One of the more frequent questions we receive as a firm is whether a client has a U.S. income tax filing requirement, despite having a very low income and no special international form attachments.
The answer, like in many areas of tax law, depends on the person’s tax profile. In this blog, we break down the different filing thresholds for U.S. persons and non-U.S. persons.
Minimum Filing Thresholds for US Persons
If you are a U.S. citizen or hold a green card, you are required file a U.S. tax return (Form 1040) on an annual basis to report your worldwide income (whether or not you owe tax to the U.S. government), but only if your income is over certain threshold amounts.
The threshold amounts depend on your filing status. For the 2020 tax year, you must file if your income was at least:
- Under 65 – $12,400
- 65 or older – $14,050
Head of Household
- Under 65 – $18,650
- 65 or older – $20,300
Married Filing Jointly
- Under 65 (both spouses) – $24,800
- 65 or older (one spouse) – $26,100
- 65 or older (both spouses) – $27,400
Married Filing Separately (any age)
- Any age – $5
The requirement to file applies regardless of whether you spent time in the U.S. during the year or had income from U.S. sources. Meaning, even if you spent the entire year abroad and earned all of your income abroad and paid tax on the income to your country of residence, you’re still required to file a U.S. tax return.
Minimum Filing Threshold for Self-Employed Persons
In contrast to other income, self-employment income has its own minimum filing threshold.
For the 2020 tax year, if you had self-employment income, you need to file a tax return if your net self-employment income was $400 or more, even if your gross income was below the threshold amounts listed above for your filing status.
Minimum Filing Threshold for Non-US Persons
While U.S. persons are taxed on worldwide income as described above, non-U.S. individuals (so-called “nonresident aliens”), are taxed in a more limited manner.
First, non-U.S. persons are generally subject to tax on U.S.-source “FDAP” (fixed, determinable, annual, or periodic) income, which includes passive-type items, such as interest, rent, royalties, and dividends. This income is taxed on a gross basis (i.e., with no offsetting deductions) at the rate of 30% by way of withholding at source by the U.S. payer, who has primary responsibility as the “withholding agent” to collect, deposit, and report the tax to the IRS.
Second, foreign persons who are considered to earn income “effectively connected” with a trade or business in the U.S. (in contrast to the passive-natured FDAP income) are subject to tax at graduated rates on a net basis (i.e., reduced by available deductions). U.S. payers generally do not need to withhold tax on such effectively connected income (“ECI”).
With respect to filing, a foreign person must report U.S.-source FDAP (with some exceptions) and ECI on an annual basis on the Form 1040-NR.
In contrast to U.S. persons, there is no income minimum threshold amount if a Form 1040-NR is required.
Filing Even When Not Required
We note, finally, that even in cases where you don’t meet the filing threshold amount (in the case of U.S. persons), or you otherwise don’t have a filing requirement, there are instances where filing can be to your advantage – i.e., it results in a refund from the IRS.
This could be the case if tax is over-withheld or if you’re eligible for refundable credits. A careful review of your tax profile by an Expat Tax Professional will ensure that you’re taking advantage of your optimal filing position.