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SA residents

Visiting the US? What you need to know about tax

Steven Jones

28 March 2008

That "gap year" or extended business trip may mean having a chat to the US Internal Revenue Service.

The information contained in this article has been obtained from the US Internal Revenue Service (IRS). However, should you be contemplating an extended stay in the United States, it is recommended that you consult with a firm specialising in US tax*.

You are classified as a "non-resident alien" unless you are either a US citizen or a resident alien of the United States. You are a resident alien of the United States if you must meet either the "substantial presence" test or the "green card" test. Even if you do not meet either of these tests, you may be able to choose to be treated as a US resident alien for part of the year.

Substantial presence test
You meet the substantial presence test if you are physically present in the United States on at least:

31 days during the current year, and
183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:

o All the days you were present in the current year, and

o 1/3 of the days you were present in the first year before the current year, and

o 1/6 of the days you were present in the second year before the current year.

Green card test
You meet the green card test if you are a lawful permanent resident of the United States. You generally have this status if you have been issued an alien registration card, also known as a "green card." You continue to be a resident under this test unless the status is taken away from you or is determined to have been abandoned.

Dual-status alien
You can be both a non-resident alien and a resident of the United States during the same tax year. This usually occurs in the year you arrive in or depart from the United States. You would need to file an income tax return in the US for the year in which you are regarded as a dual-status alien.

Who must file an income tax return?
If you are a non-resident alien visiting the United States only for pleasure, receive no income from US sources, and are not engaged or considered to be engaged in a trade or business in the United States, you do not have to file a US income tax return.

However, you must file a US income tax return if you engaged or were considered to be engaged in a trade or business in the United States during the tax year. You must also file a US income tax return even if:

Your income did not come from a trade or business conducted in the United States,
You have no income from US sources, or
Your income is exempt from US income tax.

Engaged in a trade or business
Whether you are engaged in a trade or business in the United States depends on the nature of your activities. If you perform personal services (work) in the United States at any time during the tax year, you usually are considered engaged in a trade or business in the United States.

Others who must file
Even if you are not engaged in a trade or business in the United States, you must file a return if you have US income and not enough income tax was withheld to pay the tax that is due.

You must also file a return if you are claiming a refund of over-withheld or overpaid tax. Also, you must file a return if you want to claim the benefit of any deductions or credits. For example, if you do not have a job or trade or business in the United States, but you do have rental or royalty income from an interest in US real property, you may choose to treat that activity as a US trade or business. To claim a deduction for any allowable expenses related to that business, you must timeously file a true and accurate return.

With certain exceptions, you must file a return when you take the position that a US tax treaty overrules or modifies a US tax law. You must provide special information with the return, including a statement of facts supporting your position.

Identification number
You must furnish a taxpayer identification number on returns, statements, and other tax-related documents. Generally, this is a social security number (SSN). If you do not have and are not eligible to get an SSN, the IRS will issue you an individual taxpayer identification number (ITIN). An employer identification number (EIN) is required if you are engaged in a trade or business as a sole proprietor and have employees or a qualified retirement plan.

What income is taxed
A non-resident alien usually is subject to US income tax only on US source income. Under limited circumstances, certain foreign source income is subject to US tax.

US source income includes, but is not limited to, the following:

Wages, salaries, commissions, fees, tips, etc., for services performed in the United States.
Interest, with the following exceptions:

o Interest paid by certain resident aliens or domestic corporations if at least 80% of the payer's gross income for the 3 preceding years was from sources outside the United States.

o Interest on certain amounts paid by a foreign branch of a domestic corporation or a domestic partnership.

o Interest on deposits with a foreign branch of a domestic corporation or domestic partnership, but only if the branch is in the commercial banking business.

Dividends, with the following exceptions:

o Dividends received from a domestic corporation if the corporation elects to take the Puerto Rico and possession tax credit.

o Part of the dividends received from certain foreign corporations.

Rents and royalties from property located in the United States or from any interest in that property.
Gains, profits, and income from the sale or exchange of inventory in the United States you purchased outside the United States and its possessions.
Gains, profits, and income from the sale or other disposition of a US real property interest. A US real property interest is any interest in real property (including natural deposits) located in the United States or the Virgin Islands and any interest (other than solely as a creditor) in certain domestic corporations holding US real property interests.

Employees of foreign persons, organizations, or offices
Income for personal services performed in the United States as a non-resident alien is not considered to be from US sources, and is tax-exempt if you meet all three of the following conditions:

1. You perform personal services as an employee of or under a contract with a non-resident alien individual, foreign partnership, or foreign corporation, not engaged in a trade or business in the United States; or you work for an office or place of business maintained in a foreign country or possession of the United States by a US corporation, a US partnership, or a US citizen or resident; and
2. You perform these services while you are a non-resident alien temporarily present in the United States for a period or periods of not more than a total of 90 days during the tax year; and
3. Your pay for these services is not more than $3 000.

If you do not meet all three conditions, your income from personal services performed in the United States is U.S. source income.

Crew members
Compensation for services performed by a non-resident alien in connection with the individual's temporary presence in the United States as a regular crew member of a foreign vessel engaged in transportation between the United States and a foreign country or US possession is not US source income and is exempt from US tax.

Income tax withholding
If you are an employee, your employer will usually take income tax out of your wages and pay it to the US Treasury in your name. This is called withholding. The rate of withholding depends on the amount of your income and the information you give your employer. The amount withheld is credited against the tax you owe when you file your US tax return.

Household employees
If you work as a household employee, your employer does not have to withhold income tax. However, you may agree to voluntary income tax withholding by filing a Form W-4 with your employer. The agreement goes into effect when your employer accepts the agreement by beginning the withholding. You or your employer may end the agreement by letting the other know in writing.

30% flat rate
If you do not work as an employee, any pay you receive for your services is subject to withholding at a 30% flat rate. Additionally, income tax must be withheld at a flat rate of 30% on other types of income from US sources unless they are connected with the conduct of a US trade or business, or the rate has been lowered by tax law or income tax treaty. For example, the 30% flat tax is withheld from the following types of income.

o Interest (other than interest on bank deposits, savings and loan, credit union, or similar accounts, amounts held by insurance companies under agreements to pay interest, or certain portfolio debt obligations).

o Dividends.

o Rents.

o 85% of social security benefits paid to non-resident aliens.

o Annuities (payments from pensions, trusts, etc.).

o Royalties.

When and where to file
If you are an employee and you receive wages subject to US income tax withholding, you must generally file by the 15th day of the 4th month after your tax year ends. If you file for the 2007 calendar year, your return is due on 15 April 2008.

If you did not receive wages subject to US income tax withholding, you must file by the 15th day of the 6th month after your tax year ends. For the 2007 calendar year, file your return by 16 June 2008.

If you cannot file your return by the due date, you may use one of the electronic filing options. Generally, this will extend the due date to 15 October 2008. However, you must file a request for extension by the regular due date of your return.

Penalties
The law imposes penalties for filing your tax return late or for late payment of any tax due. However, a penalty is not charged if you can show that there was reasonable cause for your filing or paying late.

Departing Aliens and the Sailing or Departure Permit
Before leaving the United States, you may need to come to an IRS office to apply for a certificate of compliance (known as a sailing permit or departure permit) from the Internal Revenue Service. A certificate of compliance certifies that you have satisfied the US income tax laws. This is not your final tax return.

If you are included in one of the following categories, you do not have to get a sailing or departure permit before leaving the United States:

o Category 1: Representatives of foreign governments with diplomatic passports, whether accredited to the United States or other countries, members of their households, and servants accompanying them.

o Category 2: Employees of international organizations and foreign governments (other than diplomatic representatives covered under Category 1) and members of their households whose compensation for official services is exempt from US tax under US tax laws, and who receive no other income from U.S. sources.

o        Category 3: Alien students, industrial trainees, or exchange visitors, including their spouses and children, who come to the United States on "F-1," "F-2," "H-3," "H-4," "J-1," "J-2," or "Q" visas only and who receive no income from US sources while in the United States under those visas other than allowances to cover expenses incident to study or training in the United States, such as expenses for travel, maintenance, and tuition; the value of any services or food and lodging connected with this study or training; income from employment authorized under US immigration laws; or interest income on deposits that is not effectively connected with a US trade or business.

o        Category 4: Alien students, including their spouses and children, who come to the United States on an "M-1" or "M-2" visa only and who receive no income from U.S. sources while in the United States on those visas, other than income from employment authorized under US immigration laws, or interest income on deposits that is not effectively connected with a U.S. trade or business.

o        Category 5: Certain other aliens temporarily in the United States who have received no taxable income during the tax year up to and including the date of departure or during the preceding tax year. If the IRS has reason to believe that an alien has received income subject to tax and that the collection of income tax is jeopardized by departure, it may then require the alien to obtain a sailing or departure permit. Aliens covered by this paragraph are:

o        Alien military trainees who come to the United States for training under the sponsorship of the Department of Defense and who leave the United States on official military travel orders,

o        Alien visitors for business on a "B-1" visa, or on both a "B-1" visa and a "B-2" visa, who do not remain in the United States or a U.S. possession for more than 90 days during the tax year,

o        Alien visitors for pleasure on a "B-2" visa,

o        Aliens in transit through the United States or any of its possessions on a "C-1" visa, or under a contract, such as a bond agreement between a transportation line and the Attorney General, and

o        Aliens who enter the United States on a border-crossing identification card or for whom passports, visas, and border-crossing identification cards are not required. These aliens must be visitors for pleasure, visitors for business who do not remain in the United States or a US possession for more than 90 days during the tax year, or visitors in transit through the United States or any of its possessions.

o        Category 6: Alien residents of Canada or Mexico who frequently commute between that country and the United States for employment, and whose wages are subject to the withholding of US tax.

You should get your sailing or departure permit at least 2 weeks before you plan to leave the United States. The clearance, however, may not be issued more than 30 days before you leave. If both you and your spouse are aliens and both of you are leaving the United States, both of you must go to the IRS office.

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