International
Students and Scholars
Lesson 1
DETERMINATION OF
RESIDENCY STATUS
Determination
of Residency Status
• Do not confuse tax residency with:
– immigration residency
– residency for tuition purposes
– residency requirements for earning a
degree etc.
Resident or Nonresident?
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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:
–
–
–
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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 nonresidence and possibly a tax return
• What
– Form 8843—mandatory for all
nonresidents
– Possibly Form 1040NR or 1040NR EZ
When and Where to File
• 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
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
Additional limitations of Form
1040NR-EZ
• 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
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
Points to Consider When
Determining Treaty Application
• 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
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
Other Income
• Not Effectively Connected Income
– 30% (or reduced treaty rate, if applicable)
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Dividends
Interest (from sources other than bank deposits)
Gambling Income
Sale of Capital Assets
Social Security Benefits
Real Property 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
Form 8843 continued
• 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
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)
Form 1040NR-EZ
• 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 halftime 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
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
Social Security Tax
• 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
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.