But I am not a tax expert! Tax Basics for Assisting International Students and Scholars

But I am not a tax expert! Tax Basics for Assisting International Students

and ScholarsMary Upton

Theo Wu

Intended beneficiaries

• If you’re responsible for providing education to foreign students and scholars, AND

• That person receives income from your organization, THEN

• We hope this presentation will help you demystify US tax law expectation and give you confidence to know where help can be found.

Overheard

I’m a foreign person. I don’t have to pay any money to

your government.

Don’t you know that I’m a foreign student?

But my department’s offer letter says this fellowship is

not taxable.

Wrong Expectations

• US Tax Law– Tax treatment of US persons DOES NOT equal tax

treatment of non-US persons– Without doing anything, a foreign person’s

income must have taxes withheld– AND the IRS holds you accountable to make sure

the taxes are withheld and remitted

Four terms

• US person for tax purposes– US citizen, Legal Permanent Resident, Resident

Alien (is a foreign national)– Meets the Substantial Presence Test

• Non-US person for tax purposes– Nonresident Alien (is a foreign national)– Does not meet the Substantial Presence Test

Substantial Presence Test

Substantial Presence Test (SPT)

• 31 days during the current year, and • 183 days during the 3-year period that

includes the current year and the 2 years immediately before that, counting: – All the days you were present in the current year,

and – 1/3 of the days you were present in the first year

before the current year, and – 1/6 of the days you were present in the second

year before the current year.

Substantial Presence Test (SPT)

• Exempt from counting days:– Does not mean exempt from paying US taxes– F-1 and J-1 students (5 years)– J-1 non-students (2 of last 6)

• In current year, count all days the person is available to be present in the US– Resident aliens from day 1– Retroactive withholding to day 1

IRS Publication 4011

• Pub 4011, IRS Publication 4011, Publication 4011

• Determination tree for SPT

Review

• A foreign person in the US is considered:– Resident alien for tax purposes– Nonresident alien for tax purposes– Determined by the SPT on his physical presence– Publication 4011 is a helpful decision tree

US person

• IRS Form 1040 or 1040-EZ OK• TurboTax, TaxCut, etc OK• W-9

Non-US person

• Is the payment considered taxable income?• If yes, how much tax?• Institution has an obligation to withhold AND

report

IRS Form W-8Ben

Defining Income

Defining Income

• Fellowship/scholarships– Qualified Expenses– Room and Board

• Salary/wages– Service component

• Prize/award– Public competition

• Gifts– No strings attached

What is subject to withholding?

NRA RA

Scholarship/Fellowship

Subject to reporting by your org? Yes Yes

Taxable? Maybe Maybe

Subject to withholding? Yes No

Salary/Wages

Subject to reporting by your org? Yes Yes

Taxable? Yes Yes

Subject to withholding? Yes Yes

Prize/Awards

Subject to reporting by your org? Yes $600 or above

Taxable? Yes Yes

Subject to withholding? Yes No

Withholding Rate

Withholding Rate

• 30% federal income tax rate• Scholarship/fellowship federal tax rate

reduced to 14%– F, J, M, Q visa status

• Payroll is at graduated rates but does not include the standard deduction because that’s for US persons

• ? % state income tax rate

Tax Treaty Benefits, FICA

Tax Treaty Benefits

• Avoid double taxation• Not granted automatically• Must be a non-US person in the current year• Must address this type of income• Each tax treaty is different• Requires a US based tax identifying number• Reduces the tax rate• Based on tax residence

Tax Treaty Benefits

• If you are ever concerned about the person’s qualifications to get a tax treaty benefit, you should withhold now and let the person make a claim for the benefit when the person files a tax return at the end of the year.

FICA Taxes

• NRA FICA exemption (IRC Section 3121(b)(19))– Non-US person in the current year– F, J, M, or Q visa type– Performed to carry out the purpose specified in

subparagraph (F), (J), (M), or (Q) (i.e. F-1 student is studying full-time and not working full-time)

End of the Year

End of Year

I’m still not a US person. I don’t pay taxes to your

government.

I claimed the tax treaty and didn’t have any taxes taken

from my pay.

The government must understand this is very hard

and I don’t understand English well

Last year I did my tax refund and didn’t owe. This year, why do I owe?

End of Year

• The IRS expects your foreign visitors to complete a tax return if she was present in the US during the year– US person: 1040 or 1040EZ (like any US person)– Non-US person: 1040NR or 1040NR-EZ

• At the end of the year, a non-US person may also receive the 1042-S form instead of or in addition to the W-2

• You use these reporting forms to complete your tax filing for the year

IRS Form 1042-S

• Claim tax treaty benefit on incomes• Reporting of taxable income provided to the

individual except salary/wage income (W-2)– May include the tax amount withheld– May include special situations in which taxes are

not withheld but the income is taxable

In review

In review

Substantial Presence Test = (1 x Current Year Days) + (1/3 x Last Year Days) + (1/6 x 2 Years Ago Days)

• Substantial Presence Test helps determine Resident alien or nonresident alien

• IRS Publication 4011

In review

In reviewNRA RA

Fellowship/Scholarship

Subject to reporting by IU? Yes Yes

Taxable? Maybe Maybe

Subject to withholding? Yes No

Salary/Wages

Subject to reporting by IU? Yes Yes

Taxable? Yes Yes

Subject to withholding? Yes Yes

NRA require tax withholding on taxable income

In review

• 30% federal income tax rate• Scholarship/fellowship federal tax rate

reduced to 14%– F, J, M, Q visa status

• ? state income tax rate

In review

• Tax treaties:– Must be a NRA in the current year– Requires a US based tax identifying number– Based on tax residence

• NRA FICA exemption– Must be a NRA in the current year– F, J, M, or Q visa type– Performed to carry out the purpose specified in

subparagraph (F), (J), (M), or (Q)

In conclusion

• 1042-S must be postmarked by March 15• 1040NR (individual tax return) due April 15• 1042 due March 15• Submitting Form 7004 for the 1042

automatically grants a 6 month extension

Questions?