2024 Year-End Tax Tips for Nonresidents 

As the end of 2024 approaches, nonresidents who have recently arrived in the US or who are planning to stay into the new year should consider important tax planning strategies to avoid surprises and optimize their financial position. Below are essential tips for year-end tax planning.

1. Evaluate Your Tax Residency Status

The IRS determines your tax residency status using the substantial presence test (this is also dependent on what kind of Visa you hold). If you have spent 31 days in the US during 2024 and a total of 183 days over the last three years, you may be classified as a tax resident.  Understanding your tax residency status is crucial because it determines whether you need to report only US-sourced income (as a nonresident) or your worldwide income (as a tax resident).

If you arrive in the US partway through the year and meet the substantial presence test, you might need to file a dual-status tax return. This means part of the year you will only be taxed on your US source income during your period of non-residency and then be taxed on your worldwide income (meaning your US and non-US source income) and be considered a tax resident. It is important to keep track of your days in the US (including what states you were in) and days overseas. Filing dual-status ensures that only the applicable part of your worldwide income is reported, which can help manage your overall tax liability.

3. Utilize Tax Treaties Where Applicable

The US has income tax treaties with over 60 countries to help mitigate being taxed in your home country and in the US on the same income. These treaties may allow you to exclude certain income from US taxation or provide reduced tax rates on specific types of income.  Leveraging tax treaties can prevent double taxation and potentially reduce your US tax liability. For instance, some treaties exclude certain types of foreign-earned income or capital gains from US taxes.

4. Claim Foreign Tax Credits

If you have paid taxes on income to your home country while also being taxed by the US, you can claim foreign tax credits to reduce your US tax liability. The credit applies up to the US tax rate on your income, and unused credits can be carried forward to future years.  This is another strategy that helps you avoid being taxed twice on the same income, ensuring that your total tax burden is fair and not duplicated.

5. Consider Timing for Income Recognition

Timing when you receive income can affect which tax year it falls into and potentially impact your tax rate. If you are nearing US tax residency status, deferring income until after the new year may help manage your taxable income.  If you anticipate becoming a tax resident in 2025, deferring income into 2025 can reduce your 2024 taxable income, helping you stay below certain tax thresholds and potentially benefiting from better tax planning opportunities next year. Assess whether you can legally defer receiving income, such as bonuses or investment gains. Speak to your employer or financial advisor to plan the timing of your income recognition strategically.

6. Check Eligibility for Social Tax Exemptions

Totalization agreements are pacts between the US and certain countries to coordinate social security taxes. If you already pay social security taxes in your home country, these agreements can exempt you from paying US social security taxes. This exemption can reduce your overall tax liability by eliminating redundant social security tax contributions.

7. Selling Your Home

Before moving to the US, if you do not plan to keep your home in your home country, consider selling this property. If you sell the property after you move to the US and become a tax resident, you will need to report the gain/loss from the sale of the property. When calculating the gain/loss of the sale, currency exchange rates will need to be considered.  If you had a mortgage on the property, you have the potential of having to pay potential gains when repaying the foreign mortgage. This is due to the currency exchange rate changes. If you know you will be selling your property, it is best to close before your move to the US.

Conclusion

Tax planning for nonresidents in the US is complex, especially when transitioning to tax residency status. Taking proactive steps now, such as understanding your residency status, leveraging tax treaties, and claiming applicable credits, can help you avoid costly tax issues. This article is only a summary of the many tax strategies and tips for nonresident aliens coming to the US. If you have specific questions or need guidance on your situation, you can reach out to May Sung at info@mkhstaxgroup.com.