Tag Archives: income

When Immigrants Pay In, but don’t collect… then what?

According to a recent piece by “News USA”, 78 million baby boomers are nearing retirement, at which point they will leave the workforce to receive massive amounts of Social Security Administration (SSA) benefits. In a time of major economic downturn, the unlikely “saving grace” is the immigrant population, which pays into the Social Security system without collecting benefits.

The article goes on to say that so-called undocumented immigrants in the U.S. account for some 5 percent of the nation’s workforce. Contrary to popular belief, between one-half and three-quarters of
undocumented immigrants pay federal and state income taxes, Social Security and Medicare taxes – in addition to sales and property taxes.

As of October 2005, the Social Security Administration concluded that undocumented immigrants contributed an estimated $520 billion to the Social Security system – a figure that would increase exponentially if all of these immigrants were required to earn their legal status and contribute their share.

As the Babyboomers approach retirement age, immigrants will be knowingly or unknowingly subsidizing Social Security benefits, making a basic retirement even possible for millions of Americans.

Many experts and proponents of Comprehensive Immigration Reform have stated repeatedly that by requiring the undocumented aliens to come out of the shadows and earn legal status, immigrants will not only contribute by paying taxes, but will play a hefty role in shoring up the teetering Social Security system, and provide a fiscal windfall to U.S. taxpayers. …what’s so bad about that?

U.S. Citizens and Resident Aliens Abroad – Filing Requirements

If you are a U.S. citizen or resident alien living or traveling outside the United States, you generally are required to file income tax returns, estate tax returns, and gift tax returns and pay estimated tax in the same way as those residing in the United States.

Your income, filing status, and age generally determine whether you must file a return. Generally, you must file a return if your gross income from worldwide sources is at least the amount shown for your filing status in the Filing Requirements table in Chapter 1 of Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.

Foreign Earned Income Exclusion

United States citizens and resident aliens are taxed on their worldwide income, whether the person lives inside or outside of the United States. However, qualifying U.S. citizens and resident aliens who live and work abroad may be able to exclude from their income all or part of their foreign salary or wages, or amounts received as compensation for their personal services. In addition, they may also qualify to exclude or deduct certain foreign housing costs.

A common misconception that contributes to the international tax gap is that this potentially excludable foreign earned income is exempt income not reportable on a US tax return. In fact, only a qualifying individual with qualifying income may elect to exclude foreign earned income and this exclusion applies only if a tax return is filed and the income is reported.

To qualify for the foreign earned income exclusion, a U.S. citizen or resident alien must:

* Have foreign earned income (income received for working in a foreign country),
* Have a tax home in a foreign country, and
* Meet either the bona fide residence test or the physical presence test

The foreign earned income exclusion amount is adjusted annually for inflation. For 2008, the maximum foreign earned income exclusion is up to $87,600 per qualifying person.

If married and both individuals work abroad and both meet either the bona fide residence test or the physical presence test, each one can choose the foreign earned income exclusion. Together, they can exclude as much as $175,200 for the 2008 tax year.

In addition to the foreign earned income exclusion, qualifying individuals may also choose to exclude or deduct from their foreign earned income a foreign housing amount. The amount of qualified housing expenses eligible for the housing exclusion and housing deduction is limited.

The limitation on housing expenses is generally 30% of the maximum foreign earned income exclusion. For 2008, the housing amount limitation is $26,280 for the tax year. However, the limit will vary depending upon the location of the qualifying individual’s foreign tax home and the number of qualifying days in the tax year.

The foreign earned income exclusion is limited to the actual foreign earned income minus the foreign housing exclusion. Therefore, to exclude a foreign housing amount, the qualifying individual must first figure the foreign housing exclusion before determining the amount for the foreign earned income exclusion.

Since the foreign earned income exclusion is voluntary, qualifying individuals must choose to claim the exclusion. The foreign earned income exclusion and the foreign housing cost amount exclusion are claimed and figured using Form 2555 , which must be attached to Form 1040. However, if only the foreign earned income exclusion is claimed, a shorter Form 2555-EZ may be used instead.

Once the choice is made to exclude foreign earned income, that choice remains in effect for the year the election is made and all later years, unless revoked.

Not foreign earned income: Foreign earned income does not include the following amounts:

* Pay received as a military or civilian employee of the U.S. Government or any of its agencies
* Pay for services conducted in international waters (not a foreign country)
* Pay in specific combat zones, as designated by an Executive Order from the President, that is excludable from income
* Payments received after the end of the tax year following the year in which the services that earned the income were performed
* The value of meals and lodging that are excluded from income because it was furnished for the convenience of the employer
* Pension or annuity payments, including social security benefits

Self-employment income: A qualifying individual may claim the foreign earned income exclusion on foreign earned self-employment income. The excluded amount will reduce the individual’s regular income tax, but will not reduce the individual’s self-employment tax. Also, the foreign housing deduction – instead of a foreign housing exclusion – may be claimed.

A qualifying individual claiming the foreign earned income exclusion, the housing exclusion, or both, must figure the tax on the remaining non-excluded income using the tax rates that would have applied had the individual not claimed the exclusions.

Once the foreign earned income exclusion is chosen, a foreign tax credit, or deduction for taxes, cannot be claimed on the income that can be excluded. If a foreign tax credit or tax deduction is claimed for any of the foreign taxes on the excluded income, the foreign earned income exclusion may be considered revoked.

Once the foreign earned income exclusion is claimed, the earned income credit cannot be claimed for that year.

Timing of election: Generally, a qualifying individual’s initial choice of the foreign earned income exclusion must be made with one of the following income tax returns:

* A return filed by the due date (including any extensions),
* A return amending a timely-filed return. Amended returns generally must be filed by the later of 3 years after the filing date of the original return or 2 years after the tax is paid, or
* A return filed within 1 year from the original due date of the return (determined without regard to any extensions)

U.S. Tax Withholding on Payments to Foreign Persons

Most types of U.S. source income paid to a foreign person are subject to a withholding tax of 30%, although a reduced rate or exemption may apply if stipulated in the applicable tax treaty.

In general, a person that makes a payment of U.S. source income to a foreign person must withhold the proper amount of tax, report the payment on Form 1042-S and file a Form 1042 by March 15 of the year following the payment(s).

The person making the payment is considered to be the withholding agent. You are a withholding agent if you are a U.S.or foreign person that has control of any item of income of a foreign person that is subject to withholding.

A withholding agent may be a(n): 1) Individual, 2) Corporation, 3) Partnership, 4) Trust, 5) Association, 6) Nominee, or 7) Any other entity, including any foreign intermediary, foreign partnership, or U.S. branch of certain foreign banks and insurance companies.

Important note: As a withholding agent, the payer is personally liable for any tax required to be withheld, independent of the tax liability of the foreign person to whom the payment is made.

A payment to a foreign person is subject to withholding if it is from sources within the United States, and it is either: 1) Fixed or determinable annual or periodical (FDAP) income, or 2) Certain gains from the disposition of timber, coal, and iron ore or from the sale or exchange of intangible property (such as patents or copyrights).

Examples of FDAP income subject to withholding include (but are not limited to): Compensation for personal services, dividends, interest, pensions and annuities, alimony, real property income (such as rents), royalties, and taxable scholarships and fellowship grants.

When you make a payment of U.S. source income to a foreign person or entity you are normally required to withhold U.S. income tax at a rate of 30% and report it on Forms 1042-S and 1042 by March 15 of the year following the payment(s).

The penalty for not filing Forms 1042-S and1042 when due (including extensions) is usually 5% of the unpaid tax for each month or part of a month the return is late, but not more than 25% of the unpaid tax. Additional penalties apply for failure to provide complete and correct information or if you fail to provide a complete and correct statement to each recipient. The maximum penalty is $100,000 per year.

U.S. Tax Guide For Aliens (non-U.S. citizens)

For tax purposes, an alien is an individual who is not a U.S. citizen.

Aliens are classified as nonresident aliens and resident aliens. This publication will help you determine your status and give you information you will need to file your U.S. tax return. Resident aliens generally are taxed on their worldwide income, the same as U.S. citizens. Nonresident aliens are taxed only on their income from sources within the United States and on certain income connected with the conduct of a trade or business in the United States.

The IRS has published a convenient tax guide for Aliens, essentially containing all about “What You Need To Know About U.S. Taxes”.