East African Money

CPA Wayne Schoene wrote a piece on tax issues for Ugandan expatriates for AfricaConnections.  East African Money is a featured blog of AfricaConnections.  Please check out his article below.  It’s also been published at Ugandans Abroad.

By Wayne Schoene–

Benjamin Franklin once wrote, “In this world nothing can be said to be certain except death and taxes.”  Unfortunately, there is little certainty when it comes to the United States tax laws.  This is part one of a series of articles that deal with tax issues for Ugandans living in the United States.

Before you can start completing forms and crunching the numbers, you need to determine what your status is for federal income tax purposes.  There are basically three statuses for people that are not U.S. citizens – resident alien, nonresident alien and dual-status alien.  A dual-status alien is someone who is a nonresident alien for part of the year, and a resident alien for the other part of the year.

To determine your federal income tax status you must go through at least one of two tests.  The first is the “Green Card Test.” In general, during the time you possess a “green card” you are a considered a resident alien for federal income tax purposes. However, to complicate matters further if this is the first or last year of that you possess a green card you may have a dual-status.  In other words, you may have a nonresident status before you obtain your “green card” or after it is abandoned or taken away.

Example: Bob has been living in the United States for the last 3 years.  On December 1, 2009 the U.S. Government grants him a green card.  In 2009, he is considered a resident alien for the entire year.

Example: Mary has entered the United States for the first time on July 15, 2009.  On December 1, 2009 the United States Government granted her a green card.  She is considered a nonresident alien for tax purposes from July 15th through November 3oth and a resident alien from then on.  She has a dual status for federal income tax purposes.

The second test is the “Substantial Presence Test” and is more complicated.  In general, if you are considered to have a day of presence in the U.S. any day or fraction of a day that you were physically inside the country.   For this test the days you a temporarily present in the U.S. as a teacher or trainee under “J” or “Q” visas do not count.  As well as the days you temporarily present in the U.S. as a student under “F”, “J”, “M” or “Q” visas.

Other days that won’t count for this test can be found in the Form 1040NR instructions published by the Internal Revenue Service  If you were “physically present in the United States” for at least 183 days during 2009 you are considered a resident alien for federal income tax purposes.  If you were physically present for less than 183 days in 2009 you must look at some additional criteria to determine if you are considered a resident alien or a nonresident alien.

If you are a resident alien for federal income tax purposes you should file the Form 1040 or if you are eligible, one of its shorter versions.  It is also important to note that resident aliens are subject to taxation on their worldwide income.

Example: Grace is a single resident alien for federal income tax purposes.  In 2009, she earned $30,000 in wages while working the United States.  In addition, during the year she owned an apartment building in Kampala which provided her with an equivalent of 20,000 U.S. dollars in income.  Since she is a resident alien her entire $50,000 of worldwide income in 2009 is subject to U.S. taxation.

If you a non-resident alien for federal income tax purposes you should file the Form 1040NR or if you are eligible, the shorter version known as the Form 1040NR-EZ.  Nonresident aliens are only subject to U.S. taxation on their “U.S. source” income.  In addition, U.S.-foreign tax treaties allow some nonresident aliens to exempt part or all of their “U.S. source” income from U.S. taxation.  Currently there is no U.S. – Uganda double taxation treaty in effect as this time.

Example: Moses, a single nonresident alien for federal tax purposes, earned $15,000 while on a temporary job assignment in New York City in 2009.  In addition, he earned wages equivalent of 8,000 U.S. Dollars (sh16million) while working in Kampala during 2009. He would file a nonresident tax return and only $15,000 of his worldwide income would be subject to U.S. taxation.

If you are a dual-status alien for federal income tax purposes, you must file a dual-status tax return.  If you were a resident alien on the last day of the year, you must file a Form 1040 and write “Dual Status” across the top of the form.  If you were a nonresident on the last day of the year, you must file a 1040NR and write “Dual Status” across the top of the form.  For additional instructions and what specifically needs to be attached to each of these respective forms, please see the Form 1040NR instructions published by the Internal Revenue Service.

Disclaimer:

Unless, expressly stated otherwise in this article,  (1) nothing contained in this article was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by the taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended; (2) any written statement contained in this article relating to any federal tax transaction or matter may not be used by any person to support the promotion or marketing or to recommend and federal transaction or matter;  and (3) any taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor with respect to any federal tax transaction or matter contained in this article.  No one without our express written permission, may use any part of this article in promoting, marketing or recommending an arrangement relating to any federal tax matter to one or more taxpayers.

About the author:

Wayne Schoene is a Certified Public Accountant based in San Jose, California.

His e-mail is wayne@iellp.com.