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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 (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
Non-US person
• Is the payment considered taxable income?• If yes, how much tax?• Institution has an obligation to withhold AND
report
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
• 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
• 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 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
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 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