Examples of U.S. Worldwide Income Tax Rules for Visa Holders

Examples of U.S. Worldwide Income Tax Rules for Visa Holders

When a U.S. Taxpayer is either a U.S. Citizen or a Lawful Permanent Resident, they are required to report their worldwide income on their U.S. tax return. This differs from most countries that only tax individuals on their worldwide income when they are considered a resident of that country for at least six months in the year. In addition, U.S. Citizens and Lawful Permanent Residents are required to disclose their foreign accounts, assets, investments, trusts, entities, etc. to the U.S. government on various international information reporting forms each year such as the FBAR and IRS Form 8938. In addition to U.S. Citizens and Lawful Permanent Residents, there is another category of individuals who may also be required to report their worldwide income and assets to the U.S. government each year – U.S. Visa Holders along with other non-citizen slash non-permanent residents who meet the Substantial Presence Test. Let’s focus on when U.S. Visa Holders may have to file U.S. taxes to report their worldwide income.

*These examples are for illustrative purposes only and Taxpayers should consult with a Board-Certified Tax Law Specialist if they have specific questions about their reporting requirements and not rely on this article for legal advice.

First, What is the Substantial Presence Test?

The Substantial Presence Test (SPT) is essentially a counting-days test. We have separate materials to assist you with understanding substantial presence, but in a nutshell, SPT means that the Taxpayer was in the United States for at least 183 days over the past three years using a ratio/calculation to determine how many days they were present in the U.S. for each year. While there are exceptions, exclusions, and limitations to this rule, it generally means that if the Taxpayer was in the United States for more than 121 days in each of the past three years they will qualify as a resident under substantial presence and be required to report their worldwide incoming global assets. Let’s look at a few examples:

H-1B Work Visa

Many Taxpayers come to the United States on an H-1B work visa — or they are already in the United States on an F-1 and when they graduate they transition to H-1B work visa status. Some Taxpayers only remain in the United States part-time to work and other Taxpayers are in the United States to work full time over multiple years.

• • • Example: Daniel became an H-1B visa holder in April of the current year. He lived in the United States for the full year and was in the United States in the current year for more than 183 days. Daniel may be required to report his worldwide income and assets on his US tax return.

    • Example: Michelle became an H-1B visa holder in September of the current year but was in the United States previously on a B1/B2 tourist visa for six months in each of the past three years. Michelle may be required to report his worldwide income and assets on her U.S. tax return.

    • Example: Brenda recently became a H-1B visa holder in August of the current year. In each of the five prior years she was on an F-1 visa which was the first time that she was ever in the United States and/or had a visa. She timely filed the 1040-NR/Form 8843 each year. Since she did not have her H-1B for at least 183 days in the current year and was a non-U.S. person under the F-1 exception for the past five years she may not have met substantial presence and may not be required to is required to report her worldwide income and assets on her U.S. tax return.

L-1 Transfer Visa

The L-1 visa is a work transfer visa and is also a very common type of visa. With an L-1 Visa, the Taxpayer may be working in a foreign country when he is transferred to the United States to work.

• • • Example: Keith is a foreigner who never lived in the United States previously before being transferred to the United States on an L-1 work visa. In the current year he arrives in the United States. Keith arrives in February and remains in the United States for the next ten months. Keith may be required to report his worldwide income and assets on his U.S. tax return.

    • Example: Brian is a foreigner who is transferred to the United States in August of the current year on an L-1 visa. In the prior year, Keith had worked in the United States on a H1B visa from January to October. Brian may be required to report his worldwide income and assets on his U.S. tax return.

    • Example: Melinda is a foreigner who is transferred to the United States in February of the current year. It was the first time she had ever been in the United States, and she worked in the United states for four months before being transferred back to the foreign headquarters. Melinda may not be required to report her worldwide income and assets on his U.S. tax return.

B1/B2 Tourist Visa

The B1/B2 tourist visa is a very common type of visa where the Taxpayer can remain in the United States (usually) for up to six months in a year and the visa would generally last for 10 years before it must be renewed. Even though the Taxpayer does not work in the United States they may still have to report their worldwide income and disclose their foreign assets.

• • • Example: Frank is a foreigner who travels to the United States on a B1/B2. In each of the past three years he traveled to the United States for about 5 months each year. Even though frank was not in the United states for more than six months each year he may be required to report his worldwide income and assets on his US tax return.

    • Example: Dean is a foreigner who is in the United States for 6 months in each of the two prior years but only three weeks in the current year. Since Dean did not meet the substantial presence test in the current year because he was not in the United states for at least 31 days, he may not be  required to report his worldwide income and assets on his U.S. tax return.

    • Example: Scott is a foreigner who came to the United States on a B1/B2 visa for three months. The visa expired but then Scott obtained an H-1B visa and was in the United States for a total of four months on the H-1B visa. Even though Scott was not on either visa for more than six months, he may be required to report his worldwide income and assets on his U.S. tax return.

EB-5 Investment Visa

Just as some foreign countries have their own version of their residence-by-investment and Citizenship-by-investment visas, the United States offers the EB-5 investment. This type of visa essentially allows foreigners to buy a U.S. visa which can then transition into a green card and ultimately citizenship if that’s what they are seeking.

• • • Example: David is a foreigner who invested in the United States by way of an EB-5 investment visa. He remained in the United States in the current year for nine months and does not have any U.S. income but has a significant amount of foreign income. David may be required to report his worldwide income and assets on his U.S. tax return.

    • Example: Bryan is a foreigner who invested in the United States by way of an EB-5 visa but did not come to the United States at all in the current year. Even though he’s had the visa for the full year, since he did not spend any days in the United states, he may not be required to report his worldwide income and assets on his U.S. tax return.

    • Example: Mary is a foreigner who came to the United States intending on obtaining her EB-5 visa. She remained in the United States for nine months when ultimately her visa application was rejected. Even though technically Mary was a foreigner who never obtained the visa she was seeking, since she was in the United states for more than 183 days in the current year, she may be required to report her worldwide income and assets on his U.S. tax return.

F-1 Student Visa

The F-1 student visa is one of the most common types of visas that foreigners obtain when they want to go to school or university in the United States. The general rule is for the first five years that a Taxpayer is on the F-1 visa they are not considered a U.S. person for tax purposes and instead of filing a 1040 they file form 8843 with a 1040-NR. It is very important to note that there are exceptions, exclusions, and limitations to this rule, especially if they were on a different visa in previous years and/or had an F-1 visa prior.

Closer Connection Exception

Even if the Taxpayer meets the substantial presence test and thus is required to report their worldwide income and global assets, they may be able to avoid substantial presence if they can prove they have a closer connection with foreign a country(s). There are several requirements and limitations for applying the closer connection exception but for Taxpayers who qualify they may be able to avoid having to pay taxes on worldwide income and report their global assets.

Treaty Elections

Some Taxpayers who are in the United States as residents may be able to fall back on a tax treaty if one exists between the United States and their country of residence to reduce or eliminate certain U.S. taxes. It does not mean that the Taxpayer will not meet the substantial presence test, but it just means that the Taxpayer qualifies under the treaty to reduce or eliminate certain taxes.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.