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Alien and immigrant taxes are tricky! The forms and rules can be very confusing. Immigrants may find it extra confusing because this may be the first time they are preparing US taxes. Many immigrants opt to use a professional tax advisor like MYRA Wealth to help with their taxes or may turn to tax software options. These strategies can help prevent mistakes but it's still important that you be informed before heading into tax season. One omission could cost you a lot of money and if you are in the process of immigrating, can jeopardize your current or future status.
Here are 10 common tax-filing mistakes encountered by immigrants. As you prepare for tax season, take care to make sure you’ve avoided them!
#1. Not Declaring All Of Your Income
If the IRS finds out that you haven’t declared all of your income, you may incur penalties and interest. If you are willfully evading taxes, you may even be subject to criminal prosecution and jail time. In addition, as an immigrant, this may negatively impact your application for citizenship. If USCIS discovers that you haven’t paid your taxes or owe back taxes, your citizenship application may be denied. If you find yourself in the situation of owing back taxes and can show that you are making efforts to pay them via a payment plan, USCIS can factor this into their decision.
#2. Not Disclosing Foreign Bank Accounts
If you become a resident alien at any point, you have to start paying taxes on your worldwide income. You also need to disclose foreign bank accounts to the IRS! You may need to file Form 114 or Form 8938. A professional tax advisor like MYRA Wealth can help you figure out if you need to file these forms. The penalties for failing to file are really hefty!
Related Article: When Do I Need To File Form 8938?
#3. Completing Form W4 Incorrectly On Your First Day At Your Job
On your first day at work (or sometimes before your first day), your employer will ask you to fill out a W4 form. This form tells your employer how much to withhold from your paycheck to give to the IRS over the course of the year.
If you’re a non-US citizen and considered a nonresident alien, you have to fill out the W4 in a special way.
If you fill out your W4 incorrectly, you might have too much withholding or not enough.
If you are a non-resident alien taxpayer, here are some tips for completing your W4 form:
- Section 1 + 2: Input your name and SSN
- Line 3: Select single regardless of what you actually are
- Line 4: Ignore unless your name differs from the one on your social security card
- Line 5: Put “1”
- Line 6: On the dotted line after “each paycheck,” write “non-resident alien”
- Line 7: DO NOT claim to be exempt
- Sign! And give the form to HR
Also be sure to put your correct address on the form. For example, if you are working in a summer internship in another state, be sure to put the address of where you are actually residing during your internship. If you don’t, you might end up with withholding for the incorrect state and having to complete extra state tax returns.
Students on F, J, M, or Q visas in particular often make mistakes when completing their W4. If you complete your W4 incorrectly, your paycheck withholding may be incorrect. In particular, you may pay extra unnecessary payroll taxes (known as FICA taxes which are 6.2% Social Security Tax + 1.45% Medicare Tax). This is a lot whether you are earning a full time salary or just working in your summer internship. Non-resident taxpayers on F, J, M, and Q visas do not have to pay FICA taxes.
If you accidentally paid FICA taxes and shouldn’t have, you can get them back. An accountant can help you retrieve these erroneously paid FICA taxes for the past three tax years.
If you are a student on an F, J, M, or Q visa, follow the tips above on your W4 form.
Related Article: Do Aliens Pay Taxes?
#4. Not Filing Form 8843 If You Are On An F or J Visa
Form 8843 tells the US the # of days that you were physically present in the US on a student visa. It records the # of days that you spent in the US and were exempt from the Substantial Presence Test.
All students on F or J visas are considered nonresident aliens and the days spent in the US on that visa do not count toward the Substantial Presence Test.
In order to get this “exemption” on your days spend in the US under the F or J visa, you have to complete Form 8843. Even if you have no income, you should file this form! Your spouse on a F2 or J2 visa should also file the form.
If you didn’t file it, you can still file it for the previous 3 tax years. Filing this form can help extend your ability to file as a non-resident alien for a little longer while you are working in the US on an H1B, helping exclude your global income from taxation.
Related Article: Students On An F1 Visa Don’t Have To Pay FICA Taxes
#5. Filing As A Resident if You Are A Non-Resident Alien
Residents file Forms 1040 for their tax return. Non-residents file Form 1040NR. In order to determine if you are a nonresident alien you have to determine if you pass the “Green Card Test” or the “Substantial Presence Test.” The Substantial Presence test is not a question of whether you are literally sitting and residing in the US. It’s a calculation of how much you have been in the US over the last few years and this year in order to determine if you should be taxed like a resident and therefore taxed on not only your US but also your global income.
If you don’t meet the Substantial Presence Test, don’t file as a resident! Be sure to file Form 1040NR for non-residents. Failing to file correctly can result in incorrectly paid taxes. If you filed incorrectly, you can fix your taxes going back three years. A tax advisor like MYRA Wealth can help you.
#6. Filing As A Non-Resident Alien If You Are A Resident Alien
The formula for determining if you are a resident alien - also known as the Substantial Presence Test - is pretty tricky, so it’s no wonder that many people mess it up. But it’s important to know your proper filing status because you don’t want to get into delinquency with the IRS! Don’t file Form 1040NR for non-residents if you are considered a resident alien. There are several Substantial Presence Test calculators online that you can use to determine your correct filing status.
Related Article: Do I Have To Pay Taxes On Inheritance From a Foreign Relative?
#7. Incorrectly Claiming That You Are A Head of Household
Just because you cook, clean, and do errands and feel like the head of the household doesn’t mean that you are necessarily head of household for tax purposes! This can be confusing because you may see “Head of Household” on your tax return and think, ‘Yes, I am head of the household.’
The United States has something called “Head of Household” status. Filing as Head of Household can lead to lower taxable income and can increase your refund. Sometimes it is better to file as Head of Household than as single.
In order to claim you are “Head of Household” you must be:
- Unmarried or ‘Considered Unmarried” (filing a separate return from your spouse, living apart for the last 6 months due to separation - things like military service, medical treatment, education, and business trips are not enough to be considered living apart)
- Have paid over half the cost of keeping up your home for the year for yourself and your dependent(s)
- Have a qualifying dependent that lived with you for over half the year
Head of Household status is mostly for single parents.
This is different from claiming a dependent. There are situations in which you might be able to claim a dependent but not claim Head of Household status (such as due to a divorce decree).
If you claim Head of Household status and don’t meet the requirements, you may be caught through an audit and ordered to pay back taxes plus a 75% penalty. Steep! The IRS can also disallow you from filing as Head of Household for up to 10 years into the future - and they can also jail and fine you!
#8. Not Declaring Foreign, Worldwide Income If You Are A Resident Alien
Your foreign banks may not issue tax forms and it can be easy to forget if you are generating passive income abroad, perhaps from investments. If you are considered a resident alien because you meet the Substantial Presence Test or the Green Card Test, be sure to report this foreign (global) income regardless of the amount. Even if you are paying taxes elsewhere, these amounts are still taxable in the US, although you may get a credit for the foreign taxes paid on your US taxes.
Related Article: 4 Ways To Reduce Taxes On Your Foreign Income
#9. Claiming The Dependent Child Tax Credit For Children That Don’t Live With You
In order to claim a child as a dependent, they must live with you. Don’t make the mistake of claiming your children as dependents if they don’t live with you even if they do depend on you!
You can claim a non-citizen child as a dependent if the child is considered a “qualifying child.” Note that only children who are US nationals, US resident aliens, or Mexico or Canadian nations can qualify. A qualifying child is defined as:
- The child is your son, daughter, stepchild, foster child, brother, sister, half-brother, half-sister, stepbrother, stepsister, adopted child or a descendant of one of these, such as a grandchild
- On the last day of the tax year, the child is <19, a full-time student younger than 24, or permanently disabled
- The child lived with you for >half the year
- You provided >half the child’s financial support during the tax year
- The child must be a U.S. national, U.S. resident alien, or a resident of Canada or Mexico
- The child will need an SSN or ITIN
If you made a mistake and claimed your child as a dependent and shouldn’t have, you can amend your tax return within 3 years. When you eliminate the dependent, your taxable income will likely go up so you may owe extra taxes and even penalties. Sometimes the IRS will waive the penalties if you can convince them that you made an honest mistake.
#10. Checking “Married Filing Jointly” If You Are A Non-Resident Taxpayer
In general, if either spouse is a nonresident alien, you can’t file married-filing-jointly. But nonresident aliens married to citizens or resident aliens can opt to file married-filing-jointly and be treated as a US resident for tax purposes. Speak to a tax advisor about the best choice for your situation.