But I am not a tax expert! Tax Basics
for Assisting International Students
and Scholars
Mary Upton
Theo Wu
Intended beneficiaries
• If you’re responsible for providing education
to foreign students and scholars, AND
• That person receives income from your
organization, THEN
• We hope this presentation will help you
demystify US tax law expectation and give you
confidence to know where help can be found.
Overheard
I’m a foreign person. I don’t
have to pay any money to your
government.
Don’t you know that I’m a
foreign student?
But my department’s offer
letter says this fellowship is not
taxable.
Wrong Expectations
• US Tax Law
– Tax treatment of US persons DOES NOT equal tax
treatment of non-US persons
– Without doing anything, a foreign person’s income
must have taxes withheld
– AND the IRS holds you accountable to make sure
the taxes are withheld and remitted
Four terms
• US person for tax purposes
– US citizen, Legal Permanent Resident, Resident
Alien (is a foreign national)
– Meets the Substantial Presence Test
• Non-US person for tax purposes
– Nonresident Alien (is a foreign national)
– Does not meet the Substantial Presence Test
Substantial Presence Test
Substantial Presence Test (SPT)
• 31 days during the current year, and
• 183 days during the 3-year period that
includes the current year and the 2 years
immediately before that, counting:
– All the days you were present in the current year,
and
– 1/3 of the days you were present in the first year
before the current year, and
– 1/6 of the days you were present in the second
year before the current year.
Substantial Presence Test (SPT)
• Exempt from counting days:
– Does not mean exempt from paying US taxes
– F-1 and J-1 students (5 years)
– J-1 non-students (2 of last 6)
• In current year, count all days the person is
available to be present in the US
– Resident aliens from day 1
– Retroactive withholding to day 1
IRS Publication 4011
• Pub 4011, IRS Publication 4011, Publication
4011
• Determination tree for SPT
Review
• A foreign person in the US is considered:
– Resident alien for tax purposes
– Nonresident alien for tax purposes
– Determined by the SPT on his physical presence
– Publication 4011 is a helpful decision tree
US person
• IRS Form 1040 or 1040-EZ OK
• TurboTax, TaxCut, etc OK
• W-9
Non-US person
• Is the payment considered taxable income?
• If yes, how much tax?
• Institution has an obligation to withhold AND
report
IRS Form W-8Ben
Defining Income
Defining Income
• Fellowship/scholarships
– Qualified Expenses
– Room and Board
• Salary/wages
– Service component
• Prize/award
– Public competition
• Gifts
– No strings attached
What is subject to withholding?
NRA
RA
Scholarship/Fellowship
Subject to reporting by your org?
Taxable?
Subject to withholding?
Yes
Yes
Maybe
Maybe
Yes
No
Salary/Wages
Subject to reporting by your org?
Yes
Yes
Taxable?
Yes
Yes
Subject to withholding?
Yes
Yes
Prize/Awards
Subject to reporting by your org?
Yes
$600 or above
Taxable?
Yes
Yes
Subject to withholding?
Yes
No
Withholding Rate
Withholding Rate
• 30% federal income tax rate
• Scholarship/fellowship federal tax rate
reduced to 14%
– F, J, M, Q visa status
• Payroll is at graduated rates but does not
include the standard deduction because that’s
for US persons
• ? % state income tax rate
Tax Treaty Benefits, FICA
Tax Treaty Benefits
•
•
•
•
•
•
•
•
Avoid double taxation
Not granted automatically
Must be a non-US person in the current year
Must address this type of income
Each tax treaty is different
Requires a US based tax identifying number
Reduces the tax rate
Based on tax residence
Tax Treaty Benefits
• If you are ever concerned about the person’s
qualifications to get a tax treaty benefit, you
should withhold now and let the person make
a claim for the benefit when the person files a
tax return at the end of the year.
FICA Taxes
• NRA FICA exemption (IRC Section 3121(b)(19))
– Non-US person in the current year
– F, J, M, or Q visa type
– Performed to carry out the purpose specified in
subparagraph (F), (J), (M), or (Q) (i.e. F-1 student
is studying full-time and not working full-time)
End of the Year
End of Year
I’m still not a US person. I
don’t pay taxes to your
government.
The government must
understand this is very hard
and I don’t understand English
well
I claimed the tax treaty and
didn’t have any taxes taken
from my pay.
Last year I did my tax refund
and didn’t owe. This year, why
do I owe?
End of Year
• The IRS expects your foreign visitors to complete
a tax return if she was present in the US during
the year
– US person: 1040 or 1040EZ (like any US person)
– Non-US person: 1040NR or 1040NR-EZ
• At the end of the year, a non-US person may also
receive the 1042-S form instead of or in addition
to the W-2
• You use these reporting forms to complete your
tax filing for the year
IRS Form 1042-S
• Claim tax treaty benefit on incomes
• Reporting of taxable income provided to the
individual except salary/wage income (W-2)
– May include the tax amount withheld
– May include special situations in which taxes are
not withheld but the income is taxable
In review
In review
Substantial Presence Test =
(1 x Current Year Days) +
(1/3 x Last Year Days) +
(1/6 x 2 Years Ago Days)
• Substantial Presence Test helps determine
Resident alien or nonresident alien
• IRS Publication 4011
In review
In review
NRA
RA
Fellowship/Scholarship
Subject to reporting by IU?
Taxable?
Subject to withholding?
Yes
Yes
Maybe
Maybe
Yes
No
Salary/Wages
Subject to reporting by IU?
Yes
Yes
Taxable?
Yes
Yes
Subject to withholding?
Yes
Yes
NRA require tax withholding on taxable income
In review
• 30% federal income tax rate
• Scholarship/fellowship federal tax rate
reduced to 14%
– F, J, M, Q visa status
• ? state income tax rate
In review
• Tax treaties:
– Must be a NRA in the current year
– Requires a US based tax identifying number
– Based on tax residence
• NRA FICA exemption
– Must be a NRA in the current year
– F, J, M, or Q visa type
– Performed to carry out the purpose specified in
subparagraph (F), (J), (M), or (Q)
In conclusion
•
•
•
•
1042-S must be postmarked by March 15
1040NR (individual tax return) due April 15
1042 due March 15
Submitting Form 7004 for the 1042
automatically grants a 6 month extension
Questions?