“Non-US person” may end-up paying US Tax on Worldwide Income and providing US Tax Reporting

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US Tax: New policies recently rendered state, non-US citizens turn into taxpayers depending on the time they have lived in the US.

It is observed that this taxation is borne by non-US citizens. Those who visit families in the states stay for a few months each year. Visitors may have had to extend their stay because of Covid limits, medical needs, or other factors. A person could unintentionally meet the “substantial presence” requirement and fall under the residency-based tax payment scheme.

The US Internal Revenue Service administers the Substantial Presence Test. It is done to determine who is a non-resident but nonetheless qualifies for US taxation. The criteria for this is, if a person is physically present in the USA for 183 days or more, they are treated as US residents for income tax purposes.

In addition, if someone is present for a minimum of 31 days during the current calendar year,  plus one-third of the days they were present in the preceding calendar year and one-sixth of the days they were present in the second preceding calendar year equals t or is more than 183, then the person qualifies for the “Substantial Presence Test” (SPT).

This is an important test.  Which is a key distinction to keep in mind is that US tax residents pay taxes on their worldwide income and are subject to credit on foreign taxes paid. On the other hand, those who do not reside in the US are solely subject to taxation on their income from the US. This could be daunting for people who qualify as US tax residents by accident.

If one is looking to avoid falling under this policy, a seasonal visitor must keep their visits fewer than 121 days each year.

One also has the option of taking these tests to be exempt from the SPT –

  1. The Closer Connection Test
  2. The Exempt Individual Test
  3. The Treaty Tie-Breaker Tests

Add to this, US Tax residents should meet the complex tax reporting requirements on their foreign assets. This includes –

  1. Foreign Bank Account Reports (FinCEN Form 114) that detail foreign bank accounts
  2. Specified Foreign Financial Assets (Form 8939)
  3. Controlled Foreign Corporations (Form 5471)
  4. Other required reporting forms

Penalties can be levied on failure to fill these forms. Also, returns can be hefty, but they can be struck off if the taxpayer has a reasonable cause for not filing. An accidental tuning into a US tax resident could expose you to paying a state income tax. As an example, a person who spends the required number of days in New York will have to pay New York an income tax on their worldwide income.

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