Federal Taxes for Immigrants
The United States has a complex tax system. Tax issues can derail the naturalization process. Immigrants have to be compliant with our tax laws to be able to become United States citizens and to obtain green cards.
The two most common taxes that we get questions about are the U.S. gift and estate tax and income tax. This article addresses both types of tax. Before getting into these taxes, we should pause to consider the Individual Tax Identification Number or ITIN.
The Individual Tax Identification Number
United States citizens are issued Social Security Numbers. These numbers are issued by the Internal Revenue Service. Taxpayers are required to list these numbers on their tax returns. They are used by state and federal tax authorities to track tax returns.
Those who are not United States citizens can obtain an Individual Tax Identification Number or ITIN. It is equivalent to a Social Security Number in terms of tax return filing and tracking how tax returns are processed.
Importantly, the ITIN does not:
- Authorize work in the United States,
- Provide eligibility for Social Security benefits, or
- Enable the holder to qualify a dependent for Earned Income Tax Credit Purposes
You can obtain an ITIN by filing a Form W-7, Application for IRS Individual Taxpayer Identification Number.
Federal & State Gift & Estate Taxes
The United States imposes gift and estate taxes on the right to transfer property to third parties. This transfer tax can be as high as 40 percent. The tax rate is applied to the value of the property that is transferred.
There are exceptions. One is the annual gift amount. An individual can transfer up to $16,000 to any other person each year free of gift taxes. This amount can be transferred each year. And the number of recipients is unlimited. The individual, whether a U.S. citizen or a U.S. resident, may also be able to give away up to $11 million free of gift taxes.
The estate tax is similar to the gift tax, but it applies to transfers on death–i.e., inheritances. These transfers can also qualify for the $11 million exemption. However, non-resident aliens who own property in the United States do not qualify for the $11 million dollar exemption. They can only exclude up to $60,000 of property from the estate tax. This can result in significant taxes. Those who are not citizens or residents of the U.S. should consult with a Texas probate attorney to plan for these taxes as they can usually be avoided with advanced planning.
Some states also impose gift and estate taxes. A local tax attorney should be consulted to determine whether these state-specific taxes apply and how to avoid them.
Federal & State Income Taxes
The United States imposes income taxes on those who are in the United States. It does so regardless of whether the individual is in the United States legally or illegally.
The income tax is imposed on services, gain from the sale of property, and other transactions. Wages are the most common example. Wages are amounts paid for the performance of services. They are paid by an employer to an employee. Income tax is also imposed on amounts paid to a contractor. For example, amounts paid to a worker to make a home repair are taxable.
The United States income tax is imposed on the sale of the resident’s non-U.S. property as well. For example, if a U.S. resident owns property in their home country and sells the property while they are a resident of the U.S., the U.S. may impose tax on the gain from the sale of the foreign real estate.
There can be an exception to these rules if the home country has negotiated a Tax Treaty with the United States.
Some states also impose an income tax. Notably, the states of California and Arizona impose an income tax. The State of Texas does not.
Taxpayers are obligated to file their own income tax returns each year. They also have to remit any tax payments each year.
