The American tax code is incredibly complex. Add in being from another country and it’s no surprise that we see a lot of mistakes made by non-US citizens on their tax returns. Find our top 5 mistakes below so you know how to avoid them!
1. Filing as a ‘resident’ instead of ‘non-resident alien’
There are two types of personal tax return filings in the U.S., resident and non-resident, and they each come with their own set of rules. A resident will file their tax return on Form 1040. A non-resident will file Form 1040NR.
To determine which one to file, you have to figure out if you are what the IRS calls a “non-resident alien.” We’re not a fan of that term, both because it sounds a bit demeaning, and also because it can be misleading. You might be living full-time in the U.S., working or going to school here, but that’s not what the IRS is referring to when they say “resident”. The IRS has their own set of rules to determine who is a resident.
The short story is for non-US citizens and non-Green Card holders, there is a test called the IRS Substantial Presence Test, which uses a formula based on the number of days physically present in the U.S. over the past three years to determine if you’re a resident. The result is that those on F & J visas and others who just moved here are typically taxed as a non-resident.
This implies that you should have filed Form 1040NR instead of a Form 1040, meaning you may have mis-paid your taxes. We see this mistake all the time, especially for those who try to file their taxes themselves online. Luckily, you have three years to amend your taxes, so reach out to us at Visor if you might need to correct your tax filing.
2. Incorrectly completing Form W-4 on first day of work
The U.S. is a pay-as-you-go system, meaning the government collects taxes throughout the year. The amount that gets withheld is determined by what you entered on Form W-4, which your employer typically requires you to fill out on your first day of work, whether you’re full-time or interning. For non-US citizens who are considered non-resident taxpayers, there are specific instructions on how to fill out the Form W-4. However, since many non-US citizens don’t even realize that they’re technically non-resident taxpayers, they often don’t fill out the W-4 correctly.
This has two big implications: 1) potentially not withholding enough income tax and thus owing a big check to the government when filing taxes and 2) having FICA payroll taxes withheld when you are actually exempt. The latter can result in a big over-payment (more on this below).
If you recently started a job or an internship, check out our cheat sheet to completing Form W-4 or consult with a Visor tax advisor. We’re happy to help. Getting this right upfront can save you big headaches later.
3. Paying payroll taxes due to incorrectly completing Form W-4
As mentioned above, if you fill out your W-4 incorrectly and do not indicate to your employer that you are a ‘non-resident’ for tax purposes, then your paycheck withholdings might not be handled properly. This primarily impacts international students who are working or interning on F, J, M or Q visa types. The biggest consequence of this: unnecessarily paying payroll taxes (also known as FICA taxes).
The biggest tax benefit for non-residents on certain visa types is an exemption from payroll taxes. Payroll taxes, comprised of Social Security and Medicare and collectively often referred to as FICA taxes, total over 7.5%. That means, for someone earning a salary of $100,000, payroll taxes will total $7,500. Even if you are an international student making just $15,000 for a summer internship, you’ll still pay over $1,100 in payroll taxes. Non-resident taxpayers on F, J, M and Q visas do not have to pay these taxes though.
Filling out the Form W-4 correctly in the first place is the best way to avoid this. However, if you realized that you didn’t do this and had payroll taxes withheld, you have up to three years to potentially reclaim your taxes. Check the Form W-2 (the tax form showing your wages that your employer should have sent you) and add up boxes 4 & 6 to see how much got withheld. Then reach out to Visor and we’ll show you how to get this money back.
4. Students on F or J visas forgetting to file Form 8843
Seeing how certain non-residents are exempt from payroll taxes, it’s actually often far more more optimal for many international students to file as a ‘non-resident alien’ rather than a ‘resident’. For the most part, the choice is out of your control. However, international students can provide themselves more optionality by filing Form 8843.
If you are in the U.S. on a F or J visa, those days do not have to be counted in the IRS Substantial Presence test (which is IRS’s way of determining whether you file as a resident or not). To have these days exempted, you must file Form 8843 every year that you were in the U.S. on one of these ‘exempt’ visas. Even if you did not earn income that year and thus are not required to file a full tax return, you’ll still want to file a Form 8843.
With payroll taxes at 7.5%, the savings from this strategy can be significant. If you forgot to file Form 8843, you can still file it up to three years later. Learn more here or contact us at Visor for help.
5. Failing to disclose foreign bank accounts
Once you do become a resident for tax purposes, you’re now subject to tax on your worldwide income just like every other US citizen. You’re also on the hook to disclose any international bank accounts to the US government.
While the latter does not technically impact the amount of tax you pay, it is a required filing as part of your tax return and the penalties for not doing so are steep. We’re talking $10,000 steep. It pains us when we see non-US citizens forget this requirement.
If you think you might need to file either Form 114 (FBAR) or Form 8938, contact a Visor tax advisor today.
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