International Students and Scholars

Lesson 1

DETERMINATION OF RESIDENCY STATUS

Determinationof Residency Status

• Do not confuse tax residency with:– immigration residency– residency for tuition purposes– residency requirements for

earning a degree etc.

Resident or Nonresident?

• Substantial Presence Test• Exempt Individual• Green Card Test• Residency Through Marriage• Dual-Status Alien

Substantial Presence Test

• 31 days during the current year, and

• 183 days during the three year period that includes the current year and the two years immediately before that counting:– current year times 1, plus– first preceding year times 1/3, plus – second preceding year times 1/6.

Exempt Individuals

• F, J, M, & Q student status holders• J & Q teacher or trainee status

holders• Not exempt from taxation.

Exempt from counting days of presence for a specified period of time.

Exempt students (F & J)

• 5 years• Dependents are included if

their status is derivative and they are dependent on the main status holder

• All must file an 8843

Exempt teacher/trainee

• Any two years out of a six year period

• Must count years in student or trainee status

• Dependents are included if their status is derivative and they are dependent on the main status holder

• All must file an 8843

Establishing a closer connection

• Can ignore the substantial presence test if:– are present in the U.S. less than

183 days in the current year, – have a tax home in a foreign

country for the entire year and closer ties with that country than the U.S., and

– file form 8840.

Green Card Test

• Date of adjustment to status--not the date pink ‘green card’ issued

• No option--if you are a Permanent Resident, you are a resident for tax purposes

Residency Starting Date

• Passes Substantial Presence Test (SPT)– First day of the tax year the SPT is passed

• Granted permanent residence status--green card test– First day in the U.S. as permanent resident

• When both apply: the earlier of the two

Residency through marriage

• Nonresident spouse treated as a resident

• May file as residents, but required to file a statement, signed by both, and

• Required to file jointly, and• Report world-wide income

Dual-status Aliens

• Can be very complex• Applies when taxpayer has two

residency statuses during the same tax year

• Refer to professional preparer

Lesson 2

WHO MUST FILE

Who Must File

• In the United States, unlike most of the world, it is the individual’s responsibility to know what taxes must be filed with the government.

• Most of the world, the government automatically assesses and collects taxes.

Resident Aliens

• File just as United States citizens file

• See IRS Publication 17 or any of the numerous VITA sites for U.S. citizens

• Extensive number of resources, public and private, for help with tax obligations

Dual Status Aliens

• See IRS Publication 519 for a detailed description of this status and examples of how to file.

• Too complex for this training, encourage dual status aliens to seek professional help with their tax questions.

How nonresident is different

• Generally pay tax only on US-source income

• Interest may be tax free• Married nonresidents cannot file

jointly• Generally only one personal

exemption• Most tax credits do not apply• Standard deduction not allowed

(except students from India)

Nonresident Rules

• Itemized deductions limited to:– state and local taxes withheld– contributions to charity– casualty/theft losses– miscellaneous business deductions

• Investment income (other than interest) is generally taxed at a flat 30%

Nonresident Aliens Filing Requirements

• Who– All F, J, M, and Q status holders must

file a statement to substantiate non-residence and possibly a tax return

• What– Form 8843—mandatory for all

nonresidents– Possibly Form 1040NR or 1040NR EZ

• When– Tax returns by 15 April

•Form 1040NR or Form 1040NR EZ

– Form 8843 only by 15 June

• Where– Internal Revenue Service Center– Philadelphia, PA 19255-0219

When and Where to File

1040NR-EZ instead of 1040NR

• Does not claim dependents• Cannot be claimed as someone’s

dependent• Under 65• Only wages, salaries, tips, taxable

refunds of state/local income taxes, & scholarships or fellowships--all other income on 1040NR

• Taxable income <$50,000

• Cannot claim any adjustment to income except scholarship & student loan interest

• Cannot claim tax credits• No exemption claimed for spouse• If itemizes, can only claim state

income tax deductions• The only taxes owed are income

taxes

Additional limitations of Form 1040NR-EZ

Consequences of Failure to File

• If no taxes are owed--no penalty.– Although, Form 8843 always

required

• However, nonimmigrant alien status requires that the individual not violate any U.S. laws—including tax laws.

Lesson 3

TREATY OVERVIEW

Treaty Overview

• IRS Publication 901 your simplest resource for details of treaties

• Treaties can exempt income that are classified as scholarship or compensation for teaching or during studies– File IRS Form 8233 with payer to

exempt income from withholding

• Purpose is based on immigration status! (A graduate student teaching classes is a student and not teacher.)

• Student/scholar must have been tax resident of treaty country immediately prior to coming to U.S. for purpose on current INS documents.

• Dependent and Independent Personal Services rarely allowed for students and scholars—see Canada exception.

• Clarification--read the text in Pub 901

Points to Consider When Determining Treaty

Application

IRS Income Codes on 1042S

• 15 Scholarship or Fellowship grants– Qualified (unreported and untaxed):

tuition, mandatory fees, and maybe books

– Nonqualified (reported and taxed, if not exempt by treaty): room and board and uncontrolled payments

• 18 Compensation for teaching and research

• 19 Compensation during study and training

Unique Treaty Provisions

• India– Standard deduction and exemptions

for spouse and dependents (always read dependents)

• Canada– $10,000 dependent personal services if

it does not exceed $10,000--plus much more

• China– Maintain treaty benefits even once a

resident

Lesson 4

FAMILY ISSUES

Family Issues

• Few nonresident students and scholars may claim their family members as dependents.

• If they can (Canada, India, Japan, Korea, Mexico), the dependent must have a taxpayer identification number (TIN):– Social Security Number, SSN– Individual Taxpayer Identification

Number, ITIN

Filing Status and Marital Status

• Unmarried = Single• Married, use one of the

married statuses even if spouse not in the U.S.

• Only nonresidents from Canada, India, Japan, Korea, and Mexico can claim an exemption for spouse—read the rules.

Filing Status and Dependents

• Most nonresidents cannot claim their dependents—even if the dependent is a U.S. citizen.

• Only nonresidents from Canada, India, Japan, Korea, and Mexico can claim a deduction for dependents—read the rules.

Spouse and Dependent Reporting Obligations

• Even if no income, all F-2s and J-2s are required to file a Form 8843 yearly.

• All income must be reported, even if earned in violation of immigration laws

• J-2s are not exempt from FICA taxes

Lesson 5

TAXATION OF NONRESIDENTS

Taxation of Nonresidents

– Source of Income

– Type of Income

– “Effectively Connected” versus not effectively connected

Source of Income

• A nonresident’s Foreign Source Income not taxed in U.S.

• U.S. source income that is not taxed:– Interest Income (interest on deposits

held in the “banking business”)– Qualified scholarships and

fellowships

Qualified Scholarships/Fellowships

• Candidate for a degree at an accredited institution

• Qualified Expenses– Tuition and Mandatory Fees– Fees, books, supplies, & equip

required of all

“Effectively Connected?”

• Effectively Connected Income– Students & Scholars are

considered engaged in a U.S. trade/business—thus income “EC”

– Effectively Connected Income Taxed at Graduated Rates•Personal Services (on campus

employment)•Business Profits/Losses

• Not Effectively Connected Income– 30% (or reduced treaty rate, if

applicable)• Dividends • Interest (from sources other than bank

deposits)• Gambling Income• Sale of Capital Assets• Social Security Benefits• Real Property Income

Other Income

Adjustments and Itemized Deductions for Nonresidents

• Deduction for Student Loan Interest– Loan must have been for educational

expenses only and interest paid in tax year

• Itemized Deductions– State and Local Taxes– Charitable Contributions—U.S. charities

only– Casualty or Theft Loss, Job Expenses,

and Educational Costs, Tax Prep Fee

Lesson 6

FORM 8843

8843

• Name & TIN—must match exactly

• US address only if not filing with 1040NR or 1040NR EZ

• Part I– 1a & 1b: Visa = Status, date

status acquired and visa number (if any)

– 4a & 4b: yes, they must count the days

• Part III, Students– 9 the official address and phone

of institution– 10 the name, address, and phone

of the international director or academic advisor

• Signature--only if not filed with 1040NR or 1040NR EZ

Form 8843 continued

Lesson 7

FINISHING THE RETURN

Finishing the Return• 1040NR and 1040NR EZ require a

taxpayer identification number for filer and any claimed dependents

• Mail 8843 and return together• Every form should have taxpayer’s

name and TIN• Attach W-2s and 1042-Ss to front

left margin • Remind NRA to Keep copies of

everything

The 1040NR EZ Return

• Line 3: Wages, salaries, tips, etc– to list on wage line of tax return Box 1 of Form

W-2– Add Code 18 income in box 2 of Form 1042-S– Add Code 19 income in box 2 of Form 1042-S– Minus Treaty benefits– Equals Amount

• Line 4: Taxable refunds from state taxes– 1099G (not students from India)

• Line 5: Scholarship/Fellowships (Room & Board)– Report all that is not exempt via treaty– U.S. source only

• Line 6: Treaty exemption– total exempt salary & scholarship or maximum

allowed by treaty--whichever is less– REMEMBER--do not include this amount in lines

3 or 5• Line 7:

– Line 3 + 4 + 5

Form 1040NR-EZ

• Line 8: Student loan interest deduction– All these rules must be met:

•Paid during tax year•Must have been required to be paid•Filing status must be single•Loan for educational expenses only•Loan recipient must be at least a

half-time student.

Form 1040NR-EZ

• Line 9: Scholarship excluded– 1042-S Income and exemption codes

• Income code 15 scholarship– Exemption 2 (tax code) or no exemption

• Line 10: subtract 8 + 9 from 7• line 11: state taxes withheld

– India: Single, $4,750/Married, $4,750• line 12: subtract 11 from 10• line 13: personal exemption

$3,050

Form 1040NR-EZ

• Line 14: taxable income: subtract 13 from 12

• Line 15: find tax in tax tables • Line 18: Federal income tax withheld

– Form W-2s, box 2– Form 1042-Ss, column g

• Line 19: rare for international students/ scholars

• Line 20: F & J holders are not required to file 1040-C “sailing permits”

Form 1040NR-EZ

• Taxpayer must sign form• Direct deposit• Installment agreement possible, but

penalties and interest will be charged• VITA Volunteers do NOT sign the form

– Print VITA and Site #

• Page 2--refer to 8843

Form 1040NR-EZ

When to File 1040 NR

• To claim dependents– Canada, India, Japan, Korea,

Mexico

• Additional deductions– Charitable contributions, etc.

• Not effectively connected income– Dividends

Lesson 8

SOCIAL SECURITY TAX

Social Security Tax

• Foreign students and scholars are exempt from FICA (social security and Medicare taxes) while they are nonresidents for tax purposes—this includes students on OPT

• Once they become resident for tax purposes, they are subject to FICA taxes.– Exception for all full-time students

working on campus

• Dependents in F2 or J2 status are never exempt from FICA

• When withheld in error:– Ask the employer to refund– If not refunded, use IRS Form 843

to request a refund, per the example

Social Security Tax

Lesson 9

STATE INCOME TAX ISSUES

State Income Tax Issues

• Some states do not honor income tax treaties

• Other states base their state returns on the federal adjusted gross income

For Additional Questions

• Refer to the publications that are mentioned in your training material. The publications are available at www.irs.gov

• Call the Philadelphia Service Center at 215-516-2000. It is easier to get through early in the morning or late in the evening.