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Tax Considerations for International Citizens and Expats Living in the U.S.

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Alisson Ward

Tax Professional | Content Writer

User An illustration depicting an expat family living in the US, consisting of parents and children from diverse backgrounds. The family is engaged in various activities such as working on laptops, studying, and enjoying leisure time together. In the background, there are symbols representing tax considerations for expats, such as international flags, currency symbols, tax forms, and a globe, highlighting the global nature of expat tax issues.

Moving to a new country is a significant life change, and if you’re an international citizen or expatriate living in the United States, understanding the U.S. tax system is crucial. The U.S. tax system is complex, and the rules for international citizens and expats can be especially intricate. Here, we’ll explore the key tax considerations for international citizens and expats living in the U.S. 

Tax Residency Status

One of the first tax considerations for international citizens and expats in the U.S. is determining your tax residency status. Your tax residency status will dictate how you are taxed in the U.S.  There are three primary tax residency statuses: 

  • U.S. Citizen or Resident Alien: If you hold U.S. citizenship or meet the substantial presence test, you are considered a U.S. tax resident. This means you are subject to taxation on your worldwide income. 
  • Nonresident Alien: If you don’t meet the substantial presence test, you are typically considered a nonresident alien. Nonresident aliens are subject to U.S. taxation only on their U.S.-source income, such as income from a job in the U.S. 
  • Dual-Status Alien: Some individuals may be considered dual-status aliens, meaning they are treated as a nonresident for part of the year and a resident for the other part. 

Income Sourcing

Understanding how different types of income are sourced is essential for international citizens and expats. U.S.-source income, which is generally taxable in the U.S., includes: 

  • Wages and salaries for services performed in the U.S. 
  • Rental income from U.S. properties. 
  • Income from a U.S. business or trade. 
  • Dividends and interest from U.S. sources. 

 

Foreign-source income, on the other hand, is typically not taxable in the U.S. for nonresident aliens. However, it’s crucial to understand tax treaties between the U.S. and your home country, as these treaties can impact the taxation of certain types of income. 

Tax Credits and Deductions

International citizens and expats living in the U.S. may be eligible for various tax credits and deductions. Some of the most common tax credits and deductions include: 

  • Foreign Tax Credit: This credit allows you to offset some of the U.S. tax liability with taxes paid to your home country. It prevents double taxation on the same income. 
  • Child Tax Credit: If you have dependent children, you may be eligible for this credit, which can reduce your U.S. tax liability. 
  • Standard Deduction: The standard deduction reduces your taxable income. International citizens should determine whether they are better off taking the standard deduction or itemizing deductions. 
  • Exemptions: Nonresident aliens may be eligible for personal exemptions, which further reduce their taxable income. 

Reporting Foreign Assets

International citizens and expats may have foreign assets, such as bank accounts or investments in their home country. It’s essential to report these assets to the U.S. government. The Foreign Bank Account Report (FBAR) and the Foreign Account Tax Compliance Act (FATCA) are two key reporting requirements. 

  • FBAR: If you have financial accounts in a foreign country with a total value exceeding $10,000 at any point during the year, you must file an FBAR with the U.S. Treasury Department to report those accounts. 
  • FATCA: FATCA requires foreign financial institutions to report information about financial accounts held by U.S. citizens and residents. This helps the U.S. government track foreign assets held by U.S. taxpayers. 

Social Security and Medicare

International citizens and expats living in the U.S. may be subject to Social Security and Medicare taxes. These taxes fund the U.S. social safety net and healthcare system. Whether you are required to pay these taxes depends on your visa status and the specific U.S. tax treaties with your home country. 

It’s essential to understand your tax obligations regarding Social Security and Medicare, as compliance with these requirements is critical. 

Tax Treaties

The U.S. has tax treaties with many countries, which can impact the taxation of certain types of income, tax credits, and other aspects of your tax liability. These treaties are designed to prevent double taxation and ensure that international citizens and expats are taxed fairly. 

To take advantage of the benefits of a tax treaty, you should review the specific treaty between your home country and the U.S. and determine how it applies to your situation. 

State Taxes

In addition to federal taxes, you may be subject to state taxes, depending on where you live in the U.S. Each state has its own tax laws and regulations, so it’s essential to understand the state tax requirements for your specific location. 

State tax considerations can include income tax, sales tax, property tax, and other taxes that vary from state to state. 

Tax Preparation and Compliance

To ensure that you comply with U.S. tax laws and regulations, consider working with a tax professional who specializes in international tax matters. They can help you navigate the complexities of the U.S. tax system, including determining your residency status, filing the necessary tax forms, and taking advantage of tax credits and deductions. 

Proper tax compliance is essential for international citizens and expats to avoid penalties, fines, and other legal issues related to tax evasion or underreporting income. 

Conclusion

Tax considerations for international citizens and expats living in the U.S. can be intricate and require a clear understanding of tax residency status, income sourcing, tax credits, deductions, reporting foreign assets, Social Security and Medicare obligations, tax treaties, state taxes, and overall tax compliance. 

Navigating the U.S. tax system as an international citizen or expat can be challenging, but with proper planning and guidance, you can minimize your tax liability and ensure that you meet all your tax obligations. Working with a tax professional experienced in international tax matters is a wise step to ensure you make informed decisions and avoid potential tax-related issues.

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