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Tax Basics for International Students, Scholars and Faculty/Staff

Introduction

The US federal and state governments participate in a taxing system which takes money from each employee’s earnings to pay for various governmental services (such as road maintenance). These taxes are usually deducted by the withholding agent (for example the university) prior to issuing a pay check. If insufficient taxes are removed prior to the year end then the employee must pay the difference when ‘filing’ their taxes at the end of the year. If more than enough taxes have been taken during the course of the year then the employee may well get a ‘tax return’ after filing their tax return for that year.

It is the responsibility of the employee to file taxes at the end of each working year. Failure to do so could result in fines, and penalties including difficulties in applying for permanent residency down the road. If an employee has failed to file previous taxes they can do so after the fact realizing there may be a fine associate with it.

There are numerous tax treaties which may protect some income from being taxed. These treaties vary from country to country and should be explored individually. Some tax treaties are designed to prevent double taxation and some are designed to exempt income from taxation. Some are valid for a certain period of time and some for a specific amount of money. Countries with tax agreements include but are not limited to:

Resident v. Non-resident

For tax purposes individuals are considered either residents or non-residents. These terms do not have the same meaning in taxation as they do in immigration. For taxation purposes a resident alien is one who is taxed on the same basis as a US citizen. Residents generally pay state and federal income taxes, as well as social security and medicare taxes. Furthermore residents are subject to taxation on their worldwide generated income where non-resident aliens are taxed only on income earned in the US .

Residency (for SAU international students/scholars/faculty/staff) for taxation purposes is determined either by the Substantial Presence Test or by the length of time in this country. The Substantial Presence test is used to determine the number of days a non-resident has been in the US . If a person has been here over 183 days they are generally considered a resident for tax purposes. In this document any reference to a ‘resident’ is to be considered a resident for tax purposes only.

F1 and J1

F1 and J1 students and scholars are exempt from the Substantial Presence test. However an F1 and J1 student who has been here for over 5 calendar years (2 calendar years for scholars  in J status) is considered a resident. Until then they are taxed as non-residents (social security and medicare taxes do not apply) as long as the work they are doing is consistent with their status.  (For F1 students even practical training is acceptable.) If the student has been in the US for over 5 years (2 years for the scholar) then they are required to file as residents and pay Social Security and Medicare Taxes (FICA) just as US citizens pay (on income earned in the US and abroad). The exemption to the Substantial Presence Test does not apply to F1 or J1 status holders who change their status to other non-immigrant status which is not exempt or to a special protected status or to permanent residency. See http://www.irs.gov/businesses/small/international/article/0,,id=129427,00.html  for more details.

Although J Exchange Visitor scholars are initially exempt from the Substantial Presence Test their spouses are not. Those in J2 status (who are allowed to work) who earn money in the US must pay state and federal income tax as well as social security and medicare taxes. F2 would also be required to pay but notice should be given to the fact that their status prohibits working in the US.        J exchange visitors are taxed as non-residents.

Special Considerations

Scholarship money for a degree pursuing student is excluded form taxable income if it is used to pay for tuition, fees, books, supplies and equipment. Monies that go towards other expenses like room and board is taxable income. If the student is not pursuing a degree the whole scholarship is taxable income.

Non-residents can not claim the standard deduction (exception for students from India ).

Non-resident aliens can claim only a personal exemption for themselves (special rules apply to residents from Mexico , Canada , Japan , India and South Korea .)

Non-resident aliens cannot claim the education credit.

Filing Forms

International students and scholars must file state and federal tax returns as well as the 8843 Statement for Exempt Individuals and Individuals with a Medical Condition.

If the non-resident alien student had Social Security and/or Medicare taxes erroneously deducted from their salary during the year they can file an 843 form to reclaim them.

Before leaving the country a non-resident alien should file a 1040C or Form 2063 sailing permit which notifies the IRS of the pending departure.

If a student or scholar leaves the country they are still required to file a tax return if they earned income during the previous year.

H1B Temporary Employment

In general resident aliens who are performing work in the US are taxed as US citizens and are responsible for state and federal income taxes, as well as Social Security and Medicare taxes. Non-residents are also usually liable for social security and medicare taxes on income earned in the US .

F and J’s who change status to H1B are responsible for social security and Medicare taxes from the first day of US employment regardless of whether they are considered residents or whether their income is exempt from federal income tax under an income tax treaty. This is also the case for those entering in TN status…they too are liable for social security and medicare taxes regardless of whether they are considered residents unless their income is protected under a Totalization Agreement. (See countries covered above.)

A person who enters the country to work in H1B status in the middle of a year may be considered a resident if s/he was in the US over 183 days during that year. For that time period they would be taxed on worldwide generated income.They would be considered to hold ‘dual-status’ since they were a non-resident the rest of that year. (This would also apply to an F1 visa holder who had not met the 5 year rule before changing to H1B)