taxes and social security

Welcome to the United States! Understanding the U.S. tax system and the basics of Social Security is a fundamental part of establishing your financial life in America. The U.S. taxes system can seem complex, especially with different rules applying based on your residency status. This guide will help you understand your tax responsibilities, identify your tax status, explain how your income is taxed, and provide crucial information about taxpayer identification numbers and Social Security.

Resident vs. Nonresident Taxes

For tax purposes, an alien is defined as an individual who is not a U.S. citizen. Your tax obligations in the U.S. largely depend on whether you are classified as a resident alien or a nonresident alien. Resident aliens are generally taxed on their worldwide income, just like U.S. citizens. This means all income, regardless of where it was earned or its source, is subject to U.S. tax. Nonresident aliens, on the other hand, are typically 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.

You can determine your status by meeting one of two tests. The first is the Green Card Test, where you are considered a resident for tax purposes if you are a lawful permanent resident of the United States at any time during the calendar year. You generally have this status if the U.S. Citizenship and Immigration Services (USCIS) has issued you a Form I-551, Permanent Resident Card, commonly known as a green card. Once you have this status, you continue to be a resident alien unless this status is legally taken away from you or is administratively or judicially determined to have been abandoned.

Abandoning your resident status requires filing Form I-407 (Record of Abandonment of Lawful Permanent Resident Status) or a letter stating your intent to abandon, attached with your green card, to USCIS or a U.S. consular officer. It’s important to send these by certified mail with return receipt requested and keep proof. Note that a lawful permanent resident who is required to file a tax return as a resident and fails to do so may be regarded as having abandoned status and could lose permanent resident status under U.S. immigration law.

The second test is the Substantial Presence Test. You are a resident for tax purposes if you meet this test for the calendar year. To meet the test, you must be physically present in the United States on at least 31 days during the current year and 183 days during the three-year period that includes the current year and the two preceding years. This calculation counts all the days you were present in the current year, one-third of the days you were present in the first preceding year, and one-sixth of the days you were present in the second preceding year.

However, certain days do not count towards the Substantial Presence Test. These include days you commute to work in the U.S. from Canada or Mexico if you regularly commute, days you are in the U.S. for less than 24 hours when in transit between two places outside the U.S. (e.g. changing planes), and days you are in the U.S. as a crew member of a foreign vessel unless you engage in other U.S. trade or business.

Days you are unable to leave the U.S. due to a medical condition that arose while you are in the U.S. also don’t count, though if you exclude days for a medical condition, you must file a fully completed Form 8843 with the IRS.

Days you are an exempt individual also don’t count toward the test. This category includes certain foreign government-related individuals with A or G visas (excluding A-3 or G-5), teachers or trainees on J or Q visas who substantially comply with visa requirements, students on F, J, M, or Q visas who substantially comply, and professional athletes competing in charitable sports events. If you qualify as an exempt individual, you generally must file Form 8843 with the IRS.

Even if you meet the substantial presence test, you can still be treated as a nonresident alien through the Closer Connection to a Foreign Country Exception. This applies if you are present in the U.S. for less than 183 days during the year, maintain a tax home in a foreign country, and have a closer connection to that foreign country than to the U.S. This exception requires you to file a fully completed Form 8840 with your income tax return. You cannot claim this exception if you have applied or taken steps to change your status to a permanent resident, or if you had an application pending during the current year.

Dual-Status Aliens

You can be both a nonresident alien and a resident alien during the same tax year, typically in the year you arrive in or depart from the United States. This is known as a dual-status tax year, and special rules apply for filing. If you meet the substantial presence test, your residency generally starts on the first day you are present in the U.S. during that calendar year. However, you might be able to exclude up to 10 days of presence from your residency starting date if you can establish a closer connection and tax home in a foreign country on those days. If you exclude days, you must file a statement with the IRS.

There’s also a First-Year Choice available. If you do not meet the green card or substantial presence test for the current or prior year, but meet the substantial presence test for the following year, you can choose to be treated as a U.S. resident for part of the current year. This requires specific conditions, such as being present for at least 31 consecutive days, and filing a statement with Form 1040 or 1040-SR. You cannot file the form or statement until you meet the substantial presence test for the following year.

For residency termination, if you were a U.S. resident but will not be one in the next year, your residency generally ends on December 31, unless you qualify for an earlier date. This earlier date is usually the last day you were physically present in the U.S. for the substantial presence test or the first day you are no longer a lawful permanent resident for the green card test, provided you maintain a tax home and closer connection to a foreign country for the rest of the year. You must file a statement with the IRS to establish this earlier date.

Taxpayer Identification Numbers

A Taxpayer Identification Number (TIN) is an identification number used by the IRS to administer tax laws. It is crucial for filing your U.S. tax returns. You must furnish a TIN if you have income effectively connected with a U.S. trade or business, have a U.S. office, are a nonresident spouse treated as a resident, or are filing a tax return, amended return, or refund claim.

The most common TIN is a Social Security Number (SSN), which is issued by the Social Security Administration (SSA). Generally, you can get an SSN if you are lawfully admitted to the United States for permanent residence or under other immigration categories that authorize U.S. employment. For international students with F-1, M-1, or J-1 visas, specific SSA publications provide more information about required documents. You can contact the SSA at SSA.gov or by phone to inquire about eligibility.

If you do not have an SSN and are not eligible to get one, you must apply for an Individual Taxpayer Identification Number (ITIN). An ITIN is for tax use only and does not entitle you to social security benefits or change your employment or immigration status under U.S. law. You apply for an ITIN by filing Form W-7, IRS Application for Individual Taxpayer Identification Number.

This form requires documentation to substantiate your foreign/alien status and true identity. You can mail the form and documents to the IRS, present them at IRS walk-in offices, or process your application through an Acceptance Agent (such as colleges, financial institutions, or accounting firms) authorized by the IRS.

Some ITINs expire if they haven’t been used on a federal tax return for tax years 2021, 2022, or 2023, and must be renewed if you need to file for 2024. ITINs assigned before 2013 have already expired and also need renewal if used for 2024 tax year. You do not need to renew your ITIN if you do not need to file a federal tax return. Important to note: you cannot claim the Earned Income Credit using an ITIN.

An Employer Identification Number (EIN) is for business taxes. An individual might use an SSN or ITIN for personal taxes and an EIN for business taxes. Foreign entities like corporations needing an EIN to claim a tax treaty exemption should apply using Form SS-4, Application for Employer Identification Number. Special instructions apply for filling out Form SS-4 for this purpose to indicate no U.S. income tax filing requirement.

A penalty of $50 may be imposed if you fail to include your SSN or ITIN where required on a return, statement, or document, or if you fail to provide it to another person when required, such as to a bank for interest income. This penalty can be avoided if you show reasonable cause and not willful neglect.

How Your Income is Taxed

The U.S. tax system differentiates how income is taxed based on your alien status and the nature of the income. For resident aliens, you are generally taxed in the same way as U.S. citizens. Your worldwide income is subject to U.S. tax and must be reported on your U.S. tax return. Income of resident aliens is subject to the graduated tax rates that apply to U.S. citizens and residents, and you will use the Tax Table or Tax Computation Worksheets in the Instructions for Form 1040.

For nonresident aliens, your income subject to U.S. income tax is divided into two categories. The first is Income Effectively Connected with a U.S. Trade or Business (ECI). Generally, if you perform personal services in the United States at any time during the tax year, you are considered engaged in a U.S. trade or business, though certain compensation paid by a foreign employer is excluded. Taxable scholarships or fellowship grants from U.S. sources received by students or trainees on F, J, M, or Q visas are treated as effectively connected income.

Other examples include owning and operating a business in the U.S., being a member of a partnership engaged in a U.S. trade or business, or being a beneficiary of an estate or trust engaged in such a business. ECI, after allowable deductions, is taxed at graduated rates, which are the same rates that apply to U.S. citizens and residents. Pensions received by nonresident aliens attributable to personal services performed in the U.S. after 1986 are also effectively connected income.

The second category is Income Not Effectively Connected with a U.S. Trade or Business, also known as FDAP Income. This includes fixed or determinable annual or periodical income from U.S. sources. Common examples include interest, dividends, rents, royalties, and gambling winnings. U.S. social security benefits are also included, with 85% typically included in U.S. source FDAP income. This type of income is generally taxed at a flat 30% rate, or a lower treaty rate if applicable.

There are important exemptions to note. Not all items of U.S. source income are taxable. For example, certain portfolio interest is exempt from the 30% tax if specific conditions are met. Certain dividends from foreign corporations, interest-related dividends, and short-term capital gain dividends from mutual funds may also be exempt. Compensation for services performed by a nonresident alien temporarily present for not more than 90 days and not more than $3,000 paid by a foreign employer is also generally exempt. Crew members on foreign vessels and students/exchange visitors receiving pay from a foreign employer may also exclude certain income.

Filing Your U.S. Tax Return

The specific forms you need to file and when you need to file them depend on your tax status. For resident aliens, you should file Form 1040 (U.S. Individual Income Tax Return) or Form 1040-SR (U.S. Tax Return for Seniors). The due date for filing and paying any tax due is April 15 of the year following the tax year. You can get an automatic 6-month extension to file by filing Form 4868, but this does not extend the time to pay your tax.

For nonresident aliens, you are generally required to file Form 1040-NR (U.S. Nonresident Alien Income Tax Return). You must file Form 1040-NR even if your income did not come from a U.S. trade or business, you have no U.S. source income, or your income is exempt from income tax, provided you were engaged or considered engaged in a trade or business in the U.S. during the year. You must also file if you want to claim a refund of overwithheld or overpaid tax, or to claim the benefit of any deductions or credits.

There are exceptions to filing Form 1040-NR. These include nonresident alien students, teachers, or trainees on F, J, M, or Q visas who have no income subject to tax, certain students or business apprentices from India eligible for treaty benefits whose gross income was below a certain threshold ($14,600 for single, $29,200 for qualifying surviving spouse in 2024), and partners in a U.S. partnership not engaged in a U.S. trade or business whose income is not effectively connected.

The timing for filing Form 1040-NR varies. If you are an employee with wages subject to U.S. income tax withholding, you generally file by April 15 for the calendar year. If you are not an employee who receives wages subject to U.S. income tax withholding, you generally file by June 15 for the calendar year. Extensions are available by filing Form 4868. You can also file a protective return if you believe you had no gross income effectively connected with a U.S. trade or business. This preserves your right to deductions and credits later by filing Form 1040-NR by the deadline.

For dual-status aliens, the filing requirements are more complex. If you are a resident alien at the end of the tax year, file Form 1040 or 1040-SR and write “Dual-Status Return” across the top. Attach a statement (Form 1040-NR marked “Dual-Status Statement”) showing your U.S. source income for the nonresident period.

If you are a nonresident alien at the end of the tax year, file Form 1040-NR and write “Dual-Status Return” across the top. Attach a statement (Form 1040 or 1040-SR marked “Dual-Status Statement”) showing your income for the resident period. You generally cannot use the standard deduction for a dual-status tax year, and you also cannot file a joint return unless you make a special choice to treat a nonresident spouse as a resident for the entire year.

Social Security and Medicare Taxes

If you work as an employee in the United States, you will generally pay Social Security and Medicare taxes, also known as FICA tax. These contributions go towards your future benefits, including retirement, survivors, disability, and medical insurance (Medicare). Your employer typically deducts these from your wages.

There are exemptions for students and exchange visitors. Generally, services performed by nonresident aliens temporarily in the U.S. on F, J, M, or Q visas are not covered by Social Security and Medicare if the services are performed to carry out the purpose for which you were admitted, such as on-campus work, practical training, or economic hardship employment. This means these taxes should not be withheld from your pay.

However, if you are considered a resident alien (even if your visa status remains F, J, M, or Q), Social Security and Medicare taxes will be withheld. Services performed by spouses or minor children on F-2, J-2, M-2, and Q-3 visas are covered under Social Security. Agricultural workers on H-2A visas are also exempt from Social Security and Medicare taxes on compensation related to their visa.

If Social Security or Medicare tax was withheld in error from pay that is not subject to these taxes, you should first contact the employer who withheld the taxes for a refund. If you cannot get a full refund from your employer, you can file a claim for refund with the IRS on Form 843. You will need to attach a copy of your Form W-2 to prove taxes withheld, your visa, Form I-94 or other arrival/departure documents, Form DS-2019 for J-1 visa or Form I-20 for F-1/M-1 visa, and a statement from your employer or your own explanation if unavailable. Do not use Form 843 for Additional Medicare Tax.

If withheld in error, claim a credit on Form 8959 with your tax return, or file an amended return (Form 1040-X) for a prior year.

For self-employment tax, nonresident aliens are generally not subject to self-employment tax unless an international social security agreement is in effect that covers them under the U.S. system. Resident aliens must pay self-employment tax under the same rules as U.S. citizens. Income received as a resident alien from self-employment is subject to this tax, even if the services were performed as a nonresident alien.

Interestingly, research suggests that unauthorized immigrants actually improve the fiscal health of Medicare and Social Security because their employers may contribute FICA tax on their behalf, even though these immigrants are not eligible for benefits. Therefore, mass deportations would hurt, not help, these trust funds. For authorized immigration, the evidence suggests immigrants are at worst neutral and at best net contributors to the system.

Immigrants often spend less on healthcare than native-born individuals and are more likely to be working-age taxpayers, disproportionately contributing to Medicare. Similarly, for Social Security, new immigrants are often younger and working, contributing to the system when it’s needed, especially as the Baby Boomer generation ages. They also tend to have more children, which can increase future contributors to the program.

Tax Treaty Benefits

The United States has income tax treaties with many countries, which can provide an exemption from, or a reduced rate of, U.S. tax on certain items of income. If you are from a treaty country, you should understand how to claim these benefits. To claim a treaty withholding exemption or reduced withholding rate, you should notify the payer of the income (the withholding agent) of your foreign status.

For income that is not personal services income, such as interest or dividends, you generally file Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals). For personal services income like wages, salaries, or compensatory scholarships, you generally file Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual.

If you receive both scholarship/fellowship grants and personal services income from the same payer, you can use Form 8233 for both. Otherwise, for scholarships/fellowships that are not compensation, use Form W-8BEN. Many treaties offer exemptions from U.S. income tax for compensation received for teaching, lecturing, research, or for remittances received from abroad for study and maintenance. These exemptions often have time limits, such as 4-5 years for students or 2-3 years for teachers/researchers.

If you claim an exemption for compensation for dependent personal services, you generally need to file Form 8233 along with a specific statement tailored to your country’s treaty, as detailed in Appendix A for students/trainees and Appendix B for teachers/researchers of Publication 519. You may also be able to claim a treaty exemption even if you became a resident alien, due to “saving clause” exceptions in some treaties.

When reporting treaty benefits on your return, in some cases, income fully exempt under a treaty may not need to be reported. However, if it was reported as taxable income on a Form W-2, 1042-S, or 1099, you should report it on the appropriate line of your tax form, such as Form 1040 or 1040-SR. Then, you should enter the amount for which treaty benefits are claimed in parentheses on Schedule 1 (Form 1040), line 8z, and write “Exempt income,” the treaty country name, and the treaty article. For income subject to a reduced rate, attach a statement showing the tax computation and treaty details.

You are generally required to file Form 8833, Treaty-Based Return Position Disclosure, to disclose certain treaty-based return positions. However, you are not required to file Form 8833 for many common situations, including claiming a reduced withholding tax rate on interest, dividends, rent, royalties, or other FDAP income normally subject to the 30% rate, or claiming a treaty reduction/modification of income from dependent personal services, pensions, annuities, social security, or income of artists, athletes, students, trainees, or teachers (including taxable scholarships/fellowship grants). Failure to file Form 8833 when required can result in a penalty of $1,000.

Conclusion

Understanding the U.S. tax system and your Social Security obligations is a critical aspect of your financial journey as a new immigrant. From determining your alien tax status to understanding how different types of income are taxed and knowing your filing requirements, each piece of information helps you navigate the system effectively. Remember to secure the correct Taxpayer Identification Number (SSN or ITIN) and be aware of potential Social Security and Medicare tax exemptions, especially if you are a student or exchange visitor. Explore any applicable tax treaty benefits that may reduce your tax burden.

The IRS provides extensive resources, including online tools, publications, and assistance centers, to help you. Utilizing these resources and, when necessary, seeking professional tax help can ensure you meet your obligations and maximize any eligible benefits. Your commitment to understanding these financial responsibilities will contribute significantly to your long-term economic stability and successful integration into American society.