Foreign Visitor Tax Guide: Section Three

Section Three: U.S. Tax Obligations For Foreign Nationals

3.1 Tax Basics for Nonresidents (for Tax Purposes)
A nonresident's tax responsibility is complex. The definition of what to include as income and what might be exempt from taxes can be confusing. This Foreign Visitor Tax Guide is basically designed to help the nonresident alien. Therefore, the following information is provided in some detail to inform and direct the nonresident alien in tax basics as they relate to the individual's tax obligation.

Remember, the definitions of nonimmigrant, an immigration law term (see Section 1.12), and nonresident, a tax law term (see Section 1.13), are not the same. One can be a nonimmigrant for immigration purposes (see Section 1.12) and still be a resident for tax purposes (see Section 1.13).

Income received by a nonresident may be subject to income tax. However, a nonresident may be exempt from paying U.S. income tax because of a tax treaty between the U.S. and his/her country of residency. The U.S. currently has treaties with 62 countries. Each treaty is different. A payment must meet the strict requirements of the treaty in order to be exempt from tax. If the income is not exempted by a tax treaty, the nonresident alien pays U.S. tax only on income from sources inside the U.S. A nonresident receives no tax exemption for dependents. All nonresidents must file IRS Form 1040NR (Income Tax Return for Nonresident Aliens) on or before April 15 (June 15 if no wages are earned) each year, even if all income is exempt from tax because of a treaty (see Section 3.2.2 below).

Striking differences exist between the taxation of residents and nonresidents of the U.S.
The basic characteristics of the nonresident taxation follow:

1. Tax is generally levied on U.S. source income only.

2. Tax treaty provisions may exempt some income from tax.

3. Interest income may be tax free.

4. Nonresident aliens cannot file jointly with their spouse.

5. Generally only one personal exemption is allowed regardless of family status.

6. No standard deduction is permitted except by India.

7 . Itemized deductions are limited to:

• State and local taxes withheld.
• Contributions to charity.
• Casualty/theft losses.
• Miscellaneous business deductions.

8. Investment income is generally taxed at a flat 30%.

9. No child or dependent care credit is permitted.

A number of special rules regarding the standard deduction and spousal exemptions are in effect for residents of certain countries, such as India, Canada, Mexico, Japan, and Korea. Residents of these countries should contact the ASU Human Resources, Records and Payroll Office, for additional information on these rules.

3.2 Nonresidents U.S. Nonresident Alien Income Tax Return (Form 1040NR)
3.2.1 What To File
A nonresident files her/his tax return on Form 1040NR "U.S. Nonresident Alien Income Tax Return". ASU will report earnings to nonresident aliens on a Form W2 and/or a Form 1042-S. Nonresidents must file an annual tax return if they earned any U.S. source income during the tax year. Holders of F, J, and M visas are required to file Form 1040NR, even if they earned no income at all during the calendar year. In addition, an individual who has had too much tax withheld from her/his wages will want to file in order to claim a refund.

3.2.2 When To File
If the nonresident earned employee wages subject to withholding during a year, her/his tax return must be filed on or before April 15, of the following year. If no U.S. employee wages were received, the return is due June 15, of the following year.

3.2.3 Where To File
All nonresident tax returns are mailed to:

Internal Revenue Service Center
Philadelphia, PA 19255

3.2.4 Additional Tax Information Statement
For all nonresidents for tax purposes, the IRS is requiring a statement detailing the basis of the individual's claim to nonresident alien status. This statement should be filed with the IRS Form 1040NR (Income Tax Return for Nonresident Aliens) on or before April 15 of each year, or June 15 if no U.S. source income has been received.

3.2.5 Tax Return Record Keeping
Every taxpayer should retain a photocopy of the completed tax return and any documentation submitted with it. Proper response to an IRS inquiry regarding a prior year's return is virtually impossible without an exact copy of that return. Occasionally circumstances require the taxpayer to submit a copy of a prior year return to the IRS. In addition, nonimmigrants applying to the BCIS for permanent residence may be required to produce copies of their tax returns previously filed.

3.3 Residents U.S. Individual Income Tax Return (Form 1040)
A person who meets the tax definition of resident (see Section 1.14) pays U.S. tax on income from all sources worldwide and cannot take advantage of tax treaties between the U.S. and other countries. Individuals who are resident aliens for tax purposes can claim exemptions for dependents. Determination of residency status for tax purposes is discussed further in Section 4 of this guide. A resident's income is generally subject to tax in the same manner as a U.S. citizen; that is, a resident is taxed on and must report income from all sources, including those outside the U.S.

Foreign nationals who are residents for tax purposes must report all interest, dividends, wages, or other compensation for services, income from rental property or royalties, and other types of income, whether from sources within or outside the U.S., on IRS Form 1040, 1040A, or 1040EZ. The university will report earnings to resident aliens on a Form W2 (for employee wages) or a Form 1099 (for independent contractor services) that must be filed with the tax return.

See Appendix 2 for examples of these forms.

3.4 Certificate of Compliance "Sailing Permit" (IRS Form 1040C or Form 2063)
A Certificate of Compliance, or "Sailing Permit," is a form that a nonresident, for tax purposes, must file with the IRS to demonstrate that he/she has paid all applicable U.S. taxes before leaving the U.S. Holders of F1, J1, H3, and H4 visas are not required to obtain the Certificate of Compliance if they had no U.S. source income other than (a) allowances or payments to cover study expenses (including travel, maintenance, and tuition) or (b) wages from authorized work (including practical training). Permanent residents (green card holders) and all nonresidents with nonimmigrant status other than F-1, J-1, H-3, and H-4 must still obtain a Certificate of Compliance from the IRS before leaving the U S.

The following information will be useful to foreign nationals who must obtain a Certificate of Compliance prior to departure from the U.S.:

IRS Form 2063 is required if the foreign visitor owes no U.S. tax at time of departure.

IRS Form 1040C is required if the foreign visitor owes U.S. taxes at time of departure.

The appropriate form should be obtained and filed at least 14 days before departure, but no more than 30 days before departure.
The appropriate form can be obtained from the local IRS office. An IRS employee will provide assistance to the visitor in completing the form.

3.5 Social Security or Tax Identification Number
A foreign national must obtain either a social security number or an IRS Taxpayer Identification Number (ITIN) if he/she is required to file a tax return with the IRS.

A social security number for work purposes can be issued only to those foreign nationals who have authorization to accept employment either by the BCIS or by operation of law. The social security or tax identification number can be obtained by filing at the local Social Security Administration Office. In addition to having a completed Form SS-5, foreign nationals who are applying for a social security or tax identification number must have their passport and at least one other piece of identification with them when they visit the Social Security Administration Office. (Appendix 1 contains a listing of the Social Security Administration Offices nearest to each of the ASU campuses).

An ITIN can be issued to those nonimmigrants who can not obtain a Social Security Number but who can accept payments from other sources, i.e., as a guest lecturer. The ITIN can be obtained by filing Form W-7 with the IRS either by mail or by person. Original or certified copies of documents that substantiate the information on the Form W-7 must also be submitted with the IRS Form W-7.

Examples of acceptable documents include an original passport, driver's license, birth certificate, identity card, or U.S. Immigration documents. If a copy of an original document is submitted, it must be certified by the issuing agency or by a person legally authorized to certify that the document is a true copy of the original. Beware of mailing originals as they may not be returned.

In some countries, foreign nationals can apply for a social security number or ITIN at the U.S. Embassy prior to their arrival in the U.S. These countries include: Germany (Bonn ); England (London); Mexico ( Mexico City); Canada (Ottawa); Italy (Rome); Chile (Santiago); Singapore; Australia (Sydney); and Japan (Tokyo).

Foreign visitors who wish to claim tax treaty exemption for any type of payment must have a social security or tax identification number or proof of application prior to receiving payment. The number belongs to them for their lifetime.

3.6 Penalties and Sanctions
Failure of a nonresident to comply with the U.S. tax law can lead to the imposition of fines and penalties by the IRS. Failure to file the appropriate tax returns or making intentionally false statements on these returns can lead to criminal penalties.