Are you a US immigrant with permanent resident status — also known as a green card holder? If so, you might encounter some unique tax scenarios when it’s time to file your US taxes.
In this article, we’ll cover everything you need to know about doing taxes as a resident immigrant, from what you need to pay to how you can save more. We’ll even go over tax tips just for green card holders and other resident immigrants, like what to do about your foreign income.
But first, let’s talk about the basics.
Do green card holders pay taxes?
Yes. A green card holder has to pay taxes the same way a US citizen would.
What do green card holders and US residents get taxed on?
As a permanent resident, you’ll be taxed on the money you earn both in and outside the US. That’s right — your worldwide income gets taxed by the US government.
For instance, let’s say you:
- Work a W-2 job in the US
- Help at the family restaurant when you’re back in Canada over the holidays
You’ll need to report income from both sources when you file your US tax return.
Nonresidents, on the other hand, only get taxed on income they earn from American sources. So a nonresident in the same scenario would only have to report income from their W-2 job. However, this doesn’t necessarily mean residents get a bad deal.
How being taxed as a US resident can save you money
If you’re a US resident, you have multiple ways to lower your tax bill that aren’t available to nonresidents.
Maybe you were wondering, why would someone want to be recognized as a US resident for tax purposes, if it means being taxed on more of their income?
There are three reasons why a non-green card holder should file as a US resident if they qualify:
- You’ll pay less in taxes. If you’re able to take advantage of all the available credits and deductions, you’ll likely save by filing as a resident (even though your foreign income is taxed)
- It will strengthen your case for citizenship. Establishing residency and complying with federal tax laws is a good way to bolster your case for citizenship or legal residency
- It’s required by law. Not reporting foreign income if you count as a resident is a form of tax evasion
The second two are pretty self-explanatory. Let’s talk more about all the ways residents can save money on their taxes.
Tax-saving strategies only US residents can use
Here are the tax-saving options that aren’t available for nonresidents:
- The standard deduction, which lets tax filers deduct an automatic $12,500 from their taxable income — $25,100 if they’re married
- Most itemized deductions, like medical expenses, charitable donations, and property taxes
- Several large refundable credits
Tax credits vs. deductions
First things first: a credit is a tax break lowers your actual tax bill, dollar-for-dollar. So if someone’s tax bill was originally $4,000, but they get a $1,000 tax credit, their actual bill would come out to $3,000.
A deduction, on the other hand, lowers your taxable income, so the tax savings aren’t as big.
Tax deductions only US residents can claim
These pie charts show what deductions are available to US residents and green card holders. As you can see, nothing is off-limits. You get the same benefits as a US citizen.
Compare this to what nonresidents can claim. The gray parts mean they’re not available.
Tax credits only US residents can use
Here’s a list of tax credits that residents can claim — but nonresidents can’t:
- Opportunity Credit*
- Lifetime Learning Credit
- Earned Income Credit*
An asterisk means the credit is refundable. That means you can get money back from the US government if you claim these credits, even if you haven’t withheld any taxes.
For example, if let’s say you owe $1,000 in taxes, but you’re eligible for a tax credit worth $2,000. If the credit is refundable, not only do you not have to pay any tax, but you’ll also get $1,000 from the US government.
Here are all the credits a resident immigrant can claim:
Nonresidents, on the other hand, can only claim the credits in green.
As you can see, if you have income from US sources, it’s usually more advantageous to be treated as a resident for tax purposes.
What makes you a US resident for tax purposes?
As we talked about above, green card holders aren’t the only immigrants who count as residents for tax purposes. How do you tell whether you fall into this category?
There are three “tests” that could qualify you as a resident. Doing any of these means you count:
- Acquiring a green card
- Establishing a “substantial presence”
- Taking advantage of “first-year choice”
Holding a green card is pretty clear. And if that applies to you, feel free to move on and read about how to file your taxes as a permanent resident!
But, what counts as “substantial presence”? And what on earth is a “first-year choice”?
Having a “substantial presence”
Establishing a “substantial presence” in the US is easier than people realize. You don’t need to have a permanent home address, work a job, or get US identification. The only thing that matters is how long you were physically present in the country.
You have a substantial presence in the US if you were physically present in the country:
- For 31 days during the current year, and
- For 183 days over the past three years — counting all the days in the current year and only some of the days in the past two years
Confused? I don’t blame you. To complicate things further, the IRS counts the 183 days in a very unusual way.
What counts as a day?
According to the IRS’s rules, only a full 24-hour period counts as a day. If you’re only in the US for eight hours, you can’t count it.
You also can’t count:
- Days you spend less than 24 hours in the country
- Days you spend commuting from a permanent residence in Mexico or Canada to your regular job in the US
- Days you spend in the US due to a medical condition that prevents you from leaving
- Days in the US as a crew member of a foreign vessel
Some of these might seem like odd requirements — the medical stipulation, for instance. The goal behind all of this is to narrow it down to only the days that you choose to spend living in the US.
Things get more complicated when you move on to the second part of the substantial placement test: the 183 days in a three-year period.
How to count your days over the past three years
To pass the substantial presence test, the IRS says you need to spend 183 days in the US over the past three years. But there’s a catch. You need to count:
- All the days you spent in the country this year
- 1/3 of the days you spent in the country last year
- 1/6 of the days you spent in the country the year before last year
Here’s an example. Let’s say someone is doing this calculation for the year 2022. They spent 60 days in the US for each year in the three-year period they’re looking at: 2022, 2021, and 2020.
To find out whether they pass the substantial presence test, they’ll add up 60, 20, and 10 to get 90.
That’s less than 183. So it’s not enough to establish residency using the substantial presence test.
Making a “first-year choice”
If you don’t meet the requirements in the substantial presence test, there’s another way to get counted as a resident for tax purposes. It’s called “first-year choice.”
This option lets you file taxes as a resident without having lived in the country for very long. To qualify, you have to:
- ✓Live in the US for 31 consecutive days
- ✓Live in the US for 75% of the days after the first day of the 31-day period
- ✓Be able to meet the substantial presence test the year after
How first-year choice works
Here’s an example: Let’s say you live in the US from October 1, 2022 to October 31, 2022. You stay the full 31 days, and then return to your home country. You come back to the US on November 20th and stay through the end of the year.
The first day of your 31-day period is October 1st. From that day till the end of the year, December 31st, there are 92 days total. Out of those 92 days, you spent 72 of them living in the US.
That’s 78%, since 72 ÷ 92 = 0.78). And 78% is more than 75%, so you’re allowed to take advantage of first-year choice.
Remember, you have to meet the substantial presence test in the following year. Meaning, you need to spend 183 days in the US the year after you take the first-year election. So this requires some planning ahead.
Not sure whether you’ll hit the mark? I recommend filing a tax extension, which lets you file your taxes in October instead of April. By then, most people can tell whether they'll pass the substantial presence test.
Can you be a US resident and nonresident in the same tax year?
In some cases, yes. This usually happens the year you enter or leave the US.
In years like that, you’ll file using the form that matches your status at the end of the year and write “Dual Status Return” across the top of it. Here’s which form to use:
- 1040 if you were a resident by the end of the year
- 1040-NR if you were a nonresident by the end of the year
For more in-depth instructions on mixed-year returns, see the IRS instructions.
How to file taxes as a resident immigrant
Filing taxes as a resident is almost identical to how US citizens file their taxes. You’ll need to:
- File (or apply for an extension) by April 15th
- Report your income on Form 1040
- Get ready to be taxed on all income — not just US income
While the filing process is generally similar to citizens, US residents do have to deal with some quirks. Let’s go over how to file resident tax returns in the US, step by step.
Step #1: Know which tax ID number you’re using
The tax agency in the United States, the Internal Revenue Service (IRS), requires each taxpayer to include a unique identification number with their tax return.
This is called a tax ID number, and it helps the IRS keep track of the millions of filers who send in their taxes every year.
For green card holders: Your SSN
If you have a Social Security number, you’ll always use that as your tax ID number.
This is the default option for green card holders. (It’s the same with US citizens.)
Some other groups of US residents are able to obtain Social Security numbers as well:
- ✓ Refugees and asylum seekers
- ✓ Work visa holders (H1B / H2B)
- ✓ International students
For residents without green cards: Your ITIN
For other US residents the only other way to file taxes in the United States is to get an ITIN, or individual tax ID number.
This number is issued by the IRS. You’ll use it in place of a Social Security Number when you file taxes.
Note that an ITIN doesn’t:
- ✘ Let you work in the US
- ✘ Claim government benefits
- ✘ Qualify you for certain tax credits
To learn more about what it can and can’t do, take a look at our article on ITINs.
Step #2: Fill out your tax forms
Once you know which ID number you’re working with, you can move forward with preparing your 1040 tax return and any related schedules. (“Schedules” are IRS forms that have to be attached to another form when you’re filing — you can’t submit them on their own.)
Especially if you’re filing a Schedule C, consider using Keeper to file your taxes. Our app is specifically designed to help people with self-employment income save the most money possible on their taxes by finding tax write-offs. We’ll talk more about how those work later!
Step #3: Report any foreign income
As I mentioned earlier, residents are taxed on their worldwide income. That means anything like:
- Earnings from jobs worked outside the US
- Interest from overseas accounts
- Retirement benefits from foreign governments
If it can be taxed in a foreign country, it can be taxed in the US too.
Reporting money in foreign bank accounts
If you have foreign bank accounts, there could be even more reporting requirements. Anyone with more than $10,000 in a foreign account has to disclose it when they file taxes.
The US has doubled their efforts to monitor overseas financial accounts. Hefty fines await anyone who tries to hide them. (Minimum penalties start at $10,000.)
Step #4: Pay your taxes
The two most common types of tax that people pay in the US are:
- Income taxes
- Self-employment taxes
These are both calculated on your annual 1040, the form everyone uses to file their US tax return. Luckily, you can lower them using tax write-offs and deductions.
Income tax affects almost everybody. The rates range from 10-37%, depending on your income level. Almost all of your income is subject to it, including:
- Rental income
This is applied against your self employment income. Meaning, income you make as a:
- Gig worker
- Small business owner
- Other self-employed individual
If that’s you, you’ll have to pay these taxes on the income you earn from self-employed work. (This is sometimes also called “1099 income,” named after the form used to report self-employed income to the IRS.)
Self-employed income is taxed at 15.3%, which you’ll pay on top of income taxes.
How to lower your tax bill as a US resident
A common misconception is that only US citizens can claim tax write-offs and deductions. That’s simply not true.
Let’s look at the biggest ways resident immigrants can save on their taxes.
Find all your business write-offs
US residents who do gig work or run small businesses are allowed to claim business tax write-offs to lower the amount of self-employment income they get taxed on.
You can subtract these expenses from the amount of money you earn doing self-employment work — which means less of your earnings are subject to tax. Tax write-offs are the most effective way to lower your self employment tax.
Many self-employed workers pay more tax than they should, because they don’t know what write-offs they’re allowed to claim. That’s how Keeper got its start. Our mission is to help freelancers and gig workers find every possible tax write-off.
The Keeper app connects with your bank and credit card accounts and finds every eligible expense. From there, we file your taxes for you — quickly and safely.
Shield your foreign income from taxes
While you can’t avoid reporting your foreign income, you might be able to avoid paying taxes on it.
If you meet both of the following requirements, you can exclude up to $112,000 of your foreign income from taxation:
- You’re a citizen of a country that has a tax treaty with the US
- You lived in that country for 330 days or you maintain a “bona fide residence”
Which countries have tax treaties with the US?
You can find the full list of countries here. Some of them include:
- The Philippines
- South Korea
What counts as a bona fide residence?
To have a bona fide residence, you don't have to physically live in that country for a specific period of time.
However, you do need to have ongoing and indefinite connections to the place. That could be something like:
- Family or friends
- An ongoing job
- A primary home for your pet
As long as your home country has a tax treaty with the US and you’ve got a bona fide residence, your foreign income is scot-free. This is known as the “foreign earned income exclusion,” and yes, it’s awesome.
The types of foreign income you can shield
Unfortunately, this only works on your “earned income,” meaning things:
- Business income
You can’t exclude retirement or investment income from being taxed.
The foreign earned income exclusion also only works on your income taxes, not self-employment taxes. That’s right: In the (pretty unlikely) event that you’re a US resident who runs a business abroad, you’ll have to pay self-employment tax on that income.
Luckily, your options don’t end here.
Opt out of Social Security taxes
Many countries have their own versions of the American Social Security program. To protect people from being taxed too much, US tax treaties include provisions to let people “opt out” of Social Security taxes in the US.
So if you already pay into social programs in your country of origin, you might be able to skip paying Social Security taxes here.
Social Security tax is a huge portion of self-employment tax. So this is especially important for gig workers and business owners. But it’s a huge benefit for everyone. (The Social Security tax rate iis 6.2% — 12.4% if you’re self-employed.)
To claim this benefit, there’s a simple one-page form (IRS Form 8833) that you are required to attach to your tax return, identifying the treaty you qualify under.
Claim your tax credits!
A common misconception is that only US citizens can claim tax credits. This isn’t true, as we talked about above.
In fact, anyone with a Social Security number is able to claim tax credits, even refundable ones. And if you have an ITIN rather than a SSN, there are still some credits you can claim.
This list isn’t exhaustive, but it includes most of the big tax credits available.
Note that, if you can’t exclude your foreign income from taxation, you can at least claim a credit for the foreign tax you paid on your US tax return.
Hopefully this article answered enough questions to help you successfully navigate your US taxes. For more help, visit Keeper’s Free Resources page or download our app today!
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At Keeper, we’re on a mission to help people overcome the complexity of taxes. We’ve provided this information for educational purposes, and it does not constitute tax, legal, or accounting advice. If you would like a tax expert to clarify it for you, feel free to sign up for Keeper. You may also email firstname.lastname@example.org with your questions.