late, the IRS and the state Department of Revenue will add on interest and penalties.
Immigration and Taxes: Importance of Residency Status for Immigrant Tax Services
There are two types of residency that determine how an individual is taxed:
US permanent residents are taxed on worldwide income, no matter in which country the income is earned.
Nonresident aliens are taxed on US source income only
The US has two important tests to determine who is a permanent resident of the US for tax purposes. These tests are very important for anyone going through the immigration process. If you don’t consider these tests, you may end up filing the wrong type of tax return or paying the wrong amount of tax. This can get you in trouble with both the IRS and USCIS.
Green Card Test
You are considered to be a permanent resident of the US for tax purposes if you have a green card. If you pass this test, you will be taxed by the IRS on your worldwide income. This should be reported every year to the IRS on Form 1040.
Substantial Presence Test
Alternatively, under the substantial presence test, you are considered to be a permanent resident of the US for tax purposes if you exceed a specified amount of time in the country. If you meet this test, then you will be taxed by the IRS on your worldwide income. Here too, you report your income annually to the IRS on Form 1040.
The test is triggered if you spend at least the following amount of time in the US:
31 days of the current year that residency is being tested for, and
183 days over the three year period that includes the current year and the two prior years.
For the purposes of determining the amount of days present in the U.S. under the 183-day test, the days are calculated by counting the full amount of the days in the current year, 1/3 of the days present in the year prior to the current year, and 1/6 of the days present during the year that was two years prior to the current year.
Exceptions to the Substantial Presence Test
Time in the US for the following individuals is not considered for the substantial presence test:
a student that is holding a F, J, M, or Q visa and is in substantial compliance with the terms of the visa;
a government-related individual holding an A or G visa or an immediate family member of an individual that is holding an A or G visa;
a teacher or an individual engaged in training with a J or Q visa; or
an athlete who has travelled to the United States to participate in a sporting event for charity.
Closer Connection Test
There is one more exception to the permanent residency rules the comes into play. Under the closer connection test, a person is not a resident of the US for tax purposes if he or she
was in the United States for less than 183 days in the current year,
maintains a tax home in another country, and
can demonstrate a closer connection to that country.
To satisfy the closer connection test, the IRS looks at where the individual maintains bank accounts, the address listed on official documents such as bank accounts, bills, and official documents. They also look at the familial life of the individual and the location of his permanent home, personal property, family, church, and place of work.
Lastly, the IRS will also look at steps of an individual taken in an attempt to acquire permanent citizenship such as applying for permanent residency.
The impact of tax treaties is one of the more complication areas of immigration tax services.
The US has tax treaties with dozens of foreign countries. These tax treaties often impact how the income of a foreign person resident in the US will be taxed by the IRS. Tax treaties often establish preferential tax rates for certain types of income.
Every tax treaty is different. Ask you CPA, Enrolled Agent or tax accountant for information on the tax treaty applicable to your country.
Tax Reporting Requirements
As mentioned above, tax returns are required to be filed with the IRS and the state Department of Revenue on an annual basis. In most cases, the filing date is April 15, subject to extension. Permanent residents of the US file Form 1040. Nonresident aliens file Form 1040-NR.
US citizens and permanent residents of the US who have an interest in a foreign bank account with a value over $10,000 must report the account to the US government on an FBAR (“Foreign Bank Account Report,” also called FinCen Form 114). Foreign assets that produce income (including foreign stock) may also require reporting on Form 8938. Check out our article, FBAR vs 8938: Which One Should I File, for more detailed information on this topic.
Other forms that may need to be filed are Form 5471, for interest in a foreign corporation, and Form 8865, for interest in a foreign partnership.
Significant penalties may apply if these forms are not filed.
Immigration Tax Services: Authorization to Work
USCIS does not penalize a non-US citizen who works in the US without a work permit and files a US tax return. Therefore, it is almost always best to file a US tax return, even if you do not have a work permit, due to the requirements of both the IRS and USCIS.
If a tax return was not filed because of a missing work permit (or any other reason), the return may be filed late. Penalties and interest may apply. Importantly, for both immigration and taxes, a late tax return is better than no tax return filed at all.
When you get a new job, you will need to prepare Form W-4 and submit it to your employer. This form will ensure that the correct amount of taxes are withheld from your paycheck. Here is a link to the 2023 Form W-4 from the IRS website.
Accountants who Provide Immigration Tax Services
It is important to work with an immigration tax accountant or tax preparer who is familiar the immigration process and the requirement of both the IRS and USCIS. Because of the complex relationship between immigration and taxes, a CPA or Enrolled Agent (EA) who is experienced with immigration tax services is the best choice.
Here are a few reasons why you should use a CPA or Enrolled Agent for immigration tax services:
They are required to follow the very strict ethical standards of the AICPA and IRS
They have the highest level of training and education of all tax preparers and tax planners
In the event that you have a problem with the IRS, only a CPA or Enrolled Agent can represent you to the government. They can speak on your behalf and negotiate for you. If you work with a CPA or Enrolled Agent, you should not have to speak with the IRS at all. They will do it for you.
If you or someone you know has an issue relating to immigration tax services, tax notices, an IRS audit or any other matter, please contact us at (678) 235-5460 or (773) 828-0551. Or, reach out to us by email at Gary.Massey@masseyandcompanyCPA.com.
Massey and Company CPA is a boutique tax and accounting firm serving individuals and small businesses in Atlanta, Chicago and throughout the country. Our services include tax return preparation, tax planning for businesses and individuals, IRS tax problem resolution, IRS audits, sales tax, and small business accounting and bookkeeping.