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For nonimmigrant L-1 visa holders in the United States, taxation has always been a pertinent topic. While many aliens would like to avoid breaking the law, the majority are confused about their U.S. tax status and what is required of them. This article gives you insight into all you need to know about L-1 visa taxation.
The L-1 visa is an employment-based nonimmigrant classification that allows a multinational organization to transfer a foreign professional employee from any of its offices overseas to the United States. To qualify for this work visa, you must have worked for the foreign parent, subsidiary, branch, or subsidiary of the organization for at least one of the last three years.
The L-1 visa is in two categories, namely L-1A Intracompany Transferee Executive or Manager and L-1B Intracompany Transferee Specialized Knowledge. It is a dual intent visa that allows qualified applicants to adjust their nonimmigrant status to immigrant status and gain lawful permanent residence with the United States green card.
All non-U.S. citizens and non-U.S. permanent residents are generally required to pay taxes on the money earned while working in the United States. This is officially known as the U.S. Effective Connected Income. However, for those who have resided in the U.S. long enough to meet the Substantial Resident Test, the Internal Revenue Service (IRS) will tax them on their worldwide income.
Worldwide income is an aggregation of your foreign and domestic income. Foreign, from the IRS standpoint, means any place outside of the United States. This may be in your home country or some other country. So, as an L-1 visa holder, you will be seen as a U.S. resident for tax purposes as long as you meet the substantial presence test.
The substantial resident test will depend on how much time you spend in the U.S. on your work visa. You will be classified as a U.S. tax resident if:
Example 1 You were physically in the U.S. for 120 days each year in 2017, 2018, and 2019. To determine if you meet the substantial presence test for 2019, count the full days of presence in 2017, 1/3 days of presence in 2018 (40 days), and 1/6 days of presence in 2019 (20 days): 120 days + 40 days + 20 days = 180 days. In this case, you will not be considered a resident under the substantial presence for 2019 because the total 3-year period is 180 days. This means you will only be required to pay tax on money earned while working in the United States. Example 2 You were physically in the U.S. on 130 days in 2017, 120 days in 2018, and 120 days in 2019. To determine if you are considered to have met the substantial presence test, you will need to count the full days of presence in 2017 (130 days), plus 1/3 of 2018 (40 days), plus 1/6 of 2019 (20 days): 130 + 40 + 20 = 190 days. In this case, you will be considered a resident under the substantial presence test. This means you will be subject to United States Income tax on your worldwide income unless otherwise stated.
You were physically in the U.S. for 120 days each year in 2017, 2018, and 2019. To determine if you meet the substantial presence test for 2019, count the full days of presence in 2017, 1/3 days of presence in 2018 (40 days), and 1/6 days of presence in 2019 (20 days): 120 days + 40 days + 20 days = 180 days.
In this case, you will not be considered a resident under the substantial presence for 2019 because the total 3-year period is 180 days. This means you will only be required to pay tax on money earned while working in the United States.
You were physically in the U.S. on 130 days in 2017, 120 days in 2018, and 120 days in 2019. To determine if you are considered to have met the substantial presence test, you will need to count the full days of presence in 2017 (130 days), plus 1/3 of 2018 (40 days), plus 1/6 of 2019 (20 days): 130 + 40 + 20 = 190 days.
In this case, you will be considered a resident under the substantial presence test. This means you will be subject to United States Income tax on your worldwide income unless otherwise stated.
As an L-1 visa holder, you may be subject to tax income from U.S. sources. The U.S. source income is grouped into two categories, namely;
Incomes that are generally treated as an investment and other passive income or business income are as follows:
The United States income taxes are self-assessed by L-1 taxpayers – meaning you can prepare and submit your tax returns to the IRS office yourself. You can also choose to go through a tax agent or contact the IRS office for help. The following guidelines are crucial when filing your L-1 visa taxes:
As an L-1 nonimmigrant receiving wages subject to U.S. tax withholding, you must file your tax return on April 15th of the following year every year. If April 15th is on a weekend, the next workday after April 15th will be considered the due date.
Different forms and documents are used for tax purposes, depending on the type of taxation being filed. The following are some of the regular taxation forms you will need as an L-1 visa holder:
To file your income tax return, you will need to use the 1040NR, U.S. Nonresident Alien Income Tax Return. Both the income that is effectively connected with a business or trade in the U.S. and income that is Fixed, Determinable, Annual, or Periodical (FDAP) are reported on the 1040NR. Generally, FDAP is taxed at 30%. However, if you are qualified for the treaty rate, your charges will be lower. No deductions are allowed against FDAP income. Effectively Connected income is reported on page one while FDAP income is reported on page four of the 1040NR form.
Foreign Financial Bank Accounts (FBAR) will be required if you have a financial interest in or signature authority over any financial account that has a balance that exceeds $10,000 in the aggregate at any point during the year, outside of the U.S. In other words, this determines if you can own or control any foreign account. There is a significant penalty for failing to willfully file an FBAR and that can be as much as $100,000 fine or 50% of the total balance of the foreign financial account per violation. If the IRS finds that the violation was non-willful the penalty is $10,000 per violation.
If you are an L-1 visa holder with foreign financial assets that have an aggregate value exceeding $50,000, you will also need to file an 8938. The form is used to report information about those assets and must be attached to your annual tax return. Unlike FBAR, which is limited to just account balance and insurance policies, this form is more comprehensive and covers both accounts and assets (i.e., if you owned stock in a foreign company that is considered a Specified Foreign Asset). One difference between Form 8938 and the FBAR is that individuals are required to report the max balance in the account with the FBAR but not required to report income that is generated from those accounts. Form 8938 requires disclosing the income generated with those accounts and specifically has to be broken down by type of income earned. Failure to disclose and file Form 8938 is “$10,000 with an additional $10,000 added for each month each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.”
The 3520 is used to report the receipt of a foreign gift from a foreign person, foreign trust distribution, or foreign business. The threshold for this requirement varies, depending on the gift value. For instance, while you are required to report any foreign trust distribution, you may not need to report gifts from a foreign person unless the value exceeds $100,000, either in one transaction or a series of transactions in a tax year. The penalty for failing to file this form is the greater of $10,000 or 35% of the gross reportable amount (except for returns reporting gifts, where the penalty is 5% of the gift per month, up to max penalty 25% of the gift.
The 3520-A, on the other hand, is required if you have a foreign trust. Failure to file a 3520-A in accordance with tax law could lead to substantial penalties and fines.
Here are some other forms that may apply to your financial situation in the U.S.:
8621 Form: If you have any interest in a passive foreign investment company.
5471 Form: This is required if you have ownership in a foreign corporation.
5472 Form: This is required if you have an interest, ownership, or control in any foreign corporation.
Your 1040NR (including other taxation forms, if applicable) must be submitted to the Department of Treasury, Internal Revenue Service, Austin TX 73301.
An ITIN is issued by the IRS to people who are not qualified for a Social Security number but are required to file a U.S. tax return. As a nonimmigrant on an L-1 visa, you and any dependents claimed on your tax return must have an ITIN in order to file your income tax. Otherwise, your tax return will not be accepted by the IRS.
To apply for an ITIN, you will need to complete a W-7, Application for IRS ITIN. You must attach relevant documentation to establish your identity and connection to a foreign country. There are 13 different documents that can be used for this purpose. The IRS will accept the one you can present evidence for from the list shown in the Instructions for Form W-7.
Just like in every country, immigration and taxation are very important to the U.S. government, and there are penalties for not complying with the laws. The following are some of the consequences you may encounter for failure to file correct income tax returns:
Violation of tax law is a serious offense. If you are caught, it may end your L-1 visa status in the United States and result in your forced removal.
If you are an L-1 nonimmigrant with plans to become a green card holder in the future, you must make sure you are attentive when it comes to your taxes. When applying for status adjustment, your tax return compliance will be scrutinized. If there are issues in this area, it could jeopardize your chances of becoming a permanent resident.
To receive the taxation benefit of allowable deductions and credits, you must file an accurate income tax return on time. A tax return is considered timely if it is filed within 16 months of the due date. If you fail to file within the date, the IRS has the right to deny you the allowable deductions and credits.
Have questions related to your L-1 visa taxation or other tax liability in the U.S.? Violation of immigration and taxation law has both immediate and future consequences, and ignorance of the law is not a tenable excuse. This is why you need the help of an expert to guide you in your L-1 visa taxation.
VisaNation Law Group immigration attorneys specialize in providing high-quality immigration legal representation for those under work visa statuses such as the L-1. We help our clients make the most of their time and effort spent in the United States. To understand your taxation status and to learn how to file your tax return appropriately and in a timely manner, you can schedule a consultation with a VisaNation Law Group immigration attorneys today.
