Taxes for Non-U.S. Citizens

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Taxes for Non-U.S. Citizens

• Presented by
• Edward Shore, Tax Specialist
• University Accounting Services
• Cal Poly Pomona
• March 16, 2007

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DISCLAIMER

• I am allowed to provide only general advice based
  on publications from the IRS and Franchise Tax
  Board. 
• The information presented today is general in
  nature and accurate as of the date of this
  presentation.

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Where I Am Located
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Introduction

• Federal
• What is your tax residency?
• What is the tax structure?
• What are the tax filing requirements?
• State
• How is State different from Federal?
• What are the tax filing requirements?

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Tax Compliance Two Tax Agencies

• 1. Federal Income Tax Internal Revenue Service
  (IRS)
• 2. California Income Tax Franchise Tax Board
  (FTB)

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Federal Income TaxInternal Revenue Service (IRS)
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Federal Income Tax
Pay as you go tax liability is paid every time
income is made Example Tax withholding from
your paycheck every time you get paid.
We use tax returns (i.e. Form 1040) to ultimately
answer this question What is the true tax
liability?
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How is tax residency determined?
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Residence Tests (Federal)

• Green Card Test
• Legal Permanent Residence Card or
• USCIS I-551 Stamp in the Passport
• Substantial Presence Test (SPT)
• 31 Day Test
• 183 Day Test

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SPT 183 Day Test

• Add
• All days present in the U.S. this year plus
• All days present in the U.S. last year,
  multiplied by 1/3, plus
• All days present in the U.S. two years ago,
  multiplied by 1/6
• If the sum is 183 days or greater, you are
  considered a resident alien for the entire year.
• If the sum is 182 days or less, you are
  considered a nonresident alien.

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Count Zero days when

1. You are a student with F, J, Q, or M immigration
   status and had been in the United States for no
   more than for five calendar years (lifetime
   limit)
2. You are a teacher or researcher with J or Q
   immigration status and had been in the United
   States for no more than two of the current and
   past six years.

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Example F-1 Student

• Tran entered the United States as an F-1 Student
  on 9/9/2000. He, now a graduate student, has
  remained in the United States since.
• Tran has also taken an on campus job.
• Since Tran is an F-1 student, he gets up to five
  calendar to count zero towards the SPT. After
  2004, he must count all days towards SPT.
• Taking the test as of December 31, 2006, we have

YEAR DAYS PRESENT DAYS COUNTED FACTOR FINAL COUNT
2004 365 0 1/6 0
2005 365 365 1/3 121
2006 365 365 1 365
TOTALS 486
Tran is a resident alien for 2006. His residency
began January 1, 2005.
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Nonresident vs. U.S Resident

• NONRESIDENT ALIEN TAX SYSTEM
• Nonresident Aliens

• U.S. RESIDENT TAX SYSTEM
• U.S. Citizens
• Legal Permanent Residents
• Resident Aliens

• Dual-status Residency has both
• Other residency choices, see IRS Publication 519

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Married Nonresident Aliens can be Treated as
Resident Aliens

• You must meet the following
• The nonresident alien must be married to a
  resident alien, permanent resident, or U.S.
  citizen
• Effects
• The IRS will consider the worldwide income for
  both spouses
• The couple must file a joint return
• Both spouses must sign a statement making a
  declaration (refer to IRS Publication 519 for
  details)

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What is the tax structure?
Tax System Nonresident Alien U.S. Resident (including Resident Alien)
Sources of income taxed Only U.S. All
Income tax return form filed 1040NR 1040
Withholding Allowances Strict, often Single-1 No Specific Rules
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Federal Tax Systems Deductions
Tax System Nonresident Alien U.S. Resident (including Resident Alien)
Standard Deduction No, except students from India (tax treaty) Yes
State and Local Taxes Paid Yes Yes
Charitable Contributions Yes, over 250 must have statement from charity Yes, over 250 must have statement from charity
Loss from Theft of Property Yes, but limited Yes, but limited
Job Expenses Yes, with limits Yes, with limits
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Nonresident Alien Filing Requirements

• In general, at least 1 in income
• Exceptions
• You have no gross income
• Your only income is from wages, totally less than
  3,300 in 2006 (Notice 2005-77)
• Your only income is from interest from bank, SL,
  or credit union, which is interest income.
• Deductions are allowed only if they count against
  effectively connected income

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What is effectively connected income?

• Generally ECI consists of the following types of
  income
• Taxable Scholarships (F, J, M, Q non-immigration
  status)
• Income from performing services (independent
  contractor and employment)
• Gains and losses from sales of U.S. real property

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Income

1. Employment
2. Independent Compensation
3. Scholarships, Prizes and Awards

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1. Employment

• What is required to be employed?
• Social Security Number
• Permission to Work check your non-immigration
  status
• Form W-4 Employees Withholding Allowance
  Certificate
• Form I-9 Employment Eligibility Verification

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Form W-4 Rules

• NONRESIDENT ALIENS
• General, must file as Single 1 Allowance
• Certain countries allow more than 1 allowance

• U.S. RESIDENTS
• File W-4 as the taxpayer sees fit

PLEASE NOTE If you work for Cal Poly Pomona or
any other California State University, the EAR
(Employment Action Request) serves as a
substitute for the W-4.
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Allowances (W-4) Resident Aliens Only

• The more allowances claimed, the less tax
  withheld, but may result in a tax liability come
  April 15
• Base the number allowances on
• Whether you are claimed as a dependent on the tax
  return
• If you are married, have children, or other
  dependents (i.e. parents, siblings)
• If you or your spouse have two or more jobs

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Form W-4
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2. Independent Compensation

• The payer does not exercise control over you,
  unlike the employer-employee relationship.

Nonresident Aliens U.S. Residents or Resident Alien
Generally, 30 tax rate of the gross amount - In general, there is no withholding
Reported on the IRS Form 1042-S Reported on the IRS Form 1099
Can be eliminated by tax treaty. Some can benefit from income tax treaty benefits (limited to non-citizens only)
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3. Scholarships and Fellowships

• Scholarships and fellowships are payments to
  further a taxpayers education and research.
• The taxpayer is NOT required to perform services
  in order to receive the payment.
• Scholarships and cash prizes are NOT the same!

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Qualified Expenses under IRC 117

1. Tuition
2. CSU Fees
3. Books and supplies required as a condition for
   enrollment (hard to prove)

These scholarships are not taxed or reported.
Tuition Fee Waiver pays qualified expenses.
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Non-qualified expenses

• Room and Board
• Travel
• Miscellaneous
• These scholarships are reported and may be
  subject to withholding.

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Withholding for Taxable Scholarships

• NONRESIDENT ALIENS (Taxable Portion in excess of
  one personal exemption)
• Immigration Status F-1, Q-1, M-1, and J-1
  Students 14
• Everyone Else 30
• U.S. RESIDENTS
• Generally, no withholding is required

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Ways to Reduce Withholding

• Foreign Source Income
• Internal Revenue Code (IRC) by legislation passed
  into law.
• Income Tax Treaty

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Tax Treaties, Part 1

• Agreements that the U.S. has with many countries
  in the world.
• The treaties include articles regarding a wide
  range of payees, such as students, teachers,
  employees, prize winners, and royalty holders.
• All tax treaty forms require the beneficiary a
  tax ID to claim its benefits.

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Tax Treaties, Part 2

• Effects Federal Withholding only
• Claim tax treaty benefits during the year
• Form 8233 Employees, sent to IRS
• Form W-8BEN Independent Contractors and
  Scholarship Recipients
• Form W-9 some Resident Aliens
• Regardless of method, tax treaty benefits are
  ultimately claimed on the 1040NR.
• On the standard 1040NR, complete Item M on page
  5.

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The Golden Rule of Tax Treaties
Every tax treaty is different!
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End of Year Tax Responsibilities Federal Tax
First we will talk about the Universitys
responsibilities, then we will talk about your
tax responsibilities.
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Universitys Filing Responsibilities
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Form W-2 reconciliation of wages for 2006.
Furnished to employees no later than January 31,
2007.
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Form 1042-S Payment summary to nonresident
aliens no later than March 15, 2007. Typical
payments include payments covered by tax
treaties, income from independent service, and
taxable scholarships
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Form 1099-MISC (1099) Payment summary for U.S.
residents, including resident aliens for almost
any type of earnings except wages and salaries.
Nonresident aliens should never get this form.
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Form 1098-T Tuition Statement Summary of
qualified tuition and scholarships for our
students. Most students will receive one. Cal
Poly Pomona is required to deliver the form by
January 31, 2007. By law, we are not required to
issue a statement to nonresident aliens (since
most education credits and deductions are not
available anyway).
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Educational Expenses

• Credits generally available to U.S. residents
  (including resident aliens) only
• Hope Credit
• Lifetime Learning Credit
• Tuition and Fees Deduction
• Deductions generally available to both resident
  and nonresident aliens
• Student Loan Interest Deduction

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Your Tax Responsibilities
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What the Taxpayer Files

• Taxpayer
• Nonresident Aliens 1040NR or 1040NR-EZ, possibly
  Form 8843, possibly Form W-7
• U.S. Residents 1040, 1040A, or 1040-EZ, possibly
  Form W-7
• If you do not have a tax ID, you must file a Form
  W-7 with your tax return.

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Form 8843

• Who files
• Students under the non-immigration status F, J,
  M, or Q and you are counting 0 days towards the
  substantial test
• Teachers under the non-immigration status J or M
  and you are counting 0 days towards the
  substantial presence test
• Professional athletes (O or P non-immigration
  status)
• Those who couldnt leave the country because of
  medical problems
• Students Complete parts I and III only

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Tax Identification Numbers

• For tax reporting purposes, everyone must have a
  tax ID, which can be
• Individual Taxpayer Identification Number (ITIN)
  in the form of 9xx-7x-xxxx or 9xx-8x-xxxx
  (individuals only)
• Social Security Number (SSN) in the form
  xxx-xx-xxxx (individuals only)
• Employer Identification Number (EIN), xx-xxxxxxx
  (companies only)

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Form W-7

• Give a reason why you are filing this form (most
  likely reason f Filing an income tax
  return)
• Complete all the sections, including Box 6
• You must prove identity and your immigration
  status. The passport does both.
• Obtain and send notarized or certified copies,
  because we dont suggest sending originals.
• File with your 1040(NR) and 8843 but file only
  if you need a tax ID.

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Filing W-7 Early

• You can file Form W-7 early when
• You want to claim tax treaty benefits during the
  year but you do not have a tax ID number
• You are a student and earning a scholarship or
  grant
• You receive an honorarium, and you want to claim
  tax treaty benefits
• You open an interest-baring bank account, and you
  have bank documentation to prove you will be
  receiving interest

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Form W-7
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Deadlines for 2006 Returns
Nonresident Aliens Resident Aliens, Permanent Residents, U.S. Citizens
If you have no income file Form 8843 by April 17, 2007 If you have no wage income, file Form 1040NR with 8843 and W-7 (if required) by June 15, 2007 If you have wage income, file Form 1040NR with 8843 and W-7 (if required) by April 17, 2007 IRS Form 1040 with W-7 (if required) April 17, 2007
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Federal Excise Tax Refund (Telephone)

• Affects periods March 1, 2003 to July 31, 2006
• Allows federal refund on excise tax charged on
  your telephone services
• You can claim either the standard amount (30 for
  1 exemption) or actual expenses on Form 8913
• File for a refund either
• On the 1040NR
• If you are not filing a tax return, use Form
  1040NR EZ-T
• All applicable forms are found on www.irs.gov.

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California Income TaxesFranchise Tax Board (FTB)
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California Tax Law

• In general, California tax law usually conforms
  to Federal tax law, but NOT for tax treaties
• Use income from all sources to determine if you
  are required to file. You will have to consider
  your income from sources outside U.S.
• Minimum filing requirements (Single, younger than
  65, no dependents for the 2006 year)
• California Gross Income 13,713
• California Adjusted Gross Income 10,970

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Residency for California Tax Purposes

• Nonresidents are taxed on California income,
  while residents are taxed on all income.
• Residency is tested, but not dependent on your
  residency for federal income tax purposes.
• If you are paying non-resident tuition fees, most
  likely, you are a non-resident for California
  purposes.
• Nonresidents are generally entitled to all
  deductions as residents under California law.

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California Residency

• Nonresident 540NR taxed only on California
  income
• Resident 540 taxed on all income
• Both forms are due April 17, 2007 with no
  specific exception for non-wage earners

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On the Internet

• IRS Website (1040NR) http//www.irs.gov/
• Franchise Tax Board (California 540NR)
  http//www.ftb.ca.gov/

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Is our tax system similar to yours?
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Thank You Any Questions?