Income Tax Questions

[coffeebean]

CALIFORNIA

Hi, I had a few questions about income tax and would appreciate if someone could help.

1) If person 1 (CA resident) is receiving monthly wire transfers from his dad to help pay some medical bills in the amout of $500, sometimes more, will person 1 need to pay tax over the amount received? BTW, the wire transfer comes from oversees in the name of the dad's company, not in the name of the dad.
And can those medical bills be used as deductions when paying taxes?

2) Is it true that a foreigner living in CA (not permanent resident) that has income on another country needs to pay income tax for that income in that country AND in the US? Let's say the country is Brazil. Thanks.

I really appreciate your help.

Thanks

[LdiJ]

Originally Posted by coffeebean

CALIFORNIA

Hi, I had a few questions about income tax and would appreciate if someone could help.

1) If person 1 (CA resident) is receiving monthly wire transfers from his dad to help pay some medical bills in the amout of $500, sometimes more, will person 1 need to pay tax over the amount received? BTW, the wire transfer comes from oversees in the name of the dad's company, not in the name of the dad.
And can those medical bills be used as deductions when paying taxes?

2) Is it true that a foreigner living in CA (not permanent resident) that has income on another country needs to pay income tax for that income in that country AND in the US? Let's say the country is Brazil. Thanks.

I really appreciate your help.

Thanks

The money from your father is a gift, therefore it would not be subject to any tax.

If you are not a citizen or legal permanent resident, your worldwide income is not subject to tax, only your US income is subject to tax.

[abezon]

1. no, it's not taxable, yes, you can deduct the medical bills but only if you're itemizing.

2. Any US resident, legal or illegal, has to pay US taxes on worldwide income. However, a US resident with foreign income can claim a foreign tax credit for taxes paid to most other countries, & may be eligible for a special tax treaty rate in the other country.

You are a US resident if you either are a legal permanent resident, OR if you meet the substantial presence test by being present in the US for "183 days" or more. You calculate the days present in the US by adding togather all days in the US during 2007, + one-third of the days in the US during 2006, + one-sixth of the days in the US during 2005.

SEE A TAX PRO WITH SOME INTERNATIONAL EXPERIENCE if you are a non-citizen with foreign income, as there are also some pretty confusing tax treaty options.

[LdiJ]

Originally Posted by abezon

1. no, it's not taxable, yes, you can deduct the medical bills but only if you're itemizing.

2. Any US resident, legal or illegal, has to pay US taxes on worldwide income. However, a US resident with foreign income can claim a foreign tax credit for taxes paid to most other countries, & may be eligible for a special tax treaty rate in the other country.

You are a US resident if you either are a legal permanent resident, OR if you meet the substantial presence test by being present in the US for "183 days" or more. You calculate the days present in the US by adding togather all days in the US during 2007, + one-third of the days in the US during 2006, + one-sixth of the days in the US during 2005.

SEE A TAX PRO WITH SOME INTERNATIONAL EXPERIENCE if you are a non-citizen with foreign income, as there are also some pretty confusing tax treaty options.

I am sorry Abezon, but I do not believe that the bolded part is accurate. Only a citizen or legal resident is subject to tax on worldwide income.

Its probably a relatively moot point, because the odds of any illegal alien having foreign source income is pretty slim, but the US does not have standing to impose tax on foreign source income unless someone is a citizen or legal resident.

[abezon]

Originally Posted by LdiJ

I am sorry Abezon, but I do not believe that the bolded part is accurate. Only a citizen or legal resident is subject to tax on worldwide income.

Its probably a relatively moot point, because the odds of any illegal alien having foreign source income is pretty slim, but the US does not have standing to impose tax on foreign source income unless someone is a citizen or legal resident.

You're making a very common mistake of confusing "resident" from immigration law with "resident" from tax law. The two definitions are not the same.

The tax code imposes US taxes on worldwide income of all 'taxpayers'. The starting point in the tax code is that just about anyone who pokes their nose into the US is a taxpayer. Congress then said that anyone who is a 'nonresident alien' only has to pay taxes on US-sourced income. The code defines a nonresident alien as someone who is not a resident alien under the green card or physical presence tests. The green card test covers people with lawful permanent residency. The physical presence test covers people who are in the US more than '183 days', using the inclusion rules I discussed earlier. Thus, both legal & illegal aliens can be resident aliens for tax purposes. If they meet the substantial presence test, illegal aliens are subject to US taxes on worldwide income. (They cannot claim EIC, though.)

[coffeebean]

Thanks for helping.
Under the presence test, I am a resident, and I am a legal resident. Soon, in about 1 year, I will be a permanent resident with a green card.

If I already pay taxes in my home country, why would I have to pay it again in the US?

Now, in regards to the money from persons 1 father, I want to make it clear, in the wire it doesn't come in his name, comes in the name of a finance company. Is that all right?

Thanks so much,

[abezon]

You pay taxes to the US on your foreign income because Congress says you do. Period. If you try to claim the US can't tax your foreign income, you could be denied a green card. Your relief from double taxation comes in the form of a foreign tax credit claimed on your US tax return.

It doesn't matter what name is on the checks/wire transfers. As long as you can show the payments are gifts, they are not taxable. It would be easier if the money was not going through the finance company, but it's still a gift. You might want to get something in writing from father stating that the payments are a gift from him, & being run through the finance company for reasons of convenience.

[LdiJ]

Originally Posted by abezon

You're making a very common mistake of confusing "resident" from immigration law with "resident" from tax law. The two definitions are not the same.

The tax code imposes US taxes on worldwide income of all 'taxpayers'. The starting point in the tax code is that just about anyone who pokes their nose into the US is a taxpayer. Congress then said that anyone who is a 'nonresident alien' only has to pay taxes on US-sourced income. The code defines a nonresident alien as someone who is not a resident alien under the green card or physical presence tests. The green card test covers people with lawful permanent residency. The physical presence test covers people who are in the US more than '183 days', using the inclusion rules I discussed earlier. Thus, both legal & illegal aliens can be resident aliens for tax purposes. If they meet the substantial presence test, illegal aliens are subject to US taxes on worldwide income. (They cannot claim EIC, though.)

I understand the physcial presence test and all that implies. Our firm does hundreds of returns per year for people under those circumstances, as well as doing quite a few returns for US citizens residing abroad.

However, being taxed as a resident under the physical presence test is an election, not an imposition. (just for the record) The physical presence test ALLOWS them to file as a resident, but does not stop them from filing as a non-resident.

However, the main point I am making is that even the IRS is limited by jurisdiction. In OP's case (based on the OP's last post) OP IS a legal resident of the US, despite the fact that OP does not yet have a green card. Therefore yes, the IRS does have jurisdiction. However, in the case of an illegal alien (for example) the IRS has no jurisdiction over foreign source income, nor any leverage to impose jurisdiction.

[abezon]

I think you & I are just going to have to disagree on this one, my friend.

[tranquility]

I have no idea of the answer, but Google is your friend.

At:
[url]http://books.google.com/books?id=MISb8OwYLxoC&pg=PT235&lpg=PT235&dq=illegal+aliens+irs+taxes+foreign+source+income&source=we b&ots=VSuecBYqUl&sig=JVMpyG0aInLDXOZdZi0GA7JBoQo#PPT234,M1[/url]

is an applicable section of "Langer on Practical International Tax Planning" on Googlebooks. You can read at least a few pages of the section and come to your own determination.