International Students

1
International Students
2

• DETERMINATION OF RESIDENCY STATUS

3
Determinationof Residency Status

• Do not confuse tax residency with
• immigration residency
• residency requirements for earning a degree etc.
• Residency for tuition purposes

4
Resident or Nonresident?

• Substantial Presence Test
• Exempt Individual
• Closer Connection
• Green Card Test
• Residency Starting Date
• Residency Through Marriage
• Dual-Status Alien

5
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.

6
Exempt Individuals

• F, J, M, Q student status holders
• J Q teacher or trainee status holders
• Foreign government employees professional
  athletes during charity exhibitions

7
Exempt students (F J)

• 5 years life time, must include time in teacher
  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

8
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

9
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.

10
Green Card Test

• Date of adjustment to status--not the date pink
  green card issued
• No option--if you are a PR, you are a resident
  for tax purposes
• See dual-status alien

11
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

12
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
• No tax treaty benefits.

13
Dual-status Aliens

• Taxpayer has two residency statuses during the
  same tax year
• Must file two returns
• Allocate income

14
Dual-status Aliens

• Can be very complex
• First year of residency dependent on when you
  adjusted status to PR
• Final year of residency
• last day physically present, or
• last day a US PR
• A U.S. PR can jeopardize their PR status by
  filing a 1040NR or 1040NR EZ--seek professional
  assistance.

15
Who Must File

• In the United States, unlike most of the world,
  it is the individuals responsibility to know
  what taxes must be filed with the government.
• Most of the world, the government automatically
  assesses and collects taxes.

16
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

17
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.

18
How nonresident is different

• Generally pay tax only on US-source income
• Tax treaty may exempt some 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 (one
  exception-India)

19

• 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

20
Nonresident Aliens

• Who
• All F, J, M, and Q status holders must file a
  statement to substantiate non-residence,
  exemption, and possibly a tax return
• What
• Form 8843mandatory for all nonresidents
• Possibly Form 1040NR or 1040NR EZ

21

• When
• Tax returns by 15 April
• Form 1040NR or Form 1040NR EZ
• Form 8843 ONLY 15 June
• Where
• Internal Revenue Service Center
• Philadelphia, PA 19255-0219

22
1040NR-EZ instead of 1040NR

• Does not claim dependents
• Cannot be claimed as someones dependent
• Under 65
• Only wages, salaries, tips, taxable refunds of
  state/local income taxes, scholarships or
  fellowships--all other income on 1040NR
• Taxable income

23

• 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

24
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.
  lawsincluding tax laws.
• The Immigration and Naturalization Service is
  interested in tax compliance when an individual
  files for U.S. permanent residency!

25
Treaty Overview

• IRS Publication 901 your resource for details of
  treaties
• Treaties can exempt income from taxes that are
  classified as scholarship or compensation for
  teaching or during studies
• File IRS Form 8233 with employer to exempt income
  from withholding
• Many exceptions to general rules Canada, India,
  Japan, Korea, Mexico

26

• 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 scholarssee
  Canada exception.
• Clarification--read the text in Pub 901
• Consider Types of Income

27
IRS Income Codes on 1042S

• 15 Scholarship or Fellowship grants
• Qualified (unreported and untaxed) tuition,
  mandatory fees, and maybe books
• Nonqualified (reported and taxed) room and board
  and uncontrolled payments
• 18 Compensation for teaching and research
• 19 Compensation during study and training

28
Unusual cases

• PRC
• Teaching, 3 years, no limit
• Studying, no limit in time, 5,000/yr
• Indonesia
• Teaching, 2 years, no limit
• Studying, 5 years, 2,000/yr
• France
• Teaching, 2 years, no limit
• Studying, 5 years, 5,000/yr

29
Unusual Cases

• 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
• Japan, Korea, Mexico
• Germany, UK, others--retroactive clauses

30
Family Issues

• Few nonresident students and scholars may claim
  their family members as dependents.
• If you can (Canada, India, Japan, Korea, Mexico),
  the dependent must have a taxpayer identification
  number (TIN)
• Social Security Number, SSN
• Individual Taxpayer Identification Number, ITIN

31
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
  spouseread the rules.

32
Filing Status and Dependents

• Most nonresidents cannot claim their
  dependentseven if the dependent is a U.S.
  citizen.
• Only nonresidents from Canada, India, Japan,
  Korea, and Mexico can claim a deduction for
  dependentsread the rules.

33

• Child and Dependent Child Care Credit
• Rarely appliessee rules
• Child Tax Credit
• Rarely appliessee rules
• Earned Income Tax Credit
• Rarely appliessee rules

34
Spouse and Dependent Reporting Obligations

• Even if no income, all F-2s and J-2s are required
  to file a Form 8843 yearly.
• An ITIN is recommended-not required
• Income from illegal employment must be reported
• J-2s are not exempt from FICA taxes

35
Taxation of Nonresidents

• Questions?
• Source of Income
• Type of Income
• Effectively Connected versus not effectively
  connected

36
Source of Income

• 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)
• Compensation from a Foreign Employer

37
Taxable Income

• Resident
• WORLDWIDE INCOME
• Nonresident
• US source income only
• Payment for Services
• Scholarships/Fellowships--candidate for a degree
• Dividend income

38
Scholarships/Fellowships

• Candidate for a degree
• Elem., Secondary, Undergrad, Grad
• Nonresident Alien attended an institution that
• offers a program that is acceptable towards a
  degree
• authorized by federal law to offer such a degree
• is accredited
• Qualified Scholarship
• Tuition and Mandatory Fees
• Fees, books, supplies, equip required of all

39
Effectively Connected?

• Effectively Connected Income
• Students Scholars are considered engaged in a
  U.S. trade/businessthus income EC
• Effectively Connected Income Taxed at Graduated
  Rates
• Personal Services (on campus employment)
• Business Profits/Losses

40

• Not Effectively Connected Income
• 30 or treaty rate
• Dividends
• Interest (from sources other than bank deposits)
• Gambling Income
• Sale of Capital Assets
• Social Security Benefits
• Real Property Income

41
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 ContributionsU.S. charities only
• Casualty or Theft Loss, Job Expenses, and
  Educational Costs, Tax Prep Fee

42
What is needed to report?

• INS documents
• Passport, I-94, visa, I-20 or IAP-66/DS-2019
• IRS documents
• W-2s
• 1042-Ss
• 1099s (gov, int, div, misc, etc.)
• Previous years return
• Deduction paperwork Calendar
• Social Security Number or ITIN

43
SS ITIN

• Must have a taxpayer number to file
• Be certain name and number match card
• Social Security Number
• Can receive only if employed
• Apply with SS-5 at Social Security
• ITIN Individual Taxpayer Identification Num.
• Must have to file IRS forms to receive treaty
  benefit
• Apply with W-7 at IRS

44
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)

45

• Line 5 Scholarship/Fellowships (RmBd)
• 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

46

• 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
• Adjusted gross income
• Loan for educational expenses only
• Loan recipient must be at least a half-time
  student.

47

• 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, 4,850/Married, 4,850
• line 12 subtract 11 from 10
• line 13 personal exemption 3,100

48

• Line 14 taxable income subtract 13 from 12
• Line 15 find tax in tax tables (married filing
  separate line for all)
• Line 16 May apply to J-2 working for tips
• 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

49

• Taxpayer must sign form
• Direct deposit
• Installment agreement possible, but penalties and
  interest will be charged

50
8843

• Name TINexactly on card, TIN may be left
  blank, but not recommended
• 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)
• 2 citizenship per I-20 or IAP-66/DS-2019
• 4a 4b yes, they must count the days

51

• Part II, Teachers/Scholars/Trainees
• Attended equals employed at as teacher
  researcher
• 5 Give them the official address and phone of
  institution
• 6 Supervisor/research host address and number
• 7 Visa again means status

52

• Part III, Students
• 9 Give them the official address and phone of
  institution
• 10 Give them the name, address, and phone of the
  international director
• 11 Visa equals status
• Signature--only if not filed with 1040NR or
  1040NR EZ

53
1040 NR

• To claim dependents
• Canada, India, Japan, Korea, Mexico
• Additional deductions
• Charitable contributions, etc.
• Not effectively connected income
• Dividends

54
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 taxpayers name and TIN
• Attach W-2s and 1042-Ss to front left margin
• Remind NRA to Keep copies of everything

55
Social Security Tax

• Foreign students and scholars are exempt from
  FICA (social security and Medicare taxes) while
  they are nonresidents for tax purposesthis
  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

56

• Dependents in F2 or J2 status are never exempt
  from FICA
• H, O, and TN status holders are also subject to
  FICA taxes
• When withheld in error
• Ask the employer to refund
• If not refunded, use IRS Form 843 to request a
  refund, per the example
• Six months normal processing time

57
State Income Tax Issues

• Many states do not honor income tax
  treatiescheck the list for your state
• Other states, such as Illinois and Georgia, base
  their state returns on the federal adjusted gross
  income, the Indian students may lose the benefit
  of the standard deduction allowed by their treaty
• See www.irs.gov for link to state agencies

58
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, non toll free.
• Visit www.utexas.edu/international/taxes/