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Tax Refund Question

Tax Refund Question

Old Jan 8th 2015, 8:11 pm
  #1  
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Default Tax Refund Question

First time preparing to File my US Taxes.

I entered US in August and paid taxes for say 5 months. My employer is taking tax automatically and taking it based on my yearly salary.

I have only earned roughly 40% of my annual salary yet paid a monthly tax based on annual salary.

When filling will the IRS look as my 40% salary earnt as my total over the year and as such I paid too much tax?

Rough Example would be

Salary 100k
tax rate 40%
Total Tax due for year: 40k

Earnt 40% of salary: 40k
Time: 5 months
Tax Paid: 40k / 5 = 8k

40% Treated as Full Year
Salary 40k
Tax rate 20%
Tax due : 40k*0.2 = 8k
Pro Rate per month = 0.6k
I was here 5 months = 5*0.6
Tax due = 3k

Tax Refund = 8k - 3k = 5k

Assuming the tax rate is 40% at 100k salary and 20% at 40k for example.

To note I did not meet the 183 days of being in the country.
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Old Jan 8th 2015, 8:33 pm
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Default Re: Tax Refund Question

First part of that 40% was probably for FICA which is 7.65% of your income. Then there would have have been state income tax withheld if you live in a state that has an income tax. All of that can be determined by you last paystub of the year. The paystub should indicate federal income tax withheld and you can use Form 1040NR-EZ to determine how much income taxes are owed and the refund due from the federal income taxes withheld.

Since it is an EZ form, it is easy.

Form 1040NR-EZ

Instructions From 1040NR-EZ
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Old Jan 8th 2015, 8:54 pm
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Default Re: Tax Refund Question

Thanks Michael, I am just trying to guage if my above example is roughly how they would treat my earnings?
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Old Jan 8th 2015, 8:59 pm
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Default Re: Tax Refund Question

You may of course want to make a 7701(b) election to file as a full year resident if this is a lower tax result for you. You can file for 2014 from 20 January onwards and your FBAR once the official exchange rate is published.
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Old Jan 8th 2015, 9:00 pm
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Default Re: Tax Refund Question

Ahh so only Federal Tax Income is refunded? Not State or City taxes?
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Old Jan 8th 2015, 9:03 pm
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Default Re: Tax Refund Question

Originally Posted by unique_boy View Post
Ahh so only Federal Tax Income is refunded? Not State or City taxes?
Most States and some cities issue refunds but of course you have to complete the State and/or City return to figure out the amount refundable, if any.
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Old Jan 8th 2015, 9:07 pm
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Default Re: Tax Refund Question

Originally Posted by Cook_County View Post
Most States and some cities issue refunds but of course you have to complete the State and/or City return to figure out the amount refundable, if any.
For flip sake! This is pretty confusing first time after years of never having to deal with the HMRC!
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Old Jan 8th 2015, 9:13 pm
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Default Re: Tax Refund Question

Originally Posted by unique_boy View Post
For flip sake! This is pretty confusing first time after years of never having to deal with the HMRC!
US tax return filing is mandatory - the system is simply different from the UK system. You agreed (perhaps not knowingly) to dealing with annual income tax and informational return filing when you chose to move to the United States.
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Old Jan 8th 2015, 9:24 pm
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Default Re: Tax Refund Question

Originally Posted by Cook_County View Post
US tax return filing is mandatory - the system is simply different from the UK system. You agreed (perhaps not knowingly) to dealing with annual income tax and informational return filing when you chose to move to the United States.
I knew I had to file I am just asking questions.

I know I will be due a refund but one bit of information that is not clear anywhere.

Do they pro rata your taxes owed based on how long you have been here?

In simplistic terms in 6 months you have earnt 40k and paid 6k Federal Tax, the tax on a 40k salary is 5k so you are owed 1k State Tax. This is clear to me, note I am just using example numbers to illustrate my question

However in cases when you have not been present for the entire year do they follow the following process:

Earnt 40k, paid 6k tax, yearly tax is 5k but as person has only been in country for 6 months the tax they owe is only 2.5k?
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Old Jan 8th 2015, 9:24 pm
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Default Re: Tax Refund Question

Originally Posted by unique_boy View Post
Thanks Michael, I am just trying to guage if my above example is roughly how they would treat my earnings?
You can't without filing out the form. Your example is too simplistic since it doesn't account for exemptions and deductions and the various marginal tax brackets of 10%, 15%, 25%, 28%, 33%, and 39.6%. Since you will be filing form 1040 NR, a simple tax calculator isn't available which would handle all of that for you and give you a rough estimate.
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Old Jan 8th 2015, 10:32 pm
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Default Re: Tax Refund Question

Originally Posted by Michael View Post
You can't without filing out the form. Your example is too simplistic since it doesn't account for exemptions and deductions and the various marginal tax brackets of 10%, 15%, 25%, 28%, 33%, and 39.6%. Since you will be filing form 1040 NR, a simple tax calculator isn't available which would handle all of that for you and give you a rough estimate.
Please read my last post. The question isn't so much on how much my refund will be it is about how they treat earnings when oyu have only been in the country for a short period of time.
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Old Jan 8th 2015, 11:08 pm
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Default Re: Tax Refund Question

Originally Posted by unique_boy View Post
Please read my last post. The question isn't so much on how much my refund will be it is about how they treat earnings when oyu have only been in the country for a short period of time.
It's not that simple to answer. When filing form 1040 NR, the IRS doesn't know how much money you made outside the US but at the same time doesn't want to give foreigners a tax break that USCs don't get. Therefore from 1040 NR reduces or eliminates deductions and exemptions and uses completely different tax tables and therefore the IRS attempts make foreigners pay their fair share of taxes.

As an example that I used before, a married person working in the US for 6 months and making $20,000 during that time would pay $0 federal income tax if they were to file form 1040 but a married person working the full year and making $40,000 would pay $2,048 in federal income taxes. Therefore form 1040 NR is used instead and since the IRS doesn't know how much the person made outside the US, it uses gimmicks to try to make the person pay $1,024 or half the amount of someone that worked in the US for the full year working on the assumption that the person made $20,000 outside the US during the year. Since there is no direct correlation, sometimes taxes owed ends up being more or less than what would be considered that taxpayer's fair share.

Because of the complexity for 1st year residents, special withholdings for the W-4 is required for 1st year residents but for others, the government doesn't care how the taxpayer fills out the W-4.

Form 1040 NR EZ is really easy to fill out and shouldn't take more than a 1/2 hour if you have your latest paystubs and that is the only way you will have an idea of the amount of taxes owed.

For USCs that move between states there is a similar problem but the states solve the problem by having a partial year tax return which includes all income from both states to calculate total taxes owed for each state and then prorates the taxes for each state depending on the percentage of income made in each state. For first year foreigners, I'm not sure how the states handle that.

Last edited by Michael; Jan 8th 2015 at 11:19 pm.
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Old Jan 9th 2015, 12:10 am
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Default Re: Tax Refund Question

Originally Posted by unique_boy View Post
Please read my last post. The question isn't so much on how much my refund will be it is about how they treat earnings when oyu have only been in the country for a short period of time.
As far as I can tell the "standard deduction" is effectively prorated. You can't do what you do in the UK, show up two months before the year end and effectively get paid tax free because you get a whole year's allowance.
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Old Jan 9th 2015, 1:54 am
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Default Re: Tax Refund Question

Originally Posted by Cook_County View Post
You may of course want to make a 7701(b) election to file as a full year resident if this is a lower tax result for you.
Some discussion of the 7701(b)(4) election, which doesn't impose full year tax residence, but is complex:
Electing Resident Alien Status Under Section 7701(b)(4) | Hodgen Law PC


You can file for 2014 from 20 January onwards and your FBAR once the official exchange rate is published.
Non-resident aliens do not need to file FBAR. Of course if resident status is successfully elected it may bring an FBAR filing requirement. And it's generally not a good idea to file that early unless absolutely sure that there are no outstanding tax forms (W-2, 1099, etc).
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Old Jan 9th 2015, 2:00 am
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Default Re: Tax Refund Question

Originally Posted by unique_boy View Post
Do they pro rata your taxes owed based on how long you have been here?

In simplistic terms in 6 months you have earnt 40k and paid 6k Federal Tax, the tax on a 40k salary is 5k so you are owed 1k State Tax. This is clear to me, note I am just using example numbers to illustrate my question

However in cases when you have not been present for the entire year do they follow the following process:

Earnt 40k, paid 6k tax, yearly tax is 5k but as person has only been in country for 6 months the tax they owe is only 2.5k?
Here's how it works, in general.

As a non-resident alien, you pay tax at the normal U.S. rates on your U.S. source income. In particular, your employment income, any U.S. rentals, etc. If you have U.S. dividends, interest, or certain other types of income, special tax rates apply, usually dependent on tax treaty.

You cannot take the normal standard deduction (other than in exceptional cases), or most itemized deductions. However you can claim a personal exemption as normal, and you can take certain itemized deductions such as state income tax.

If you want to figure out your tax in advance, you need to carefully work through the form 1040NR form + instructions, plus publication 519, plus any other relevant information on the IRS website. Start here:
Taxation of Nonresident Aliens

Effectively, (as far as I understand) there is still usually a tax benefit in only have part-year income. Since although you don't get quite as many deductions as those available to U.S. residents, you do get the benefit of the lower tax bands even though you do not have a full year's income.

In your previous threads, you suggested you would be on L visa/status. If you are an intra-company transfer employee, have you got a certificate of exemption that allows you to continue paying National Insurance rather than U.S. Social Security tax? Also, is your employer paying for you to have professional tax assistance (first year tax returns are more complex than usual) and if not, why not?

Last edited by JAJ; Jan 9th 2015 at 2:04 am.
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