US Tax for Immigrants and Visa Holders: Resident or Non-Resident?

For anyone arriving in the United States, the first tax question is not how much but which system. The US taxes resident aliens on worldwide income in almost exactly the same way as citizens, while non-resident aliens are taxed only on US-source income at different rates and with far fewer deductions. Getting this classification wrong produces returns that are wrong in kind, not merely in amount.

Residency for tax purposes is separate from immigration status. You are a resident alien if you hold a green card at any point in the year, or if you meet the substantial presence test: at least 31 days in the current year and 183 days counting all days this year, one third of last year's days and one sixth of the days from the year before. Exempt individuals — students on F and J visas and certain teachers and researchers — do not count days for a limited number of years, which is why many international students remain non-resident for several filing seasons.

Non-residents file Form 1040-NR. They may not use the standard deduction, with a treaty-based exception for students from India, may not file jointly in most cases, and cannot claim most credits. US-source wages are taxed at graduated rates, while certain passive US income is taxed at a flat 30 per cent or a lower treaty rate, usually collected by withholding. Residents file Form 1040 with the same deductions, credits and rates as citizens and must report worldwide income.

The year you arrive or leave is usually a dual-status year, split between non-resident and resident periods with different rules on each side. Elections exist that can improve the outcome — the first-year choice, and the election for a non-resident spouse to be treated as a resident in order to file jointly. These elections have consequences, including worldwide reporting for the spouse, and are worth modelling before choosing.

Anyone required to file who cannot obtain a Social Security number needs an Individual Taxpayer Identification Number, applied for on Form W-7 with certified identity documents, often submitted with the first return. ITINs expire if unused for three consecutive years, and an expired ITIN on a return delays refunds and can cause credits to be denied outright.

Tax treaties can reduce or eliminate US tax on specific categories of income — scholarships, short-term employment, pensions, royalties, dividends and interest. Pakistan has a treaty with the United States, as do most countries sending workers and students. Claiming a benefit requires identifying the article, disclosing the position on the return, and giving payers the correct withholding form, typically a W-8BEN. Benefits are not applied automatically.

Residents face reporting obligations that surprise new arrivals. Foreign bank and investment accounts exceeding the aggregate threshold must be reported annually on an FBAR, and specified foreign financial assets above higher thresholds on Form 8938 with the return. Foreign pensions, mutual funds treated as passive foreign investment companies, and interests in foreign companies or trusts carry their own forms. Penalties in this area are assessed per form and are severe, and they apply even where no tax is due.

Double taxation is managed through the foreign tax credit and, for Americans working abroad, the foreign earned income exclusion. Neither removes the requirement to file. If you have income in both Pakistan and the United States, compute each country's liability separately — our Pakistan and US calculators cover the domestic arithmetic — and then take advice on the credit and treaty position. This is one area where the cost of professional help is reliably lower than the cost of getting it wrong.