U.S. Taxation of Foreign Students
2006 Tax Year
Presented by Paula N. Singer, Esq.
Partner, Vacovec, Mayotte & Singer LLP
Chairman, Windstar Technologies, Inc.
Your Goals
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Determine your tax filing obligations
Submit the correct tax form(s)
Claim only allowable deductions and
credits
Claim only allowable treaty benefits
Submit the tax form(s) timely
Pay the proper tax
General Information
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Basic Concepts
Filing Requirements
Tax Forms
Due Dates
Where to File
Penalties / Ramifications of Not Filing
Identification Numbers
Basic Concepts
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Tax Return
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Form you complete and file
Computes your tax liability
Form depends on your tax residency status
Must be filed with the appropriate tax authority
Tax Authorities
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IRS – Internal Revenue Service
Mass D.O.R. – Massachusetts Department of
Revenue
Other states
Basic Concepts
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Tax Year
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Calendar year: January 1 – December 31
Withholding
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Taxes withheld from income payments:
compensation, taxable scholarships, etc.
Advance payment toward tax liability
Does not excuse tax return filing obligation
Withholding ≠ tax liability
Basic Concepts
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Federal Tax Residency Status
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Resident Alien (RA)
Nonresident Alien (NRA)
Dual-status Taxpayer (typically in year of change to
H-1B status)
State Tax Residency Status
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Resident
Nonresident
Basic Concepts
Immigration vs. tax definitions of residency
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Immigration
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A nonimmigrant is a nonresident
An immigrant (“green card holder”) is a resident
Tax
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A nonimmigrant can be either a nonresident (NRA) or
a resident (RA)
A green card holder is a resident (RA)
Basic Concepts: Residents
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Are subject to tax on their worldwide income
Can claim deductions for their dependents:
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Who are US citizens, US nationals, or US residents, or
residents of Canada or Mexico, and
Who have a US taxpayer identification number
Can claim the standard deduction or itemized
deductions if higher
Can claim credits available to US citizens except
for the Earned Income Tax Credit (EITC)
May have disclosure form requirements
Basic Concepts: Residents
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File Form 1040, 1040A, or 1040EZ - Can e-file!
File Mass Form 1 (or Form 1NR)
Should have income reported on:
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Form W-2 for taxable wages
Form 1099 for dividends, interest, etc.
Form 1042-S for treaty exempt income
May have disclosure form requirements
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Form TD 90.22-1 Foreign Bank and Financial Account
Disclosure
Form 3520 to disclose bequests or gifts from abroad
RA Filing Requirements
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No income or income less than filing threshold:
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File a tax return if:
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Single and income is at least $8,450
Married-filing-jointly and income is at least $16,900
Income:
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1040, 1040A or 1040EZ
MA Form 1 or Form 1NR
Basic Concepts: Nonresidents
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Can only file using single or married-filing–
separately status
Can claim only one personal exemption amount
($3,300) with a few exceptions
Cannot claim the standard deduction (except for
residents from India who are students or
business apprentices)
Only pay US tax on US-source income and
income connected to a US trade or business
Basic Concepts: Nonresidents
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File Form 1040NR or 1040NR-EZ tax return Cannot e-file!
Mass Form 1-NR (or Form 1)
Should have income reported on:
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Form W-2 for taxable wages
Form 1042-S for taxable scholarships, prizes,
gambling winnings, treaty exempt income including
wages
But may also have income reported on Form
1099-INT or 1099-MISC
File Form 8843 information return if they are
“exempt individuals” in F, J, M, or Q status
NRA Filing Requirements
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Who doesn’t have to file?
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Nonresidents whose only income is wages that do not
exceed $3,300 don’t have to file a Form 1040NR-EZ
or 1040NR
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But if you had taxes withheld, you must file to claim a tax
refund
But if your wages or scholarship are exempt under a treaty,
you must file
But you may still have to file Form 8843
Mass residents or nonresidents whose income is less
than the no tax status amount
NRA Filing Requirements
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Who must file?
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All nonresidents with effectively connected
income
Employment wages
 Self-employment income
 Taxable scholarship and fellowship grants for
recipients in F, J, M, or Q status
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Even nonresidents whose income is exempt
under a tax treaty must file a tax return
Even certain dependents in F, J, M, or Q
status with no income must file Form 8843
NRA Filing Requirements

What to file:
No Income:
Income:
 Form 8843 (F, J, M,  Form 1040NR
or Q status
 Form 1040NR-EZ
individuals)
 Form 8843 attached
 Form 1040EZ-T
to tax return
 Possibly MA Form 1 or
MA Form 1NR
Tax Forms You May Receive
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Form
Form
Form
Form
W-2
1042-S
1099-INT
1099-MISC
Tax Forms You May Need to Complete
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Federal
Form
 Form
 Form
 Form
 Form
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8843
1040NR
1040NR-EZ
1040
W-7
State
Form 1
 Form 1-NR
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Obtaining Tax Forms
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The best way to obtain tax forms is to download them from
the Internet:
Federal Forms:
http://www.irs.gov/formspubs/index.html
MA Forms:
http://www.dor.state.ma.us/forms/FormsMenu2.htm
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Your international office may also have copies.
Due Date
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April 15 if you for RAs and NRAs with taxes
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Otherwise, June 15 for NRAs.
withheld recorded on Form W-2
 For 2007: April 17
Where to File
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Nonresident Federal Tax Returns:
Internal Revenue Service Center
Austin, TX 73301-0215
(But see special tax return submission rules
if you or a dependent needs to apply for an
individual taxpayer identification number.)
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For all other returns:
Check filing instructions
Penalties / Ramifications of Not Filing
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Penalties based on the tax due:
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If no tax is due, no monetary penalty is
imposed
Possible immigration consequences
File to obtain refund of withheld taxes
Taxpayer Identification Numbers
Work Authorized:
 Social Security Number
 To obtain the number, you must contact the
nearest Social Security Administration office for
an interview
 F-1 and J-1 Students must have a job or job
offer and letter from DSO/RO
Taxpayer Identification Numbers
Not Work Authorized:
 Individual Taxpayer Identification Number
(ITIN) for a tax administration purpose
 To obtain an ITIN, submit Form(s) W-7
with required documentation (certified)
and original signed tax return to:
Internal Revenue Service
ITIN Unit
PO Box 149342
Austin, TX 78714-9342
Residency Status
Residency Status
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Green Card Test
Substantial Presence Test
Exempt Individual
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Time Limits on Exempt Status
F
& J students
 J “teachers and trainees” (i.e.,
nonstudents)
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Measuring Years
Green Card Test
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A lawful permanent
resident or “green card”
holder is a resident for
U.S. tax purposes
Tax residency begins on
the notice date approving
the application
One remains a tax
resident even if he or she
leaves the U.S.
One remains subject to
U.S. tax reporting
requirements
Substantial Presence Test
(2006 Computation)
Physical presence in the U.S. for:
 31 days in 2006, and
 183 days during a 3-year period counted
as follows:
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All days in 2006
1/3 of days in 2005
1/6 of days in 2004
“Exempt Individuals”
Exempt Individuals
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F or J students
J nonstudents
Exempt from counting days of US
presence for substantial presence test
(SPT)
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Not exempt from tax under this rule
But may be exempt from tax under a tax law
or tax treaty
Time Limits on Exempt Status
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F or J students:
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Five (5) calendar years
J nonstudents:
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2 out of 7 calendar years
4 out of 7 calendar years if
ALL income foreign source
Time Limits on Exempt Status
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Must count prior calendar years in F, J, M,
or Q exempt individual status
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Can become an RA sooner because of earlier
years
EXAMPLES
Taxation Based on Residency Status
Taxation Based on Residency Status
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Income
Wages / Salary
Non-employee Compensation
Scholarships / Fellowships
Interest
Dividends
Capital Gains
Exempt Income
Income
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Residents:
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Taxed on worldwide
income
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Wages
Scholarships
Investment income
Nonresidents:
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Taxed only on US
source income
NRA - Wages / Salary
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Source based on where services
performed
Principal exceptions
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Income received from a foreign payer by a
F or J visaholder while nonresident
Income exempt by treaty
Non-employee Compensation
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From services as an independent
contractor (self-employment)
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Usually reported on:
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Caution: most nonimmigrants cannot
freelance
Form 1099-MISC for RA recipients
Form 1042-S (income code 16) for NRA
recipients
Sourced based on location of services
Scholarships / Fellowships
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Sourcing based on location of
payer not location of recipient
Nontaxable non-US source
includes scholarships /
fellowships from:
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Foreign governments
International organizations
Even if managed by U.S. agent
US source
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Divided into taxable and
nontaxable
U.S. Source Scholarships: Nontaxable
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Tuition
Fees required for enrollment in an
educational organization
Fees, books, supplies, and equipment
require for enrollment in a particular course
at an educational organization
Tuition reductions awarded to graduate
teaching and research assistants, unless
the reduction represents payment for
services
U.S. Source Scholarships: Taxable
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Fees for room, board, and incidental expenses
Any amount paid for services, even if similar
services are required of all candidates for a
particular degree
Value of room and board received for work
performed
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Exception for Resident Assistants
Graduate assistantship stipends
Withholding at 14% or exempt under a tax treaty
Interest
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Bank interest
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Not taxable to NRA unless
connected to U.S. trade or
business even if reported
on Form 1099-INT
Portfolio interest
Dividends
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U.S. source dividend
income is taxed at a flat
30% rate
Except if the rate is
reduced by an income tax
treaty
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Must still be tax resident in
treaty country
Mutual funds generally pay
dividends, not interest
Capital Gains
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Generally, an NRA will not be subject to
tax on sale of capital assets such as
shares of stock
Applicable only if individual is the U.S.
less than 183 days during the year of
sale
Gains on the sale of real estate and U.S.
business assets are subject to tax
Other Nontaxable Items
Gifts
 Loans
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Form 8843 Only
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Required to file Form 8843 to document
exempt status for residency test
Not required to file a Form 1040NR-EZ or
1040NR
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No W-2
No 1042-S
No reportable investment income
Tax Withholding
Tax Withholding
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Payroll Taxes
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Federal Income Tax
FICA Tax
Exceptions to FICA Tax
State Income Tax
Sample Form W-2
Investment Income
Scholarships to NRAs
Tax Withholding Points
Payroll Taxes
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Withheld by employer
Federal Income Tax
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Graduated rates: 10%-35%
Based on Form W-4 submitted to employer
Reported in Box 2 of Form W-2
Payroll Taxes – FICA Tax
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Social Security Tax
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6.2% of wages up to annual limit
The annual limit in 2006 was: $94,200
Reported in Box 4 of Form W-2
Medicare Tax
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1.45% of wages
Reported in Box 6 of Form W-2
Exceptions to FICA Tax
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Lawfully employed nonresident F-1, J-1, M-1, and
Q-1 visaholders
Services performed by an enrolled student for the
school he/she regularly attends
Services performed for state or local government,
unless an agreement with the federal government
is involved
Services provided for a foreign government
Services provided for an international
organization
Exceptions do not apply to F-2 or J-2 visaholders
Payroll Taxes – State Taxes
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Income Tax
Withholding based on Form W-4 or state
equivalent
Reported in Box 17 of W-2
Investment Income
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Interest, dividends, capital
gains
Resident aliens
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Generally no withholding for
U.S. citizens or resident aliens
Reported on Form 1099 at yearend
Nonresident aliens
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Flat 30% withholding unless an
applicable tax treaty allows a
lower rate
Reported on Form 1042-S at
year-end
Scholarships to NRAs
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Qualified tuition
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No withholding
No reporting required
No reporting required on tax return
Scholarships amounts for room and
board & other non-qualified
expenses
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Flat 14% withholding tax unless
exempt by treaty
Reported to recipient on Form 1042-S
Recipient required to report 1042-S
taxable amounts on Form 1040NR or
Form 1040NR-EZ
Tax Withholding Points
Three important points to remember are:
1. Having tax withheld does not excuse you
from the obligation of filing a tax return.
2. The withholding is not your exact tax
liability. You could owe more tax with the
return, or, more typically, you will receive a
refund of amounts withheld in excess of
your actual liability.
3. If you have had excess income tax
withheld, the only way you can receive a
refund is by filing a tax return.
Income Tax Treaties
Income Tax Treaties
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Overview
Treaty Information
Student Treaty Benefits
Example Treaty Benefits Tables
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People’s Republic of China
France
Italy
Teacher / Researcher Treaty Benefits
Claiming Exemptions
Overview
Income Tax Treaties:
 Agreements between the United States and foreign
countries on the taxation of various types of income
 Based on tax residency status (not citizenship)
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Must be a tax resident of the other country immediately before
coming to the U.S to qualify for the student/trainee or
teacher/researcher treaty benefits
Must continue to be tax resident in treaty country for all other
treaty benefits (i.e., dividends, interest, rents, royalties, etc.)
Always check the applicable article of the treaty to
determine eligibility for benefit
Treaty Information
Consult:
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Actual treaty texts
Search www.irs.gov for tax treaties
New: http://www.ustreas.gov/offices/taxpolicy/
www.windstar.com for easy-to-read text
abbreviated texts
Protocols amending the treaty
Technical Explanations to the treaties
IRS policies and rulings about treaties
Treaty Information
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IRS Summary Information
IRS Publication 901, U.S. Tax Treaties
 IRS Publication 519, U.S. Tax Guide for Aliens
 IRS Publication 515, Withholding of Tax on
Nonresident Aliens and Foreign Entitles
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But IRS Publications do not explain
IRS Policy requiring establishing treaty country
residency between treaty claims
 Disallowance of treaty claims if entered for one
purpose (i.e., F-2) and changed to another
purpose (i.e., F-1)
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Student Treaty Benefits
Treaties with exemption for all or part of
scholarship or fellowship grant:

Belgium, People’s Republic of China, Former
Cyprus, Czech Republic, Egypt, Estonia, France,
Germany, Iceland, Indonesia, Israel, Japan (old),
Kazakhstan, Korea (South), Latvia, Lithuania,
Morocco, Netherlands, Norway, Philippines,
Poland, Portugal, Romania, Russia, Slovak
Republic, Slovenia, Spain, Thailand, Trinidad &
Tobago, Tunisia, Ukraine, USSR/NIS (Limit
$10,000), Venezuela
Student Treaty Benefits
Treaties with exemption for compensation during training:
Maximum
Countries
/ Year
$3,000
Belgium, Cyprus, Iceland, Indonesia, Japan (old),
Korea (South), Morocco, Netherlands, Norway,
Poland, Romania, Trinidad & Tobago
Egypt, Israel, Philippines, Thailand
$4,000
Tunisia
$5,000
People’s Republic of China, Czech Republic, Estonia,
France, Germany, Latvia, Lithuania, Pakistan,
Portugal, Slovak Republic, Slovenia, Spain (less
personal exemption amount), Venezuela
$2,000
Significant Exceptions and Limitations
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Typically limited to 5 taxable years
Germany compensation benefit lost
retroactively if 4-year period exceeded
Students engaged in teaching or research
under OPT or academic training can only
use student/trainee article
Student Treaty Benefits: India

Special benefit for residents of India who are
students under Article 21(2) of the treaty with
India and Rev. Proc. 93-20

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Can claim standard deduction ($5,150) if higher than
actual deductions
Can claim personal exemption amount for spouse
Can claim personal exemption amount for children
who are US citizens
Cannot use married-filing separately rates
Student Treaty Benefits: Canada
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Student Article limited to payments from
abroad for education or training
But Dependent Services Article XV allows
a treaty benefit if the employee:
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Is an NRA and
Was paid $10,000 or less during the years
and
Remained tax resident in Canada
Teacher / Researcher Treaty Benefits
Treaties with articles containing
benefits for teachers and / or
researchers:

Belgium, People’s Republic of China,
Czech Republic, Egypt, France,
Germany, Greece, Hungary, Iceland,
India, Indonesia, Israel, Italy,
Jamaica, Japan, Republic of Korea,
Luxembourg, Netherlands, Norway,
Pakistan, Philippines, Poland,
Romania, Slovak Republic, Slovenia,
Trinidad & Tobago, United Kingdom,
USSR/NIS, Venezuela
Significant Exceptions and Limitations
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Benefits only allocated for teachers and
professors, not researchers:
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Benefits retroactively denied if benefit period
physically exceeded two years:
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Greece, Pakistan
Germany, India, Luxembourg, Netherlands,
Thailand, United Kingdom
Benefits allowed for three years:

China, Greece (but lost if become an RA)
Significant Exceptions and Limitations
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Prospective loss of benefits articles if stay
“anticipated to exceed 2 years”
One-time use Back-to-back limitation – cannot claim
benefit if claimed student benefit in the
immediately preceding period
Claiming Tax Treaty Exemption

Exemption from withholding is claimed by submitting
the appropriate form to the payer of the income

Form W-8BEN
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Form 8233
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Interest
Dividends
Noncompensatory scholarships or fellowships
Form W-8BEN only used by NRA
Compensation of services provided by a student, trainee,
teacher
Independent contractor
Form W-9 must be used to claim a treaty benefit while
an RA
Claiming Tax Treaty Exemption


In order to claim a tax treaty benefit for
compensation for services or scholarship
or fellowship income, you must file a US
tax return
Document your eligibility for the benefit by
completing one of the following:

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Form 1040NR:
Form 1040NR-EZ:
Page 5, Item M
Page 2, Item J
Claiming Tax Treaty Exemption

If you did not receive a Form 1042-S for
your treaty exempt income, document
your eligibility for the exemption using a
statement with the information requested
by Form 8233 for compensation for
services with certifying statement (see IRS
Pub. 519) or Form W-8BEN for a
scholarship or fellowship grant.
Example Treaty
Benefits Table:
People’s Republic of China
Excerpt from: IRS Publication 515 or 901, Table 2
Example Treaty
Benefits Table:
France
Excerpt from: IRS Publication 515 or 901, Table 2
Example Treaty
Benefits Table:
Italy
Excerpt from: IRS Publication 515 or 901, Table 2
Nonresident Alien
Tax Returns
Nonresident Alien Tax Returns
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Tax Return Requirements Applicable to NRAs
Deductions Allowed
Tax Forms
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Form 1040NR-EZ
Form 1040NR
Form 8843
Attachments
Sample Tax Return
Tax Return Requirements
Applicable to NRAs

Form:
Filing Status:

Taxable Income:


1040NR or 1040NR-EZ
Single or married-filingseparately
U.S. source only
Exemptions Allowed: Only one for yourself
($3,300 for 2006)

Treaty Exceptions:
Residents of Canada, Mexico,
and Korea (South) & students
from India may be allowed
additional exemptions
Deductions Allowed


NRAs must itemize
Exception


Students from India allowed to claim standard
deduction if higher
2006 standard deduction:
Single:
$5,150
Married-filing-separately:
$5,150
Deductions & Exemptions

Itemized Deductions

State & Local Income Taxes

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Gifts to U.S. Charities
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Note: Refund of state & local taxes deducted in current year
is taxable income in year refund is received.
Also registered Canadian, Mexican, and Israeli charities as
allowed under the tax treaties
Casualty & Theft Losses
Unreimbursed Employee Business Expenses (Form
2106)
Tax Preparation Fees
Education Expenses
Deductions & Exemptions

Other Deductions
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Moving Expenses (Form 3903) – must be job
related
Qualified Scholarship or Fellowship Grant
reported as income
IRA Contributions
Qualified Student Loan Interest
Tax Deductions for Educational Expenses

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
Usually applies only to MBA
students and students sent by
employers to short-term programs
If not already employed when
expense incurred or qualifies
student for new profession –
nondeductible
Law school and medical school
considered new professions
Must have income in same
calendar year in order to use
deduction
Deductible Expenses

Tuition, fees, books for training, which:



Is required by employer or by law or
regulations to keep present job, salary or
status, OR
Maintains or improves skills required in present
work from which the employee has taken a
temporary (one year or less) leave of absence
Travel and temporary living expenses

Must be for one year or less
Deductions & Exemptions –
Personal & Spouse


Personal Exemption - $3,300 for 2006
Spouse – Only allowed for:

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Residents of Canada, Mexico, Korea (South) and students
and business apprentices from India eligible for treaty
benefits of Article 21(2) of the tax treaty
Spouse must have a SSN or ITIN
Spouse has no gross income for U.S. tax purposes
Spouse cannot be claimed as a dependent on another
U.S. tax return.
Residents of Korea (South) only – spouse must have
lived with you in the U.S. at some time in 2006.
Deductions & Exemptions –
Dependents


Exemption for a dependent can only be
claimed by U.S. Nationals and residents of
Canada, Mexico, and Korea (South) and
students and business apprentice from
India whose dependents are not admitted
on a n F-2, J-2 or M-2 visa
Dependent must meet the other tests for a
qualifying child or relative.
Test for Qualifying Child


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Son, daughter, stepchild, foster child
Under age 19 or under age 24 and a full time
student, or permanently and totally disabled
Must have lived with you more than half of
the year
Child must not have provided more than half
of his or her own support for the year
Telephone Excise Tax Refund (TETR)

One-time refund in 2006 of $30 for single
taxpayers who paid long-distance telephone
excise taxes for 41 months (March 1, 2003
through July 31, 2006)



$40-$60 depending on number of personal
exemptions for dependents on return
Use Form 8913 for actual telephone excise taxes paid
if did not pay for 41 months or actual taxes higher
Use Form 1040EZ-T if eligible for refund but have no
return filing obligation
Form 1040NR-EZ
You may file Form 1040NR-EZ if all the
following apply:





No dependents
No taxable investment income
Income less than $100,000
No tax credits except federal telephone excise
tax refund credit
No itemized deductions other than state
income tax and student loan interest
Form 1040NR
Must be used to report:
 Taxable interest on dividends, capital gains
 Nonemployee compensation
(Form 1099-MISC)
 Personal exemption for spouse or children,
if allowed
 Itemized deductions
Form 8843



Must be filed by F-1, F-2, J-1, and J-2
visaholders to document nonresident status
If no tax return is filed, Form 8843 should
be filed with the Austin Service Center
If tax return is filed, Form 8843 should be
attached to the back of Form 1040NR or
Form 1040NR-EZ and filed with the Austin
Service Center
Attachments



Staple Copy B of Form W-2
to page 1 of Form 1040NR
or Form 1040NR-EZ
Staple Copy C of any Forms
1042-S to page 1 of Form
1040NR or Form 1040NR-EZ
Attach any required
statements behind Form
1040NR or Form 1040NR-EZ
Sample Student Tax Return - Facts





F-1 student
Citizen and resident of Ethiopia
Work study wages of $4,285
Scholarship for full tuition and $3,000 for
room and board
Interest from U.S. bank account
Sample Student Tax Return - Facts





F-1 student
Citizen and resident of PR China
Work study wages of $9,285, $5,000 of
which is treaty exempt
Scholarship for full tuition and $3,000 for
room and board which is treaty exempt
Interest from U.S. bank account
State Income Taxation
State Income Taxation





Overview
Massachusetts Taxation
Income Not Subject to Massachusetts
Income Tax
Determination of Residency
Sample Form 1-NR
Overview


Income received for services performed at
a location in a state is sourced in that
state
States that tax income:



Tax state residents on all income
Tax state nonresidents on income sourced in
the state
Tax part-year residents on all income during
the resident period and state source income
during the nonresident period
Massachusetts Taxation
Filing Requirements
 Residents with gross
income of $8,000 or more
 Nonresidents whose
Massachusetts source
income is more than the
smaller of:



$8,000 or
The personal exemption to
which the nonresident is
entitled after apportionment
Part-year residents with
Massachusetts source
income for entire year of
$8,000 or more
Income Not Subject to
Massachusetts Income Tax



Qualified scholarship received by
Massachusetts residents
Scholarship income received by
Massachusetts nonresidents including
room and board
Massachusetts source income received by
a nonresident who is a tax resident from a
foreign country that is excluded from
federal income by a tax treaty
Determination of Residency

Resident:

Nonresident:

Part-year
Resident:
A person domiciled in Massachusetts
or a person who spends more than
183 days of the taxable year in
Massachusetts and maintains a
permanent place of abode in
Massachusetts.
A person domiciled outside the state
for the entire year.
Neither a Massachusetts resident or
nonresident for the entire year.
Determination of Residency


Technical Information Release 95-7
interprets the Mass residency law
See 1996 article, “Massachusetts Broadens
the Definition of Residency”
Resources

www.windstar.com


Articles in archives of e-newsletter, A View from the
Crow’s Nest
Resources/Articles




Federal Telephone Tax Refund Claims by Nonresident Aliens
Ten Common Tax Return Errors and the Foreign Nationals
Who Make Them
U.S. Taxation of Foreign Students and Scholars: A Roadmap
to Your Tax Return
Shopping.windstar.com for tax guidebooks